Healthequity Inc

NASDAQ:HQY

Earnings Call Analysis

HealthEquity's Strong Q3 Growth and Positive 2025 Guidance

In Q3, HealthEquity reported a 21% increase in revenue, reaching nearly $400 million, driven by substantial growth in HSA members and assets. The company's net income stood at $5.7 million, with non-GAAP earnings per share up 30% to $0.78. Looking ahead, they forecast 2025 revenue between $1.185 billion and $1.195 billion, with adjusted EBITDA expected to be between $470 million and $480 million. The average yield on HSA cash is projected at about 3.1%. Management remains optimistic about navigating operational challenges and sustaining growth in the increasingly competitive healthcare account landscape.

Positive Momentum in Financial Performance

In the third quarter, HealthEquity showcased remarkable financial growth, with revenues climbing 21% year-over-year to reach $713.5 million. The company’s adjusted EBITDA also saw an impressive increase of 24%, finishing at $118.2 million, reflecting a healthy EBITDA margin of 39%. Notably, custodial revenue soared by 41% to $141 million, driven by a significant rise in HSA assets, which now total $30 billion, marking a year-over-year increase of $7.4 billion.

Sustaining Growth through Operational Efficiency

HealthEquity's management highlighted ongoing operational efficiencies thanks to significant investments in technology. Furthermore, projected annual yields on Health Savings Account (HSA) cash are expected to stabilize around 3.1% for fiscal year 2025. This steady cash yield is crucial as it’s indicative of the firm’s ability to maintain competitive advantages within the market.

Robust Guidance for Fiscal 2025 and Beyond

Looking ahead, the company provided ambitious guidance for fiscal year 2025, with projected revenues in the range of $1.185 billion to $1.195 billion. They forecast GAAP net income to land between $88 million to $96 million, translating to a per-share gain of $0.99 to $1.08. For its non-GAAP income, estimates sit between $274 million to $281 million, or approximately $3.08 to $3.16 per share, supported by an approximate share count of 89 million.

Challenges and Resilience Amidst Fraud and Costs

Despite its successes, HealthEquity faced challenges, particularly concerning excess service costs which swelled by about $8 million due to sophisticated fraud activities. These event-driven costs are expected to taper off significantly as the company transitions beyond these incidents, projecting only modest carryover into the fourth quarter.

Strategic Share Repurchase and Debt Management

In a demonstration of confidence in their growth strategy, HealthEquity repurchased $60 million worth of its shares as part of a previously announced $300 million buyback program, leaving $240 million of the authorization remaining. As of the end of the quarter, the company maintained $322 million in cash while effectively managing $1.1 billion in outstanding debt.

Exciting Prospects for Fiscal 2026

HealthEquity issued a preliminary guidance for fiscal year 2026, projecting revenue between $1.275 billion and $1.295 billion with adjusted EBITDA margins anticipated to improve to around 42%. This guidance is dependent on the continued strategic expansion of HSA cash deployments as part of the firm’s effort to enhance member outcomes through improved access and consumer engagement.

Emphasis on Legislative Advocacy and Market Expansion

The management is optimistic regarding legislation aiming to expand the accessibility of HSAs, notably through the HOPE Act. This act, if passed, is expected to significantly increase HealthEquity's total addressable market by enabling more demographics to gain HSA count, potentially adding an extra 40-45 million eligible households.

Conclusion: A Strong Position with Future Potential

In conclusion, HealthEquity stands at a strategic junction with solid growth metrics and an optimistic outlook. Given current guidance, effective management of service costs, and legislative opportunities, the pathway ahead seems promising for investors eyeing long-term value growth.

Earnings Call Transcript 2025-Q3

[Operator]

Good afternoon, and welcome to the HealthEquity Third Quarter 2025 Earnings Conference Call. 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, Nick. Hello, everyone. Welcome to HealthEquity's Third Quarter of Fiscal Year 2025 Earnings Conference Call. My name is Richard Putnam, Investor Relations for HealthEquity. And joining me today is Jon Kessler, President and CEO; Dr. Steve Neeleman, Vice Chair and Founder of the company; James Lucania, Executive Vice President and CFO; Scott Cutler, recently appointed successor President and CEO beginning in January.

Before I turn the call over to John, I have a couple of reminders. First, a press release announcing the financial results for our third quarter of fiscal 2025, and was issued after the market closed this afternoon. These financial results include the contributions of our wholly owned subsidiaries and accounts they administer. Press release includes definitions of certain non-GAAP financial measures that we will [ reference ] here 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 a 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, December 9, 2024 and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates or other information that might be considered forward-looking. There are many important factors relating to our business, which could affect the forward-looking statements made today. These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from statements made here today. We caution against placing undue reliance on these forward-looking statements. And we also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock as detailed in our latest annual report on Form 10-K and in subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information or future events.

Now over to Mr. John Kessler.

[Jon Kessler, executive]

Thank you, Richard, well done as always. Hi, everybody, and happy holidays. I will briefly discuss Q3's momentum in key metrics, and then we've got a cavalcade of stars. Steve, who'll describe post-election paths to health account expansion. You're going to want to hear about that. Jim will detail Q3 financial results, raised FY '25 guidance and preview FY '26, I know you're going to hear about that. And then, we're privileged to have Scott Cutler here with us with a few words of introduction.

In Q3, the team again delivered double-digit year-over-year growth across most key metrics, including revenue, which was plus 21%, adjusted EBITDA plus 24% and HSA assets plus 33% and HSA members grew 15%, driving total accounts up 8%. HealthEquity ended Q3 with 16.5 million total accounts, including 9.5 million HSAs [indiscernible] $30 billion in HSA assets, which is a lot. In fact, the HSA assets increased $7.4 billion year-over-year. And we grew the number of our HSA members who invest by 21% year-over-year, helping to drive invested assets up 58% to $13.6 billion. And if you subtract that from $30 million, you know that HSA cash reached $16.4 billion. With sales and digital member education in action, I wanted to say like firing on all cylinders, but there was a lawyer problem with that, so I didn't say that. I'm not even sure what the lawyer problem was in any case, Team Purple opened 186,000 new HSAs organically in the quarter, and that's 14% more than Q3 last year. Our HSA members added $0.5 billion in assets compared to a $0.6 billion decline in Q3, which is typically a lighter quarter organically. In fact, average HSA balance has grown by double digits over the past 12 months, which is awesome for our members and awesome for our mission. Net CBs were up $0.1 million quarter-over-quarter, though flat year-over-year which is a reminder of the impact of CDB comps on CDB comps, clearly meaning the wrong thing, of runoff of national emergency accounts. This will be the last time I will have to say that, not only because it's my last earnings call, but because we are lapping those comps.

We faced a monster year-over-year new HSA sales comp in Q4. It's a monster. We had an incredible Q4 last year. But the team's performance over the first three quarters of fiscal '25 gives it a really good chance to break the full year record for new HSAs, which would be incredible. Our operations teams were also very busy in Q3, completing the final wave of single card processor consolidation while battling a sophisticated and persistent fraud actor. These broad activities led to excess of both of these kinds of activities, I'm sorry, led to excess onetime service expense, which Jim will detail a top seasonal spend for new partner and client implementations and hiring and training and testing for a successful open enrollment season, which is now very much underway. You should feel confident though that the underlying trend of service cost reduction through remarkable digital experience continues with AI transforming more member contacts and claims interactions and mobile wallet integration so planting more plastic. If you have a HealthEquity card and it's not your mobile wallet, you got to do it. Time to do it. [indiscernible] Jim?

[James Lucania, executive]

Not yet.

[Jon Kessler, executive]

Because you don't spend any of it.

[James Lucania, executive]

Nope.

[Jon Kessler, executive]

Okay. All right. We need to work on that. Richard, you've done it?

[Richard Putnam, executive]

Nope.

[Jon Kessler, executive]

Steve? Steve's done.

[Stephen D. Neeleman, executive]

Absolutely.

[Jon Kessler, executive]

I know Steve's done, [indiscernible]. Okay. All right. I've done it. It's awesome. You should do it too. Speaking of busy, it's election day behind us, Steve and the advocacy team are now supporting multiple efforts to expand American's access to personal portable health accounts. Let's hear about it. Steve Neeleman.

[Stephen D. Neeleman, executive]

Thank you, Jon, as always, a fantastic kickoff then. We're going to miss it. Anyway, we now see three approaches to expanding access to personal portable health accounts. These include bipartisan legislation, budget reconciliation by the Republican majority and rulemaking by the new administration. The bipartisan HOPE Act, formerly known as HR 9394 would enable all Americans with ACA qualified health insurance that isn't HSA-compatible, including all Medicare recipients to save and invest tax-free for medical expenses and it encourages employers to contribute to the savings of low and middle class income employees.

Introduced in August by three Democrats and three Republicans. The HOPE Act now has the endorsement of the House problem solvers caucus, which includes 32 Democrats and 27 Republicans. Hope has also been endorsed by diverse interests, including the American Benefits Council, whose members include 430 of the nation's largest employers, a few labor organizations and the U.S. Chamber of Commerce, which is the country's largest business organization. Another path is budget reconciliation. This has been used by Democratic and Republican majorities in recent years, to pass wide-ranging tax and spending bills because it is not subject to filibuster, and the next Congress is likely to produce multiple reconciliation bills.

Also, the HSA Modernization Act and the bipartisan HSA Improvement Act, which were both passed by the House Ways and Means Committee in the current Congress are examples of HSA expansion, the majority can attach to a reconciliation bill. These two bills would expand HSA access to working seniors on Medicare. It would also include expansion to VA beneficiaries and Americans with Indian health service coverage, would also provide for HSA funding from unspent FSAs and HRAs, it would raise annual HSA contribution limits as well as making spending from HSAs more flexible and consumer-friendly. And finally, the incoming administration can use its rule-making authority within existing HSA law to expand access to the accounts. For example, by further expanding the wellness and preventative care that HSA-compatible plans may cover outside of the required deductible or recognizing the actual value of insurer contributions to HSAs offered with plans on the ACA exchanges and also approving HSA-compatible plan designs in Medicare Advantage. These are all ways that they can do that. The administration may also expand HSA's eligibility to wellness and fitness expenses.

Finally, Americans with access that have HSAs make health care more affordable and exhibit more of the healthy behaviors that reduce health care costs. Moreover, personally owned portable and investable health accounts are widely popular among young and old, liberal and conservative. So we are quite optimistic about legislative and regulatory action to expand access and will continue to support through advocacy, expert advice and credible research.

I'll now turn the time over to Jim for our results and guidance. Jim, take it away.

[James Lucania, executive]

Yes. Thanks, Steve. Thanks, John. I will briefly highlight our fiscal third quarter 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 '24 and '25 for comparison.

Third quarter revenue increased 21% year-over-year. Service revenue was $119.2 million, up 4% year-over-year, reflecting growth in total accounts, HSA investor accounts and invested assets and lower average unit service revenue as product mix continues to shift toward lower headline fee HSAs. Custodial revenue grew 41% to $141 million in the third quarter. The annualized yield on HSA cash was 3.17% for the quarter as a result of higher replacement rates and continued mix shift to enhance rates. Interchange revenue grew 15% to $40.3 million, again, notably faster than account growth as members increased contributions and distributions and conducted more payments on HealthEquity's card and platform versus requesting cash reimbursement for payments made off platform. Gross profit was of $197 million was 66% of revenue in the third quarter this year, up from 64% in the third quarter last year. As Jon mentioned, in addition to seasonal factors, gross profit during the quarter was reduced by approximately $8 million of excess service costs incurred to protect members from and reimburse those impacted by sophisticated fraud activity and to assist members during the final and largest phase of our card processor consolidation. While the seasonal ramp-up continues as a result of the sales success as Jon discussed, we believe these event-driven costs are largely behind us and expect only modest carryover into Q4.

Net income for the third quarter was $5.7 million or $0.06 per share on a GAAP EPS basis and included the $30 million onetime settlement of the WageWorks lease termination lawsuits that we disclosed on Form 8-K in November. Non-GAAP net income was $69.4 million or $0.78 per share versus $0.60 per share last year, which excludes that onetime cost.

Adjusted EBITDA for the quarter was $118.2 million, up 24% compared to Q3 last year, and adjusted EBITDA as a percentage of revenue was 39%, up from 38% in the third quarter last year. but of course, was impacted by the event-driven service costs I referenced earlier.

Turning to the balance sheet. As of quarter end, October 31, 2024, Cash on hand was $322 million as we generated $264 million of cash flow from operations in the first nine months of fiscal year '25. The company repaid $25 million of revolver borrowings during the quarter, leaving approximately $1.1 billion of debt outstanding net of issuance costs. The company also repurchased $60 million of its outstanding shares during the quarter under the previously announced $300 million authorization, leaving $240 million remaining.

Today's fiscal '25 guidance reflects the carryforward of our strong sales trajectory, operational efficiencies resulting from our technology investments and current forward interest rate curves. We expect revenue in a range between $1.185 billion and $1.195 billion. GAAP net income in the range of $88 million to $96 million or $0.99 to $1.08 per share and includes the $30 million settlement mentioned earlier. We expect non-GAAP net income to be between $274 million and $281 million or $3.08 and $3.16 per share based upon an estimated 89 million shares outstanding for the year. Finally, we expect adjusted EBITDA to be between $470 million and $480 million. We now expect the average yield on HSA cash will be approximately 3.1% for fiscal '25.

As a reminder, we based custodial yield assumptions embedded in guidance on projected HSA cash deployments and rollovers, a schedule of which is contained in today's release as well as 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. Seasonally, our fourth quarter is usually our highest service cost quarter of the year as are busy onboarding season peaks. Our guidance also includes additional expected share repurchases under the $300 million repurchase authorization. We expect both to return capital to shareholders and reduce revolver borrowings in the remaining quarter of the fiscal year. With continued strong cash flows and available borrowings on our revolver, we will maintain ample capacity for portfolio acquisitions should they become available. 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 '25 at about 20%. 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 the 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 included. We're also providing the following initial guidance for fiscal year 2026. We expect revenue to be between $1.275 billion and $1.295 billion. We expect margins will expand with adjusted EBITDA growing to approximately 41.5% to 42.5% of revenue in fiscal 2016. This initial guidance is based on an average HSA cash yield range of 3.4% to 3.5%. Based on our outlook of interest rate conditions, current forward interest rate curves for the year ahead and the continued mix shift for basic rates from basic rates to enhanced rates. A reconciliation of our adjusted EBITDA outlook for the fiscal year ending January 31, 2026 to net income, its most directly comparable GAAP measure is not included because our net income outlook for this future period is not available without unreasonable efforts that we're unable to predict the ultimate outcome of certain significant items excluded from these non-GAAP measures, such as stock-based compensation expense and income tax provision or benefit.

[Jon Kessler, executive]

Like all these introductions to other people who people want -- this is the closest any of us are ever going to get to hosting the Oscars. So thanks, Jim. It's now my pleasure genuinely so to introduce Scott Cutler, whom, as you know, or who, as you know, we did that to me -- who, as you know, will succeed me as President and CEO on January 6. Given that Scott is still at work managing a smooth transition at StockX, we are super grateful that he is in the office in the saddle joining today's call to introduce himself to you. Scott?

[Unknown Executive]

Thanks, Jon. Thanks, everybody. Great to join Team Purple. I am humbled, honored thrilled to be joining HealthEquity at this time, certainly filling some big sneakers from Jon in this transition, pun intended, Jon, I'm excited about three things in joining Team Purple right now. First, I am inspired by the mission of the company, which was infused into every conversation throughout this process. to save and improve lives by empowering health care consumers. I'm excited to work alongside Steve fulfilling this Mission.

Second, I'm excited to be joining the leading company in this space and continuing to strive to deliver outperformance in the market. Third, I'm excited to be joining the team in this next stage of growth at a time when the future holds so much opportunity for tech innovation. My career journey has been defined by digital and technology transformation across various industries, and HealthEquity will be the next chapter in the industry in that journey. I'm looking forward to continuing to drive our tech-enabled 3D strategy. first, delivering remarkable experiences. This is using data science and technology to digitize our remarkable Purple service and education while securing members' assets and information. Second is deepening partnerships using more advanced technologies to connect and extend the competitive advantage of our intelligent integrated ecosystem with our network partners. And third, driving member outcomes by combining proprietary technology, data science and integrated partnerships to empower members to make better health and financial decisions.

I really want to thank Jon, Steve and Team Purple for welcoming me and their support in this transition process. I'm excited to be working with the team to deliver on our commitments to partners, clients and members to our investors, to each of you. I look forward to meeting many of you in upcoming conferences and reporting to you our progress towards our outlined objectives.

[Jon Kessler, executive]

Thanks, Scott, and a nice start on the puns, well done, the company may continue. Let's go to Q&A. Operator?

[Stephanie Davis Demko, analyst]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today will come from Gregory Peters with Raymond James.

[Charles Peters, analyst]

Well, good afternoon, everyone.

[Jon Kessler, executive]

Good afternoon. Let's have it. Let us have it, man. Come on.

[Charles Peters, analyst]

Let you have it. Well, I have one question in 7 parts. Jon, that will give you an opportunity to give me along with, I'm sure, a number of the other sell-side analysts are hard time for the remainder of the hour. Welcome aboard, Scott. My one question in several parts is the big picture is the revenue guidance on fiscal year '26. If I'm not mistaken, it's probably a little bit below consensus, reflects high single-digit year-over-year growth. So maybe you could give us some color on the several parts that are comprising the fiscal year 2016 guidance.

[Jon Kessler, executive]

Do you want to take this one first?

[Unknown Executive]

Sure. Well, yes, I think on the main port -- like the key part of the guide is our expectation on the custodial yield, right? [ 3.5 ] I think it's the logical build. You have the refresh of our HSA cash maturity schedule. You see what's maturing. You see where the 5-year is today and a reasonable premium to that placed in a combo of enhanced in basic rates. So the pickup on those maturing assets is not as big, so call it sort of roughly $4 billion being replaced in the next year for round numbers at today's rates and you're rolling off roughly 3.2% average rate. So I think you can do that math and comfortably get inside our range there. And I think on the other main line, like we are significantly outperforming in the interchange line. Big step-up in spend per account, right? Remember that we consider that as service revenue. You'd expect it to normally grow with account growth [ ex COBRA ], which doesn't have a card. But this year, we're really outperforming that. And so I think it's sort of prudent for us to be cautious about future contributions and send in that line. We're seeing contributions up. We're seeing spend up. We're seeing average ticket up. We're seeing usage of the card versus reimbursements up and I think it's sort of reasonable to expect that to dial back down in the forward year. And then don't forget, we've had tremendous, tremendous market action this year that you can't just annualize and roll forward into the next year. So bringing all of those drivers back into expected normalized growth, I think they'll come out to something close to what we just guided you to.

[Jon Kessler, executive]

Yes. And I would just add, just conceptually you always talk about outgrowing the market and then outgrowing our top line on bottom line and top line. And I think here, what we've tried to do is we always do with this first guide. We've only been doing the first guide for, what, [ 3 years earlier ], and we started it during COVID. And we always have this challenge that is what we try to do is we guide at this point to what we see. And so what Jim is -- and I think that's particularly true this year because I'm not going to write checks that I can't cash that I'm not going to be around to deal with, I messed up the metaphor but you know what I'm saying. And so when you really look at it, the yield is yield. We've given you the data that you can compute it and based on Q3 and if you're -- if you do the math, you're going to get -- you're going to understand our range pretty well. And if someone wants to ask about that, we can walk through it. That really leaves, I think, two variables that Jim highlighted that we're going to learn more about it, and I'll maybe add a third. But the first is actual average cash, right? Over the course of this last year, we've wobbled a bit in terms of an item is difficult to forecast, which is the amount of cash that goes into investments versus not. Right now, we have a rip in market. And the result of that, in my mind, has been some excess flow relative to our expectations, and that was certainly true earlier in the year. I think maybe a little less so late in the last quarter. But nonetheless, that's something that's very hard for us to forecast. And so what we'd rather do is, let's give it a little time before we give our first true guidance.

And the second thing that Jim mentioned is interchange. And we had a tremendous year on interchange at least up through three quarters this year. And it's a function of a lot of little things. But as many good things are, and the team has really worked on this. But ultimately, we can't -- what we'd rather see is let's -- and we can, let's see how January goes as part of the fourth quarter and whatnot, and that will give the team an opportunity to refine. I think if I throw in on top of those two things, just total account growth where you all can make your assessments. I think you should be able to get to a place that you feel is totally reasonable for fiscal '26. Was that one part of the multi part? Or was that the multi part. I think -- that was the multipart.

[Operator]

Next question today will come from Stan Berenshteyn with Wells Fargo.

[Stanislav Berenshteyn, analyst]

Jon, of course, wishing you best in retirement. I just want to say your insights and [ Jovial flare ] that you brought to the earnings calls will be missed. I do have the two follow-up questions actually on what Jim just discussed. Well, first, as it relates to the custodial revenue. As we think about next year, I believe there is some wage work assets there. And I'm just curious, is the pacing of the reset for fiscal year '26 assets in any way different than what we've seen this past year? And the follow-up is, I'll just throw it in it right now. The follow-up is if we think about interchange revenue, just touched on that, it wasn't surprising to see, I guess, a sequential decrease in revenue, 10% quarter-on-quarter, but gross margin went up, I think, over 400 basis points. Can you just talk about what drove the significant increase in the gross margin line?

[Unknown Executive]

Okay. Yes, let me take the first part first. And yes, well, obviously, there are some wage works assets that were placed more in the middle of -- or will be replaced more in the middle of '26 than like a typical year. Obviously, '25, we had a big slug of wage -- of a [ benefit wall of cash ] that came in. So this is not quite a normal year of placements either. But I will -- like one thing that we are definitely taking advantage of is seeing those big billion slugs of maturities in the next couple of years. We will take the opportunity and have taken the opportunity to pull forward some of those repricings. And so when the market gives us that opportunity, like we sort of treat that as a hedge without having to purchase a hedge from all of your -- the banking side of all of your houses. So we have taken advantage of that, and we will continue to take advantage of that if the market gives us that opportunity. So expect to see some of those maturities pulled forward and therefore, reinvested earlier than the maturity date. So I think that derisks as we've talked about many times, like this is $7 billion maturing over the next two fiscal years in very large slugs like that is one of our largest market risks. It's not that the -- it's hard to move the corpus that's invested. The yield on that is pretty well known, right? But those -- but the 5-year treasury on any point in time, 24 months out, I don't have a clue what that's going to be. And if I can be [indiscernible].

[Jon Kessler, executive]

You have a clue, it's like the first clue in the Scooby Doo but not the last one.

[Unknown Executive]

It's definitely not the last clue. All I know is whatever I forecast that rate to be or the forward curve forecast that rate to be, it's going to be wrong. So to the extent we can pull forward some of that, we'll do that. But -- and we're going to keep pushing that transition to enhance rates forward over time. But yet. Like I'd like to get to that finish line as fast as possible.

[Jon Kessler, executive]

You want me to take the second part?

[Unknown Executive]

Yes, sure, the gross margin.

[Jon Kessler, executive]

Yes. So fundamentally, I mean, the thing that is driving higher gross margin in the aggregate is the mix shift to HSAs and fundamentally. And we've been saying that for quite a while, and it's been true for quite a while. I think if I focus in on this quarter, as both of us commented on in the text, the -- there are some things that caught us a little bit. That's also why we guide the way we guide is because as we've said many times, there's kind of only one tail there. So -- but fundamentally, -- what's happening is that -- two things are happening simultaneously. You've got the HSA is outgrowing the rest of the business. Command HSAs are becoming more valuable, period. And that's a function of enhanced rates. It's a function of coming out of the COVID period, et cetera. And so -- and that process still has a ways to go. So we said early on that we thought that we would bring EBITDA margins into the 40s and fiscal '25 [ died ] implies exactly that.

[Operator]

And your next question will come from Glen Santangelo with Jefferies.

[Glen Santangelo, analyst]

Thanks for taking my question and Jon, good luck in retirement. I did want to ask you and Steve about this Hope Act. I mean, essentially, could you give us a sense for maybe how big the TAM is for HSA accounts today? And then, Steve, based on your understanding of the Hope Act, how much you think that TAM expands. And then, Jon, I don't know if you've had any conversations with anyone on the hill. I don't know how you sort of handicap the likelihood of this moving forward or how you expect this to sort of play out in the new administration in 2025.

[Jon Kessler, executive]

Steve, why don't you get started on this one?

[Stephen D. Neeleman, executive]

Sure. Thanks, Glen. Yes. So I mean, look, as we watched this for the last 20 years, we have a pretty good handle on the TAM, of HSA is headed. And we've always said that we think a market maturity going, it will be around 60 million, 65 million accounts. It's kind of in that same range of where you see employer-sponsored retirement accounts land. But there's over 100 million households in the United States, 120 million households. And so we've really tried to dig in and say who could benefit from personal portable accounts that can't either because they're in a government plan. I have a good buddy of mine that used to fly Black Hawk helicopters. And after 20 years in the military, came out and went -- took us first kind of private sector job at age 45 and they offered him HSA and he you couldn't have it, it's ridiculous. And so -- because he was disqualified because he has access to military coverage. And so [indiscernible] sure is we think that this will increase the TAM from where we think even if HSAs keep growing because there are some differences we can talk about HSAs and what the legislators have proposed with the HOPE Act, there's some slight differences, not the least of which is that any ACA credible coverage can have a hope account, whereas with an HSA, you have to be in this high deductible plan. But we think it could increase the TAM by as much as 40 million to 45 million households in these, which would be really exciting for people that are on Medicare, even Medicaid TRICARE, any health services, et cetera. And then there's just a bunch of union plans and things like that, that do not offer high-deductible plans. Exchanges, there's a lot of people that go into exchanges and I think well, I'm going to jump into an HSA too, but because of the way the plans set up on an exchange, they can't have an HSA. So that's kind of the big picture. We think it takes the TAM from the total addressable market of these personally owned portable investable accounts from $60 million, $65 million accounts to over $100 million.

Jon, did you want to add something else, and we can talk a little bit about kind of the sausage-making out there that's going on that we're seeing, but did you want to add anything?

[Jon Kessler, executive]

Well why don't you comment on that? Go ahead.

[Stephen D. Neeleman, executive]

Yes. So I mean, look, we were thrilled in the middle of the August recess legislators came together and they introduced the bill, and they've been working on it for a couple of years. They were certainly talking to the industry and saying, what can we do to get more people covered because out-of-pocket expenses are real. The average deductible for a family, Glen, in a PPO plan that is not HSA qualified is about $3,000. It's real money to an American family when the median household income in this country is about $70,000. It's a lot of money, $3,000. The median -- I'm sorry, the average deductible for someone in a high deductible plan, an HSA Qualified plan is about $5,000. So it's higher but still $3,000, $5,000 a lot of money for people. And so legislators know that. They know how to pocket expenses are very, very costly. And so they've been looking for different ways to do this. And so they came together, they talk to their colleagues in Congress. They talk to people on the other side of the aisle. And so when the house introduced, these house members introduced the bill back in August, we were pretty pleased. And then it's been kind of neat to see more and more have added. I think there's now over 20 bipartisan legislators. It's right down the middle of Republicans and Democrats that are supporting this thing. And then they did a vote in the [ problem solvers coccus ] about 60 legislators there that weighed in. And again, very bipartisan group. They're right in the middle, which when you look at the count numbers in Congress, and we're basically even with a few folks that are waiting to see if they can get appointed that have given up their seats. I mean, it's kind of a 50-50 split. That means when you get a block of 60 legislators in the middle that actually want to get some stuff done. It's pretty encouraging. And then we're starting to see a lot of other groups come in, as I mentioned in my prepared remarks, like American Benefits Council and some labor groups and things like that, that are coming in and saying, "Hey, we think this is a great idea. So with that type of momentum, then the question is, well, how do you get this done? And there's going to be stuff that will start moving. Obviously, you need to see the new Congress in January. And then it's where can you find a bill that can help tens of millions of Americans that hopefully will not break the budget, and that's where we think the HOPE act can fit that bill. They still need to go through a scoring process and finalize that. But the score should be lower than what we've seen in some of the other HSA expansion stuff just because of the nature of the HOPE account. But I think that hopefully gives you a little bit of an overview and happy to ask -- take another question or Jon, and I certainly refer to you since you've been in the middle of that sausage factory. There's a young graduate. Jon was making sausages.

[Jon Kessler, executive]

Richard doesn't want me to talk any more about this, but I'm going to.

[Richard Putnam, executive]

[indiscernible].

[Jon Kessler, executive]

I am. But I want -- I'm going to say something different, okay? But you're right, this is totally selling through the [indiscernible]. Well, played. Something that the inverse of what Steve just said is what happens when somebody out-of-pocket expenses, which every commercial plan in the United States has, right, which Medicare has, et cetera, et cetera, right? And they don't have access to one of these kinds of accounts. The answer is for every dollar that you're paying out of pocket, you almost have to earn to right? When you get through with the tax -- the federal taxes, the state taxes, the payroll taxes, social security taxes, right? Uncle Same, take a bite. And that's one of the reasons by the pain of out-of-pockets without access to these accounts or without using the well seems so disproportionate because you actually have to earn so much more to do it. It's just crazy that we would not be giving people this access, and it's time to do it. And so that sort of emotional visceral what if we don't do this, right, plus Steve's very tactical, he's really gotten into this very tactical kind of how do we do it? It's kind of the thing that led me to make, I think, pretty positive comments about this last quarter, which I believe this quarter even more so.

[Operator]

And your next question today will come from Allen Lutz with Bank of America.

[Allen Lutz, analyst]

Jon, I'm going to miss the one liners. So congrats on the retirement. One question for Steve. Going back to the potential Medicare expansion. Can you remind us just how that could theoretically work for HealthEquity? How should we think about your exposure to employers with Medicare populations as well as your exposure to health plan populations that have access to Medicare. Trying to understand how is the selling process to this type of population different or the same relative to your current customer base?

[Stephen D. Neeleman, executive]

Thanks, Allen. Great question. So we get questions every day in our service center about that 65-year-old that inadvertently enrolled in Medicare Part A because Medicare told them we needed to or she needed to maintain their Medicare rates, but it turns out they really didn't need to, and now they're making contributions into an HSA and they're doing the role, so they're ineligible. And so there'll be an immediate savings to be able to say, hey, look, we can rectify that situation. And really, that would remain true -- I mean, it could [indiscernible] we could say, let's get those dollars into a HOPE account or even with the HSA expansion efforts to pass the House [ Ways and Means ] Committee next year, that would help those working seniors that are in Medicare. That was included in the bill that was passed through the House Ways and Means Committee. So in either one of those avenues, we feel confident we could ramp up pretty quickly to take care of those folks.

As far as broader distribution, we -- as you know, HealthEquity we're very lucky and blessed to have the largest group of partners, health plan partners in the United States. We've talked a lot about these. In the past, many, many hospital systems and hospital system owned health plans and the Blues Association were -- these are some of our closest partners and most of these are nonprofits. Most of these folks do have Medicare populations, pretty significant Medicare populations. In fact, I would tell you that most of our health plans, if you ask them, what is your fastest-growing book of business, at least one of them in the top couple would be medicare, MA and the like. And so we would use our same distribution channel, which is fantastic. We would go to them and say, look, we think we've built a great chassis to sell more commercial products. And now -- we've got HOPE accounts are now part of the equation or the expanded Medicare HSAs that we've mentioned, and let's go after this. And so as a company that thinks about this thought leader, I mean, our people are thinking about it every day. We have to be very thoughtful about spending money that until this legislation's passed, but I can tell you, there's a lot of thinking about it. That's for sure.

[Operator]

Your next question today will come from Anne Samuel with JPMorgan.

[Anne McCormick, analyst]

I'm hoping -- I know you're not providing guidance at this point, but was hoping maybe you could just speak qualitatively to how you're selling season wrapped up? And was there anything notably different this year versus prior years?

[Jon Kessler, executive]

Yes. So let me say, first of all, as we just repeat [indiscernible] careful observers will note that this is the first time I've ever made a comment in 50-plus of these things about a future sales number. I did it [indiscernible] is that the right word? I'm to [ sweet ]. I don't know, one of those words completely one of those. I did it. And I think that does reflect the view that we feel. If you had asked us at the beginning, well, you did at the beginning or maybe it was [ Mark on ] who did. But somebody asked us at the beginning of the year, how we felt about the year-on-year sales comp, we said it was a very tough comp. And to be in a position beat it and perhaps to beat the record from two years ago was pretty good. I think if I look at within sales, there are a couple of things I would point out. I think the biggest is that the opportunity that we saw this year was -- and it goes back to the question that was asked earlier about margin growth. was given the success that we are having at increasing the value of an HSA. And now that's kind of real and it's there. as well as kind of the related products that we've talked about that are starting to be in market and starting to get some traction, we felt like we could be particularly aggressive about HSA pricing in particularly not just in enterprise, but it's kind of upper middle market and so forth. And frankly, with distribution with the brokers and the like on our -- who have been who've been great partners to us. And so -- and we were. Conversely, where we have lower margins, right, which is some of our CDB products, we held the line. and, as you know, in some cases, increase prices. And so I think that's the right answer. If you're -- we want to sell what we think is durable business that's going to be good for the company, good for our mission and so forth for a long period of time. And so those -- that's probably the first and most important trend that we saw. And the result of that is we saw a lot more activity. You may recall last year, kind of middle market was a little bit soft for us and [indiscernible] well. We saw a lot more upper middle market, middle market activity. And that's good. Enterprise is probably not quite as strong as last year because I think everyone is kind of trying to be as competitive as they can in enterprise land. And again, there are areas where we're going to hold the line where it's a stand-alone business that kind of doesn't make sense for us. So -- but again, I think the big picture is increasingly adjusting our pricing as well as other aspects of what we're offering to compare profitability.

The last thing I'll say here is that we were really happy to be in a position where we could start talking with our clients and showing our clients and, in some cases, selling and incenting our clients on our new product pipeline. And so I mean you talk a little more about that if someone wants to. But that not only I think, has made a difference for us but, the goal in fiscal -- in this sales cycle will get to a place where we're starting to get a little revenue next year from this stuff where we had really good like some people call [indiscernible] account clients. I'm not sure that doesn't sound as good as it is, a [indiscernible] is actually pretty good and Pilot. Look, pilot implies money.

[Unknown Executive]

Yes.

[Jon Kessler, executive]

That's not good.

[Unknown Executive]

Early adopters.

[Jon Kessler, executive]

Early adopters, there you go thank you and we've always been here for me for at least for the last 5, 6 quarters. And so look, that's, I think, really valuable and is useful for us this year, but I think we'll be even more so next year. .

[Operator]

Your next question today will come from George Hill with Deutsche Bank.

[Jon Kessler, executive]

You got to watch out this operator. He's like you talk, and that's it. Mix on this. So if you -- doesn't come out at the beginning, it ain't coming out apparently.

[George Hill, analyst]

Yes. But Jon, did you guys change the hold music? Like that's not really my core question, but it sounded like the waiting music for the call [indiscernible] I thought you guys used to do a Spanish guitar, thing?

[Jon Kessler, executive]

It's interesting you mentioned this because I personally have lobbied for Snoopy for a long time. And there's a company, I won't name them, but that is oftentimes affiliated with Snoopy that is now one of our enhanced rates partners. And maybe we can get that for next quarter.

[George Hill, analyst]

Well, first of all, I wish you well. I'll say, Scott, welcome aboard. And I hope that you keep the flavor of this call the same, and I might pepper you with an [ SDN ] question. Every call and again. And if there's a pair of strange [ love dunks ] laying around, its stock X on your way out the door, I'm a size. nine and a half. Two quick questions.

[Stephen D. Neeleman, executive]

He's writing that down, George 9.5.

[George Hill, analyst]

I like it, like I said, 9.5. Jim, as it relates to the $8 million impact that you cited related to the fraud impact. So am I just reading the financials right that you guys basically absorbed that reported gross profit numbers in the quarter, so numbers effectively would have been higher. And then Jon and Steve, on the expansion into the Medicare space, one of the things I think about when I look at that space is, I assume you guys are talking about the traditional Medicare A+B business and not the MA business as a lot of those guys kind of offer a lot of their own cards. So the question would be, do you see this as something supplemental? Is it something that would be portable in addition to those benefits that tend to expire at year-end? Or is there an opportunity to work with the carriers to provide something that looks enhanced because I'm sure that you guys will know what's going on depending legislation better than I do? And I'll drop it right there.

[Jon Kessler, executive]

Why don't you take the first one, Jim, and I'll take the second one.

[Stephen D. Neeleman, executive]

Yes, well done sneaking in two questions there. So let me just clarify on the -- so the $8 million, that was excess service costs across the board, so sort of ahead of our expectations. Yes, it was absorbed into the number. But that is not just related to the fraud activity that we mentioned, but also sort of elevated member contacts, Yes, some of that related to fraud, but also some of that related to, as Jon mentioned, this was our largest wave of the card migration. We put new chip cards, mobile wallet ready cards into many, many mediums. And of course, perhaps we should have anticipated some of that incremental volume that would come our way just as the normal noise of a big of a big operational project like that, but we did not. So the two pieces there, I just want to highlight that, that's $8 million of just excess service costs related to both of those items.

[Jon Kessler, executive]

Yes. And on your second question, I think you're kind of getting to the front of this, which is -- and it does go back a little bit to the question about distribution. So one of the values in my view of having the stack card infrastructure now entirely in place is, let's say you have an MA product that what comes with it is $200 of out-of-pocket assistance, right? Well, now we can put that alongside of -- if we had hoped, we put that alongside of a HOPE account or it might be the case that $200 could be $300 if it were contributed into the HOPE account, right? Because it's not just money for anything kind of a thing. So I think that there's opportunity in MA as well as in conventional Medicare for these kind of products. It's -- and we're trying to position the infrastructure to support both those opportunities.

[Operator]

Your next question today will come from Mark Marcon with Baird.

[Mark Marcon, analyst]

Good afternoon, everybody. Jon, we're going to absolutely miss you best wishes in retirement. Scott, welcome aboard, heard great things about you from the colleagues that I work with that have worked with you in the past. So looking forward to working with you. Question relates to the guidance. specifically, Jim or Jon, could you discuss a little bit about like what your expectations are that go into the '26 guidance with regards to account growth? And are there any things that are changing? It sounds like the selling season went really well. And so I'm wondering what could potentially change that trajectory? Has there been any -- is client retention staying strong? Has there been any negative impact with regards to fraud activity? Any color that you could provide there in terms of what drives the HSA growth for next year?

[Jon Kessler, executive]

Yes. So from a -- let's just start with HSA retention. We feel real good about where we are going into fiscal '26 here. There's nothing -- there's not a shoe that we're not dropping here. On the CDB side, this is sort of the flip side of of incremental price increases that have now had the ability to work through the system and some of what I said earlier. There, I think as we go through fiscal '26, I think we could see some healthy churn. Anytime there's churn, CEOs always say it's healthy. And in this case, that's virtually true. And so I think there's some of that, but there's nothing -- I don't think there's any sort of -- I think the gist of your question is, is there a big shoe to drop there? I don't think so. And that's why if you kind of look at -- it's one of the reasons that margin gets substantially healthier next year. I mean you're looking at in the middle of the range here, 42% EBITDA margins, and then, I guess, to your point, we don't see much in the way of trailing costs from the incidents that we've seen nor have they really impacted our sales cycle, although I mean it's -- I don't have a counterfactual in front of me. So I'm sure that there has been some -- probably some cases where these have had an impact on either retention or sales. I know they've had an impact on our team. They've worked their butt off. But -- so I think things are looking -- I think when you see the account totals coming into '26, I think you'll -- I'm hoping certainly our forecast is that you'll feel good about them. And -- but we will be a little bit on the lookout for some attrition in the CDB side simply because we have raised price.

[Operator]

And your next question today will come from David Roman with Goldman Sachs.

[David Roman, analyst]

Jon, I'm sorry, I won't have an opportunity to work with you more, but I appreciate all your help as we've gotten up to speed here and look forward to following the stock going forward and seeing whatever it is you do next. And maybe as I just kind of transition here. I know there are a lot of questions about the '26 guidance but maybe you could talk through a little bit more detail how we should think about capital allocation, both internal and external as you roll forward here. You've obviously done some acquisitions like the WageWorks 1 and a few others over time that have paid benefits here to the company. You've seen a big year here of increases in operating expenses across technology and development as well as sales and marketing. So how should we think about kind of your resource prioritization and how that fits into the growth rates you've laid out here for '26 and beyond?

[Stephen D. Neeleman, executive]

I mean I'll just say first and then throw to Jim, your question reminded me of something that we could have stressed, which is our fiscal '26 does not assume M&A activity because that isn't how we do it, either large ball, small ball, whatever size ball, but that doesn't mean we won't try. So Yes, exactly. And we've talked about many times before that sales and marketing, we try to operate in an envelope, and it's been operating in an envelope of 8-ish percent of revenue, a little bit light of that thus far this year. [ Tech and dev ], we've talked about 22% is percent being the high watermark. We're spending quite a bit lower than that. And last quarter, we talked about, hey, we'd actually like that to be a little bit more but it takes time to ramp resources and some timing of project starts. So you shouldn't expect anything materially different from that going forward. And then on -- yes, sort of capital allocation sort of Jon alluded to it and I did in the remarks, right, we're obviously returning capital to shareholders currently. We've got an authorization in place. We are paying down the revolver. We've sort of talked to before, like, hey, we borrowed a couple of hundred plus million dollars to fund the BenefitWallet acquisition. Let's get that paid off over time with excess cash flow. And that is -- that revolver becomes a nice bucket to be able to finance the next deal of that size? Should it come and then aiming for a leverage profile our leverage profile gets better and better each quarter as we're growing the denominator of the leverage ratio? And that leaves us ample capital if a larger opportunity were to come its way, right? I still fundamentally believe that some of these HSA portfolio acquisitions are some of the best ROI investments we can make but we're continuing to fund the business within the envelope of cost in sales and marketing and tech and dev that we have and continuing to drive EBITDA margin enhancement along the way. So I think that's the sum of all of those things are very positive for the story.

[Operator]

Your next question today will come from David Larsen with BTIG.

[David Larsen, analyst]

I was hoping Scott Cutler could talk a little bit about what your sort of most proud of with what you did at Stock X and maybe what do you think you can bring to HealthEquity related to those accomplishments?

[Unknown Executive]

Great. A [ stock ex ] question. No, I mean, as I stated in my prepared remarks, I think what's excited me about my career journey has really been about leveraging technology and applying it to both different markets and different problems from financial services to consumer e-commerce, and I'll have to figure out a way to get George those sneakers. But I think what really gets me excited about the opportunity here is really just the continued use of technology, and we're probably in the most exciting time to be able to leverage technologies around data and AI, particularly for the member and the client, the partner experience. And so I, for one, am really excited about the platform, the strength of HealthEquity's market position and also equally excited about the continued use of technology to make that service more widely available and a better service. I mean in a nutshell is kind of what I was most proud about in lots of the different chapters in my career. And certainly, what I hope to be able to bring here. And so I'm excited about that.

[Operator]

And your next question today will come from [ Steven Valiquette ] with Mizuho Securities.

[Unknown Analyst]

Jon, congrats on your retirement and Scott, congrats on joining the company shortly here as CEO. Really, my questions here are just more on the just confirmation on the dollar amount of HSA cash custodial asset contract are pricing each fiscal year. Your previous slide deck, you had $3.4 billion for fiscal '26. Now the 10-Q shows it went down a little bit, but then fiscal '27 went up a little bit. The yields are still about the same. But really, my question is just to try to reconcile for -- so as of right now, the $3.2 billion that's set to reprice in fiscal '26, how much of that will happen sort of early in the year versus potentially later in the year, just to figure out how much is baked into the guidance or will be recognized in fiscal '26. And then the on a vein, you talked earlier on the call about pulling forward some of these repricings, I'm assuming some of that might have been the fiscal '27 maturities, unless I'm wrong. But again, just to confirm, is any of that baked into the fiscal '26 guidance? Or would that be upside relative to your initial view that you gave today on FY '26.

[Unknown Executive]

Yes. Thanks for that question. Yes, good to clarify. So yes, seasonally, very little revenue, very little of the HSA cash would mature in a normal year early in the year. Most of it happens later in the year. This, as you rightfully say, '26 has got some legacy WageWorks cash that was placed 5 years prior. So we do have a slug that matures in the middle of the year. Those are the types of things like that kind of 6, 9 million one year out type of maturities that we'd be looking to potentially pull forward to reprice, not 2-plus years, not 2 plus years out, like those kind of contracts would be a little tougher to modify with that longer runway. But yes, all of these expected actions would be priced into our current guidance, right, like it's not a [indiscernible].

[Jon Kessler, executive]

Right. And if you kind of think about it, like if you were buying -- again, these are not real hedges or you'd see it that way. But if you sort of say, well, let's move this up 6 months. Well, okay, what's going to be the true cost of that? It's going to be the red value of that 6 month and what would be that 6-month hedge. And where we can get a deal that's much better than that. We're going to pull the trigger on it, where we can't, we're not. And so we baked in some assumptions that some of these dollars would come a little earlier, but they would probably come at some percentage of that cost for lack of a better term, as a discount. So I would not be looking for a ton of up or down on this topic. It's just -- what it really is, is Steve, and you of all people know this one is our goal longer term is to create more stability in this line, right? Because it really ultimately is a fee. So if we can do that by bringing things a little bit forward, then that's the reason we're doing it. It's not to get a few extra dollars.

[Operator]

Your next question today will come from Sean Dodge with RBC Capital Markets.

[Thomas Kelliher, analyst]

This is Tom Kelliher on for Sean. I guess first, welcome, Scott, and congratulations again on retiring [indiscernible]. So I'll switch gears a bit here and do a quick check in on the commuter offering. Where do we stand relative to the pre-pandemic levels there? And how should we be thinking about that business in fiscal 2016 and beyond?

[Jon Kessler, executive]

I'll give a quick answer to this one. It's been pretty stable at, call it, 60% of maybe 65% of its pre-pandemic revenue base. And it grows a little bit, but it's not going crazy. We'll see it some of the -- we'll be happy to see the federal employees seem to be going back to work, that would be good. But that's about it. We're not going -- and in truth, it's not terribly material, the [ delta 1 ] way or the other. It's a good business, but it's a good, especially in terms of sort of service margin. It's a really good business. But that's kind of what I'd expect.

[Operator]

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

[Jon Kessler, executive]

Okay. Well that is a wrap for this B+ comedian and I'm going to say I'm leaving the stage here, but I do not want to do so without everyone here understanding the team that has over delivered again and again and that, that team is stronger and deeper than it's ever been before. And with stock and Steve, has leaders who are intensely committed to team success. And at the same time, both of these individuals in my observation, in one case, over a long time in the other case over a medium time are genuinely personally humble about their role in that and their role being serving leadership. It's really a remarkable combination that I believe as a shareholder is going to serve this company very, very well. So to the whole team, all of team purple, I really want to just end by saying, thank you not for what you've done, but for what it is that I believe in my heart is going to be done in pursuit of our mission as well as I can say so in pursuit of value for us, we shareholders. Is it us? or we? And with that, I'll -- I think that's the best way I could possibly end is by thanking the team. So thanks all, and have fun.

[Operator]

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