Healthequity Inc

NASDAQ:HQY

Earnings Call Analysis

Earnings Call Transcript 2025-Q1

[Operator]

Good afternoon, and welcome to the HealthEquity First Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Richard Putnam. Please go ahead.

[Richard Putnam, executive]

Thank you, Gary. Very fine job. Hello, everyone, and welcome to HealthEquity's First Quarter of Fiscal Year 2025 conference call. My name is Richard Putnam I [indiscernible] Investor Relations for HealthEquity. Joining me today is Jon Kessler, President and CEO and Dr. Steve Neeleman, Vice Chair and Founder of the company; and James Lucania, Executive Vice President and CFO.

Before I turn the call over to John, I have a couple of reminders as we usually do. First, a press release announcing the financial results for our first quarter of fiscal 2025 was issued after the market close this afternoon. These financial results included the contributions from our wholly [indiscernible] subsidiary and an account they administer.

The press release includes definitions of certain non-GAAP financial measures that we [ will discuss ] today. You can find on our Investor Relations website a copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures and the recording of this webcast that website is ir.healthequity.com.

Second, our comments and responses to your questions today reflect management's view as of today, June 3, 2024, and will contain forward-looking statements as defined by the SEC. [indiscernible], predictions, expectations, estimates or other information that might be considered forward-looking. There are many important factors relating to our business, which could affect the forward-looking statements made today. These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially on statements made here today. Precautions against placing undue reliance on the ward looking statements, and we also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock as is detailed in the latest annual report on Form [indiscernible] the subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of the information or future expense. Out of the way, it's over to Jon Kessler.

[Jon Kessler, executive]

Hi, everybody, and thank you for joining us for this healthy start to fiscal 2025. That was a picture time. You may not want to quit your day job. I will discuss key metrics and progress against our strategy. Jim will touch on Q1 results and detail our raised guidance for fiscal '25, and Steve is here for today. So here we go, wow, in Q1, the team delivered again double-digit year-over-year growth across nearly all of HealthEquity's key matrics. Including revenue, which was plus 18%, and adjusted EBITDA, which was plus 36%, that's 2x as much. And HSA assets, which was plus [ 22% ], which were plus [indiscernible] the HSA members grew 13% from strong HSA sales and benefit wallet, each of which I will detail in a moment. Strong HSA growth drove total accounts up 7%. HealthEquity ended Q1 with 16 million total accounts, including 9 million data saves holding $27 billion in HSA assets. HSA assets overall worry about how it's going to translate to [indiscernible] -- HSA assets overall increased $2.1 billion in the quarter, including $0.4 billion of organic growth, [ 20% more ] of our HSA investors year-over-year helping to drive invested assets up 39%.

And by the way, this quarter, our HSA investors gained access to $0 brokerage trading of individual stocks and Returning to HSA growth. Team Pearl started the selling year off with 194,000 new HSAs, a record quarter to 60,000 or 45% more than Q1 last year. So what happened? First, accounts from existing clients and partners grew very nice, even more so than during the banner MAPA driven in Q1, 2 years ago. In particular, we got a boost from the Blues health plan partner that joined HealthEquity from further a little more than 2 years ago and are now more accustomed to be with us. [ SEBI ] accounts from new logos mostly small and midsized employers at this time of year continued the positive trend that we saw over the course of fiscal '24. Beyond the organic AGA, the team transitioned 2 of the 3 tranches of benefit wallet in Q1, adding approximately 400,000 HSAs and $1.6 billion of HSA assets. The IMO benefit wallet transfer occurred last month that was at the beginning of Q2. And by timely completing what is the largest HSA portfolio transfer over to our knowledge, HealthEquity's tiny but might [indiscernible] thank you guys has raised our visibility to FY '25 results, has opened up opportunity for CDD cross-sales and Low 360 and benefit, which is the name for actual deployments into fiscal '26. And laid an anchor to win word on custodial yield for years to come as notable. CDB accounts decreased 1% compared to Q1 last year, preceding the ending of the national emergency in May and account run off later last year. Excluding that factor, we again delivered positive CDB growth year-over-year.

The key metrics support our longer-term strategy and the team advanced that multiyear strategy, which you've heard about, and which we call [ 3 deals ]. The first deal is delivering remarkable experience virtualizing our service, digitizing paper and plastic on our cloud-based health accounts platform in order to reduce service expense without sacrificing member delay. Q1 saw service costs as a percentage of revenue fell 400 basis points year-over-year. We launched more AI-driven service tech. We expanded our claims automation for HSA members that you saw at Investor Day. We deployed also to select enterprise clients HealthEquity's stacked account card for iOS and Android mobile wallets, pretty cool. The second deal is deepening partnerships across the ecosystem to grow sales without sacrificing margins. And continued -- in addition to continued work on the technology backbone of ADIs that we also discussed at Investor Day, in the partnership category, we added insurer partners and capacity in the enhanced rate program that accommodated greater-than-expected adoption as more than 85% of new benefit wallet members [indiscernible] in these rates. The third is driving member outcomes through new data-driven services that give clients and partners insight and engage members to act. During Q1, we gained important client and partner feedback. Thank you to our clients and partners who participated in these sessions live on analyzer, transparency, copayment account and other new services in development.

All of this added up -- or adds up to a quarter of investment for the future and the envelope of robust top line margin and cash flow from operations growth in the present which can be enough. Jim will now detail. Jim?

[James Lucania, executive]

John, I will briefly highlight our first quarter fiscal year GAAP and non-GAAP financial results. As always, we provide a reconciliation of GAAP measures to non-GAAP measures in today's press release. As a reminder, the results presented here reflect the reclassifications of our income statement we described in our fiscal year 2024 10-K, both for fiscal year '24 and '25 for comparison.

First quarter revenue increased 18% year-over-year. Service revenue was $118.2 million, up 6% year-over-year, reflecting a higher number of HSAs and invested HSA assets. Partially offset by the runoff of national emergency CDB activity. Service revenue also benefited from a $2.5 million catch-up accrual of investment recordkeeping fees in the quarter that will not be repeated in subsequent. [ Utility ] revenue grew 37% to $121.6 million in the first quarter. The annualized interest rate yield on HSA cash was 2.93% for the quarter. Interchange revenue grew 6% to $47.7 million. Gross profit as a percent of revenue was 65% in the first quarter this year, up from 61% in the first quarter last year. Net income for the first quarter was $28.8 million or $0.33 per share on a GAAP EPS basis.

Our non-GAAP net income was $70.3 million or $0.80 per share versus $0.50 per share last year. GAAP results reflect the impact of a difference in the timing of stock compensation expense from performance stock units granted during the quarter compared to those granted in prior years. Adjusted EBITDA for the quarter was $117.4 million, up 36% compared to Q1 last year, and adjusted EBITDA as a percentage of revenue was 41%, a 540 basis point improvement over the same quarter last year.

Turning to the balance sheet. As of the quarter end, April 30, 2024, cash on hand was $251 million, as we generated $65 million of cash flow from operations and used $199 million. As the wallet closings in the quarter. The company had $926 million of debt outstanding net of issuance costs, including $50 million drawn on our line of credit in connection with the BenefitWallet HSA portfolio acquisition. The third and final BenefitWallet tranche was funded with an additional $175 million drop on the line of credit subsequent to the quarter end. Today's fiscal 2025 guidance reflects the carryforward of our strong sales trajectory, higher expected custodial revenue and operational efficiencies resulting from our technology investments. We expect revenue in a range between $1.16 billion and $1.18 billion, GAAP net income in a range of $90 million to $105 million or $1.01 to $1.18 per share. We expect non-GAAP net income to be between $261 million and $276 million. Or $2.93 and $3.10 per share based upon an estimated 89 million shares outstanding for the year.

Finally, we expect adjusted EBITDA to be between $454 million and $474 million. The placement of the BenefitWallet as HSA cash complete, we're raising our guidance for an average yield on HSA cash between 3% and 3.05% for fiscal 2025. As a reminder, we based custodial yield assumptions embedded in guidance on projected a stay cash deployment and rollovers, a schedule of which is contained in today's release and analysis of forward-looking market indicators such as the secured overnight financing rate and mid-duration treasury forward curves. These are, of course, subject to change and not perfect predictors of future market conditions.

Our guidance also includes the expected impact of our now completed benefit Lalit safe portfolio acquisition on the remainder of the fiscal year. including higher revenue and earnings, along with higher net interest expense due to an increase in the amount of variable rate debt outstanding and drawdown of corporate cash to fund the acquisition. We expect to pay this variable rate debt down with cash from operations over the next several quarters. We assume a non-GAAP income tax rate of approximately 25% and a diluted share count of $89 million including common share equivalents. Based on our current full year guidance, we now project a GAAP tax rate for fiscal 2025 at about 25% as well. As we've done in previous reporting periods, our full fiscal 2025 guidance includes a reconciliation of GAAP to the non-GAAP metrics provided in the earnings release and a definition of all such items is included at the end of the earnings release.

In addition, while the amortization of acquired intangible assets is being excluded from non-GAAP net income, the revenue generated from those acquired intangible assets is [indiscernible] . With that, we know you have a number of questions. So let's go right to our operator for Q&A.

[Operator]

[Operator Instructions] Our first question today is from Glen Santangelo with Jefferies.

[Glen Santangelo, analyst]

Jon, I have a high-level question. Based on the feedback we're getting all the metrics they reported were obviously up and that contributed to the top line and EBITDA beat. But some would push back and make the case that maybe the better results or more acquisition-driven or more rates oriented. And so I guess the question to you is what's the message to investors that may be concerned about the level of organic growth and maybe concern that rates are coming down in the near to intermediate term. Just would love to get your high-level take on how you think about the organic growth and the risk that rates come down later this year?

[Jon Kessler, executive]

How do they get at it so quickly. Who are these people?

[David Larsen, analyst]

I can [indiscernible] I won't.

[Jon Kessler, executive]

I wonder if they might have a rating interest. Let's see. Let me first say, you can't beat everyone. Second say, respectfully, we included the benefit wallet transaction in our prior guidance. And we can talk about if others have -- others really want to delve into the details of stock versus expected and all of that. But -- we guided at the end of March. We had already done the first tranche by then, I believe, and the second tranche was on April 9. So it would be hard to take a view that we somehow came to some different results than we were expecting. As to the broader question of the rate sensitivity of our performance, the answer is, in my view that the right way to look at is that relevant question is, what is the long-term custodial bandwidth that we'll receive from a growing sort of corpus of accounts and assets.

And I think what you -- the answer is that the more evidence comes in and suggests that -- that number is at the very least, a lot higher than people thought it was a few years ago. And in any case, as Jim has said many times and as the schedules that we provide support, irrespective of any -- within the bounds of current forecast any place within those forecasts, we will, over the next, I don't know what would define in the near or medium term as. But the next 2 years, whatever, 3 years, maybe something like that. These -- we have not yet -- I think it's fair to say we have not yet reached what is the current, let's call it, noncyclical rate, much less the peak rate which, of course, will lag from the market [indiscernible]. And so I guess I would characterize that broadly as perhaps investors who or others who have to again, a complete understanding of how this model works now and how we've geared it to work over the last several years. So -- that's kind of my response. Jim, would you add anything to that?

[James Lucania, executive]

Yes. No, I wouldn't add anything to that, right? Like we keep updating that repricing, which is in this Q, right? So just as Jon said, right, we're repricing placements in the mid-1% range for the next couple of fiscal years after this 1% is over. And based where we've guided to where we think we'll be in basic enhanced rate mix, you can compute the spread we're earning over treasury. So as Jon said, yes, we're still ways away from neutral, at least in current reasonable ranges of bounds of what neutral might be.

[Operator]

The next question is from Allen Lutz with Bank of America.

[Allen Lutz, analyst]

Afternoon, I think if we back out the wallet tranches, you grew accounts 8.1% in the quarter feedback of those 2 tranches. Can you kind of talk about how quickly the market is growing as we kind of turn the calendar to 2024? And then any changes that you're seeing this year versus last?

[Jon Kessler, executive]

Lutz, I think if you're going to do that calculation, you also have to exclude accounts that were -- that came over with those tranches, but that we dedupe or whatever the right term is. So the number is a little higher than that up. If I look at the market as a whole, I think 7 years last estimate is the market on the account side is growing around 6% to 8%, something like that. [ About 6%. So ] obviously, we're doing a little better than that. I'm going to say and I would invite Steve to comment on this. One of the things we're seeing in the early part of the sales season here is a lot of energy around the accounts that we -- the accounts that we get from a new small group and the like and maybe see if you can [indiscernible] From our health plans. And maybe, Steve, you could comment a little bit about what you think [indiscernible] .

[Stephen D. Neeleman, executive]

Sure. Thanks for the question. we just constantly look at what the addressable market is with these health plans, and it's always impressive to me that if you look at our span health plan partners, we just have not penetrated their core base very deeply. I mean the bottom line on this is we have lots of opportunity with them. And I think it's a combination of of companies that haven't fully embraced health savings accounts. I mean we've offered it over the years is kind of an option typically the people in the finance department to tax benefits immediately, but it takes a little bit longer for people more broadly speaking, to understand that every dollar that goes into an HSA, you get kind of like 35% to 40% more spending power than if you are paying those out of pockets out of the regulator savings account or something like that. .

And so we just keep seeing it check along. And I think when you couple Medicare inflation or medical inflation with that. I mean, again, when you're taking a bite out of every dollar, you have to spend because of inflation, and you can get by buy back because of having great tax benefits and more spending power. I think that's what the message is coming loud and clear. And I think that whether we're at 30% market adoption, you can look at different studies or 35% and it just kind of depends on how we use the denominator. We sell a lot of room to grow. And you got to understand that most of these health plans that we've only been partnered with probably on average, just a few years, if you take all of the new ones we received with the further deal, and we just have a fantastic team that's been working them team is amazing, and we didn't call for -- sorry, on call further team, our team that came through that transaction. And then just the additional ones we've added over the years. I mean we just had a tremendous opportunity.

And so I think the key is just doing what we're doing day after day, getting out in front of the brokers, the consultants and then the health plan sales are out on the health plan account executives and taking our solution to them, and then they realize that by partner HealthEquity, they can win more business, and they can retain more business. And we have a great partnership, a wonderful just fairly recent plants, some where most of our blueplanet showed up and we'll be having meetings with our non-value plans throughout the course of the year. And so a tremendous opportunity, but it really is interesting to see how much opportunity we have lots of meat left on the bone when it comes to working with these plans. And and then working with the employers they need reasonably priced coverage with great tax benefits.

[Operator]

The next question is from Greg Peters with Raymond James.

[Charles Peters, analyst]

I'll focus my only question on your adjusted EBITDA margin improvement, which was at least ahead of our estimates. And I guess what I'm curious about given the updated guidance, is there any sort of seasonality that will flow through the margins as we think about the remaining 3 quarters because the first quarter was quite strong?

[Jon Kessler, executive]

Yes. Yes, for sure. So I think you know the normal seasonal trends of the interchange line, of course, obviously strong to start off the year. We obviously had the true-up that I mentioned in the service revenue line that's not going to occur. And I think what you're seeing is a great progress on costs, but it is that, especially in that tech and deadline. We'd like to be moving faster on a few things, got some open roles. So you'll see that line normalize throughout the year. So you are seeing a bit of a high number versus what we call a normalized Q1. .

And I think we've commented -- I mean, maybe the only thing I'd mention is that that we did have this accounting item and it's $2.5 million. So Nice thing about revenue at roughly $1 billion as the math becomes easy. So it does play a role in where we're guiding to a 40-point -- midpoint is 40 points something guide, and we delivered 41. So I think I would expect a version of our broad seasonal pattern that you see where the fourth quarter will be substantially lower. But also keep in mind, we -- as we've said, One of the benefits of what we're trying to do from a technology perspective is to flatten out that pumped in expense a little bit and maybe we'll make a little bit of progress on that this year and there's some upside opportunity there.

[Unknown Executive]

I got 2 answers to 1 question. Well done. .

[Charles Peters, analyst]

Got it, guys.

[Jon Kessler, executive]

Missed you at Shake Shack last night, Greg.

[Charles Peters, analyst]

Yes.

[Jon Kessler, executive]

I visited in your honor.

[Operator]

The next question is from George Hill with Deutsche Bank.

[George Hill, analyst]

Yes. I guess first is, you guys had a goal to get to 80% of dollars from the benefit wallet acquisition into the enhanced rates product. And I guess I just wanted to ask about your progress on that and then I have a quick follow-up?

[Jon Kessler, executive]

Sure. Wait follow-up. And Greg, we're going to have to go back to Greg.

[George Hill, analyst]

I'm taking a Greg's follow-up.

[Jon Kessler, executive]

So we did end up around 85% on benefit wallet relative to 80%, and that is helpful, but it's 5% on 60 basis points. It's not a huge number in the grand scheme of things, but it's helpful. And I think it's also look, as we commented, what's enabling that in our view is 2 things. The first is what we're trying to do in terms of articulating the program and so forth. And then the second is the strength of the stable of partner set. I really think this is feeling like what we did in the early days that Steve can well relate to -- with regard to banks, where the trick was done live one, you had a nice diverse portfolio that you can then -- you have a nice open market and so forth. And I think I got you read it to a team of people we don't name so that the recruiters don't get after them, but they know who they are that do this work, both to explain the program and so [indiscernible].

[George Hill, analyst]

Okay. And my quick follow-up would be is -- I'm kind of trying to hit on the utilization team that we're all keeping track of here in health care land. And did the benefit at acquisition having meaningful impact on interchange revenue. And what I'm trying to get to is organic interchange growth. And this whole thing is a backwards wave question is, are you guys seeing utilization in your HSA book of business of people increasingly buying stuff which should kind of show up in the interchange revenue line, which looks like it could have been a little muddy this quarter though for the acquisition?

[Jon Kessler, executive]

Yes, I think the short answer is -- let me get to the end of your question and go back to the beginning. We're not seeing -- I think there's a sort of hypothesis around GLP-1s or I don't know, maybe there's some other things people could be buying, having a huge impact on particularly HSA spend actually, if you look into the thing, on a unit basis, HSA spend this quarter was actually a bit lower than we might have expected. And FSA HRA spend was a bit higher even after factoring in the fact that, that spend is going to be high in this quarter for reasons related to seasonality and runouts and so forth. So I just don't -- we -- because we get asked this question, kind of Richard gets asked some version of it often becoming something of a GLP-1 expert. And it doesn't need anything.

So that's his solution. But I guess in all seriousness, I don't see it. And then with regard to just the first part of the question, which was [indiscernible], I think the answer is a little. I mean, you had a period of time where people didn't have access to their accounts and so forth. And that may explain why HSA underperformed just a little bit, and I know a little bit. But I think if the question is, does this quarter either provide anything that would support or address this sort of thesis. I don't know how to kill this thesis, but I can't find any evidence for it.

[Operator]

The next question is from Stan Berenshteyn with Wells Fargo Securities.

[Stanislav Berenshteyn, analyst]

Maybe on digital wallets, if I may. Jon, at the Investor Day, you spent obviously a lot of time and the team talking about the capabilities I was just wondering if you could give us a sense of whether the digital wallet rollout have any the type of impact they had a member adoption reception and whether it had any help for you in terms of driving client conversions?

[Jon Kessler, executive]

Client conversions was certainly helpful. it's still very early for digital wallet. And in particular, the way this is working Stan, is we're doing kind of 2 things at once. right? The one is that we're consolidating the various processor agreements we have into one. So that's for those of our 70-odd million members who are 60 million members or cardholders, that's a card conversion. Our park conversions are a little more complicated, actually 3 things. Two, we've added chip, which in normal banking world, no big deal at this point. In our world, a little bit more big deal because there is -- it turns out not standard logic at the merchant level for how to deal with chip, particularly at the pharmacy. And so we talked about that last quarter is something we would have to overcome and do a good job.

And then lastly, mobile, putting all of that, including stacked card on mobile. I think ultimately, the way this will help us is to pull. First is -- and I -- so I think at the moment, its primary benefit is it's an innovation that people can talk about is both new client sales and particularly FSA conversions where we have an HSA client and we can stack that FSA on top of it. And we don't report FSA sales figures, but suffice it to say we're doing well so far this year on our pipeline there. And I guess we don't report anything. But so I think that's one way in which it helps -- the second is, ultimately, on the expense and member experience side is we've discussed a lot of these expenses associated with open enrollment are driven by the need to produce cars, get them out there and so forth. And I want to be clear, we're still going to do all of it this year. We're not forcing anyone into mobile wallet.

But eventually, we will -- mobile wallet will be the default. And at that point, busy season will become more like busy week and busy week is a lot easier to handle than busy [indiscernible].

[Stanislav Berenshteyn, analyst]

Got it. Very helpful. Maybe just a quick follow-up. So obviously, you're talking about a digital wallet lots of flexibility, usability there that's opening up on the mobile side. I'm just curious, does this are these expand maybe into lifestyle spending on? And is this something that you have considered?

[Jon Kessler, executive]

We have a lifestyle product today, and it does okay. I think there's a little bit of -- it's probably safe to say there is more smoke than buyer on the lifestyle accounts, but we have that product. It does fine, and it's something that is is stackable on the wallet. So for those folks, the way lifestyle works there are some folks who don't really want to use a card for it for a number of reasons. But I guess my short answer is sure. That having been said, our focus in the company broadly and certainly in this regard is really around helping people is around empowering consumers of health care. And there's some significant overlap between lifestyle and health care. But growing the LSA category is not a huge focus for us. Just it doesn't quite move the needle. And I think our view is there's some stuff there, but it's not -- it's not enough to fill the Thanksgiving dinner. Thanksgiving table. .

[Operator]

The next question is from David Larsen with BTIG.

[David Larsen, analyst]

Congratulations on a great quarter. Can you talk a little bit about your take rate or your yield sort of buy investment category. And if you don't want to get too specific, I totally understand that, but like you have cash, you have enhanced rates and then you have what I think of as like your legacy sort of investment accounts. And I sort of thought that your yield was lower on invested assets. So as more money goes into the enhanced rates products, could that potentially pressure your yield or not? And your yield seems fine, but just any color there would be very helpful?

[Jon Kessler, executive]

Yes. I'll kind of take that in pieces. So that the there's no custodial revenue from the investments anymore. Like that's the thing we shifted. So the custodial line is the blend of the cash yield on enhanced rates and basic rates. And we've sort of talked about, on average, we're doing 5-year treasury plus, call it, 75 on enhanced rates and 5-year treasury plus 10 or so on basic rates. And obviously, the T is at the time of placement. So you're going to have a big mix there. On the investment side, yes, of course, right? We're on earning about 30 bps headline rate on invested. I think we blend out to 28 basis points or so. That is in the service revenue line. And I don't -- I tend to not think of it the way that you freeze the question, right? It's not a matter of our members are going to take all of their cash and move it into the investment account, right?

It's a it's a cash account, coupled with a brokerage account. And so as our members continue to save higher balances, they become investors. So it's not one or the other, right? It's to grow the cash balance and then they become investors. And yes, like on the marginal dollar, we earned considerably less on the next investment dollar. But that's the right thing for the member to do at that point. And over the long term, I like being leveraged to U.S. markets, right, in that investment line and we help member grow that account. And hopefully, they become managed account clients as well, and we can actively help them grow that balance. But they're not -- it's not one or the other. Right? It as a member moves along in its maturity, that's how they become investors.

[Operator]

SP1 The next question is from Stephanie Davis with Barclays.

[Stephanie Davis, analyst]

Congrats on the quarter Jon, I have to ask this whole mobile wallet call out. You know how much I take I hate taking my hole up way card on the subway. Does this mean I'm actually just use it -- if sinework Apple wallet were done?

[Jon Kessler, executive]

Yes. And I will say thank you for that really belongs to New York MTA. It's easy to underestimate the complexity of what they're doing with this product. And we went through this whole thing where there was some nonstandard programming in their system in [indiscernible] MTA did a great job of getting their folks, their contractors in here in a way that I don't think we all normally expect from the New York City subway. But I do appreciate that and not just because I'm taking the sub way back to my hotel,

[Stephanie Davis, analyst]

Okay. So let's put this framework in mind. You talked about chip cards and 1 of your early question and answers. Chip cards issue. Are you going to find a way to have users opt out of the card overall, so you can get rid of that cost from your whole expense algorithm? Or am I getting ahead of my skis?

[Jon Kessler, executive]

I think the answer is yes. We will ultimately, as I said in the commentary, our ultimate aim and emit my people who do open enrollment when we talk about this, what would be like Jon, that's hard or that you think. You can imagine we get that look at casein. But we think that, that's the right answer, particularly when you actually look at it, I mean people have -- families are complex. So it might be that we -- there's the one card that's going to our member. There's another that's going to the step kid over -- but why not our view is that ultimately, the idea that the piece of plastic is somehow an advertisement is sort of past its due date. And that ultimately, that's going to be -- mobile is going to be your default, which, by the way, means you're going to get your card earlier. It's going to be easier to update when you -- when it rolls over. .

It just -- there's a lot of good that comes from that. That has been said, Stephanie, I think the biggest -- while it is true that those darn ships are not free, we do get to amortize the the lease. But -- but but over a couple of years anyway. But I think the bigger point is the cost that we incur and the hassles that members and clients incur in this process that goes on from December from roughly the beginning of December through the beginning of January, where you're translating from an open enrollment decision that a member made to the client closing open enrollment and processing their stuff where they're vendor processing their stuff to data that comes to us to car issuance, the card printing, to card packaging to the May Oli Christmas time. It's just not not a scalable process. So we're trying to get rid of that. And I think that will help that as I said, the way to get a sense of that is you look at that bump that we have at the end of the year.

And in the fourth quarter and typically in January -- or sorry, February in the first quarter as we wind down. And -- if we can make that bump kind of go away or be less lumpy, that we have good thing, and that gives you a sense of order of magnitude.

[Stephanie Davis, analyst]

That kind of leads into my follow-up. You're talking about these AI opportunities in the prepared remarks. You've got it, like I see a pretty obvious card issuance and statementing opportunity. Like what is your what is the cost savings road map that helps your margins beyond China, Chelsea the leverage that you keep getting from rates?

[Jon Kessler, executive]

And this is a question I asked Jim a lot. He had like 6 months. So now I can just throw things at --

[James Lucania, executive]

The same thing that I say to Jon, is that like we're not going to parse out the list, right? So. There's a long line.

[Stephanie Davis, analyst]

You tell Jon that?

[James Lucania, executive]

Yes, of course, of efficiency opportunities for what is the objective of not just the financing, the objective of the service delivery team is to drive down every year their unit cost to serve accounts. And that's going to come in a number of places. And it's a math that you guys can do as well, right? You can look at our service costs and divide it by our total accounts and watch that trend line because that's the same trend line that our service leaders are looking at every month in their results and making sure they're continuing to drive progress there. We're talking about the big things because, yes, like if we can eliminate card printing completely and paper and envelopes and postage and reissue because the dress has changed, and you remember, forgot to tell us that they move right?

Yes, there's a large bucket of cost there. Will it all be removed in one single quarter, it will not, right? So it's part of -- this is the long-term objective of our investments on the cost side and the service teams drive to efficiency, right? Like this is old school, LenSx Sigma process improvement, continuous improvement work. new tools, same I think exactly Yes.

[Jon Kessler, executive]

Thanks, Stephanie.

[Operator]

The next question is from Mark Marcon with Baird.

[Mark Marcon, analyst]

My congratulations for quarter -- with regards to -- I had similar questions just with regards to like kind of disaggregate the benefit that you ended up getting in terms of the gross margin. If we think about it roughly speaking in terms of scale versus reducing unit costs, when it's fair to say that we're still at the really early stages with regards to reducing unit costs. That's one question. And then the follow-up is -- can you talk specifically about what happened on the chain gross profit margin because gross margins were terrific, but that one was a little bit softer than the year ago. So just trying to fully understand.

[James Lucania, executive]

Yes, I'll start I'll start with that.

[Jon Kessler, executive]

That's a really good call out.

[James Lucania, executive]

Yes, very good yes, very good call. Yes. So Intertractually, Jon sort of talked about that in the commentary. You mentioned that Yes, we're in the process of moving to both a new and a single card processor. And so you're seeing a bit of we're operating on multiple card processors now and not just the service cost of multiple processors, but we have some development costs related to the interchange shift there that hits that line. So that's what you're seeing or being or...

[Jon Kessler, executive]

And that's going to -- will be done at said this before. We'll be done with this transition in August. So that -- you're going to see a little bit of that. And you're going to see a similar thing in the second quarter and the first bit of the third quarter, the same thought, where we're basically paying 2 processors at.

[James Lucania, executive]

Yes. And then Yes, the other side of yes, I think it's not like a -- but there's a start in the end, right? Like the point of continuous improvement on our service cost side is that there's continuous improvement. So like there's not a day where I say, well done, guys, you're done. You don't have to try to be more efficient. So we -- the sales and retention side of the house has to deliver their part of that, right? Of course, growing accounts helps helps become more efficient and not just driving down the cost. But those work hand-in-hand. So I can't say that we walk through and say that this much is related to continuing to grow versus this much is related to our improvements. We're trying to do both of those things, right? It's driving out calls from the call center, more self-service, more automation, these work hand-in-hand.

[Jon Kessler, executive]

I think Mark is driving to his conference tomorrow?

[James Lucania, executive]

That we're going to see?

[Jon Kessler, executive]

Are you driving from from -- the New York -- are you on higher turn?

[Mark Marcon, analyst]

No, I'm in New York right now. I'm looking forward to see you.

[Jon Kessler, executive]

No, that's the nondenial like that -- you're not doing how we got here.

[Mark Marcon, analyst]

I flew this morning. Thank you. .

[Jon Kessler, executive]

We do have plans.

[Operator]

The next question is from Jack Wallace with Guggenheim.

[Jack Wallace, analyst]

So just wanted to circle back on the benefit wallet transfer. And just relative to your expectations coming into the quarter. just how the account retention fared, say, the cash AUM of the retained accounts and then the time and cost to transfer, again, just trying to get a feel for this it looked like this was slightly better across most metrics, but you tell me, it sounded like this was done in a pretty efficient manner?

[Jon Kessler, executive]

Yes. I mean we had the virtue of guiding in March and like we'd already done part of it. We're doing part it in a couple of days, and we had data from the other side. I'll take that if that yes. That's the kind of forecast. So I think that's probably fair. I'd say the one thing that we want you to be mindful of as you get into the rest of the year is that we would expect to see some incremental attrition here, whether that attrition affects assets very much so now, right? But it's always the case that we assume in these larger transactions, some post account attrition. It's not -- I don't think it's going to be in the nature of the WageWorks thing because in the wage work states -- it was already like by the time it was already 2 years after the transaction, right?

Here, it's more of our conventional portfolio acquisition, which really minimize that stuff. But just something to think about over the remainder of the year, particularly as we get into the December quarter, as I say, the Jan 31 quarter. But look, I guess my short answer is the one item where the transaction really ended up doing better than we expected at last guide really is the one I highlighted in the commentary, which is that we had assumed about 80% enhanced rate penetration, we got [ 85% ] and you can -- one can calculate the delta on that pretty well.

[Jack Wallace, analyst]

That's helpful. And then just to double click into the attrition, your comment there. So by my math, we had about 49,000 accounts or so that didn't transfer over -- is it fair to just assume that, that will hit the attrition line in the first quarter? Or is there within that bucket, something to come up?

[James Lucania, executive]

Yes. No, good call out there. Yes, from when we originally announced, right, that we crossed the benefit here, right? So that benefit will it had some attrition before we acquired it. But yes, we sort of assume.

[Jon Kessler, executive]

There are also accounts that like a Yes. others or the like we didn't -- that were long ago, and they don't have any of the health claims data or the like. So there was no point in bringing those over that's real -- those are -- that's not really what we're talking about. And we're talking about like in the -- let me just say it this way, in the quarter, right? There are about 40,000 accounts Yes, right. That were benefit wallet accounts that came over, so they're in the number in the [ $400,000 ] that we closed right? The bulk of those were more than 50% of any way, we're actually cases where there was already a HealthEquity account on that side of the member. And so we merged them.

[James Lucania, executive]

Yes. We don't try . Yes. So it looks in our numbers, like you might say, "Oh, like the closed accounts are higher, like, no, they're not actually closed accounts. We didn't we didn't net acquire the full amount because they already existed on the platform. But we brought the assets in and just merged and purge them into the existing HealthEquity account.

[Jon Kessler, executive]

It's robably also a good place to mention one other thing here. You know it's going to be .

[Jack Wallace, analyst]

No,

[Jon Kessler, executive]

It's also in the quarter, we're getting ready for the next wave of the further platform, which is called SAM, I don't know what SAM is. Maybe it's a lord of the rings thing, I don't know. But in any event, Sam is leaving us. And -- so we're moving that business over in cooperation with our health plans. And so we also did a little cleanup on that platform of accounts that -- for some of the same for some of the same reasons, we are -- this doesn't make sense to bring over at this point. And so that elevated our churn a little -- actually a few more than a maintenance because there was more original accounts around.

[James Lucania, executive]

70,000 further 0 balance accounts we closed.

[Jon Kessler, executive]

And outside of that, it was a normal quarter.

You got more than you bargained for on that.

[Operator]

The next question is from Constantine Davides with JMP.

[Constantine Davides, analyst]

Thanks. Good afternoon. Good start to the year in terms of new HSA accounts. I'm just wondering if you could expand on your comments around a couple of the more recent Blues partners and how they're contributing a bit more this year? Just a little more color on that. And then I think you also referenced some small and midsized momentum in terms of new accounts. I'm just wondering if the pipeline composition is a little more skewed to that part of the market this year?

[Jon Kessler, executive]

Yes. I'll hit the second part and then invite Steve to maybe just talk broadly about our strategy and our commitment to lose and what we've tried to do to make that commitment very clear in the choice. But just on the pipeline question, while we don't other than the test of the dynamic, we don't guide the pipelines, and we don't tend to like to talk about pipelines other than the very abstract. I think it's fair to say that if you look at our pipeline now, for sales for the remainder of the year. And your -- both and you segment it, both SMB and enterprise are -- and these are for new logos to be clear. Our -- at or ahead of where we were a year ago.

I think they're actually both slightly ahead of where we were a year ago. And so that's where we are in terms of the pipeline. Again, I stress that's new logos. And in any given year, new logos only make up a give or take a quarter of of new accounts. The rest come from growth in existing. But Steve, if you want to talk a little bit about our whole way we approach Blues and how that's relevant here.

[Stephen D. Neeleman, executive]

Absolutely. Thanks, Constantine. Yes. So I mean, just in general, you can imagine these -- most of the blue plans are non profit, there is certainly a large for-profit Blue plan. But a lot of these folks, they just -- they've always, I think, loved the idea of being able to have a company like HealthEquity come in and bring this consumer platform that is what we would refer to as an integrated platform, meaning that when somebody decides to go down the road of a higher deductible plan that says costly qualified or anything that would allow for our CDB suite of products that it needs to be easy to use these. And so integrated enrollment and then ultimately integrated claims and then integrated investments and just all of these different solutions we brought to market. And it needs to be seamless. And by doing that, it allows them to compete against some of the big national plans that historically have been able to invest more money in the solution.

And so you can imagine that in order to create not only the pipes and go together, making this integrated experience, but then also to start training salespeople on on why they can take this to market and really compete when it comes to going head-to-head with some of the more named carriers that are out there, it just takes a little time and it takes some trust. And one of the things that's happened historically is that when it was an unintegrated experience or not integrated, it didn't work so well. So sometimes those account managers were more inclined to say, "You know what, I'll just like to see kind of line if somebody ends up with an HSA-qualified plan and they go to their local bank or their local credit union or they end up with one of our competitors, then it's kind of in their opinion, it was less noise.

But -- what they've also found out is that see contain maybe have a little less noise in the sales process because they're not introducing an integrated department on HealthEquity, it does put them in a strategic disadvantage. And so -- so that's what we spend our time on. We have people throughout the whole country, working in these lot partnerships. And we've talked about [ abluzumab ]. I mean it basically goes from the East Coast all the way across the West Coast. We have great representation in the different sectors of the country, the Southeast, the [ Manic ] that in kind of the Sunbelt states and the Northeast has always been a strong role for us and we made great strides up in the Northwest. And so -- it's just -- and I wish I could say it was like some secret magic code we figured out, but it's not. It's going back to what we've been doing now for over 20 years at equity, which is providing what we believe is the best seamless integrated experience for people that are going into these types of arrangements and then having the best customer service 24/7, 365.

And so when -- and the nice thing is when we can actually go in and provide that to a Blue's plan, in this case, taking out loose network and their employees. We do it also for non-Blues plans, vertically integrated plans. -- when they actually start to say, "Boy, I experience myself, then they're willing to go out and sell it to the clients. And so I think that it did take a little while because of all we had going on with the WageWorks acquisition that we're coming up actually on our fifth year now in another few months, will be 5 years into that and then further followed that -- so it has taken a little bit of time to dedicate resources to it, but we're getting more and more integrated in a single platform with all of these plans every day. Jon, is there anything else you would add? I mean, I want to make sure I'm covering...

[Jon Kessler, executive]

No, I don't think I could have made that one better.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Jon Kessler for any closing remarks.

[Jon Kessler, executive]

Yes. I -- There are a lot of people at HealthEquity at our partners at our clients that are working their [ butts of ] right now. And I mean, it's -- we're entering a time of year where there was a long -- there used to be a little bit of a lull this time of the year. Those days are going. It's super business. And I think, busyin a very productive way. And so I'm very confident that our long-term shareholders and our long-term analysts and our long-term shareholders and analysts to appreciate that. But we also very much appreciate your support. It's been a few quarters since I've been able to genuinely say thank you and have the time for that in this call, but I'm glad I'm able to do it here. So I guess that's a great way to close. So at least it's my way to close. .

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.