Healthequity Inc

NASDAQ:HQY

Earnings Call Transcript 2019-Q4

[Operator]

Welcome to HealthEquity's fourth quarter 2019 Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Richard Putnam of Investor Relations. Go ahead, Mr. Putnam.

[Richard Putnam, Vice President of Investor Relations]

Thank you, Jimmy, and good afternoon, and welcome to HealthEquity's 2019 fiscal year end earnings conference call. My name is Richard Putnam and I Head up Investor Relations for HealthEquity. With me today we have Jon Kessler, our President and CEO; Dr. Steve Neeleman, our Vice Chairman and Founder of the company; Darcy Mott, our Executive Vice President and Chief Financial Officer.

Earlier today we reported in a press release our fourth quarter and fiscal 2019 year-end financial results. A copy of which can be accessed on our Investor Relations website at ir.healthequity.com. It's also my duty to let you know that our call today will include forward-looking statements including predictions, expectations, estimates or other information that might be considered forward-looking. During today's discussion we will present some important factors relating to our business, which could affect those forward-looking statements.

Forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the statements made today. As a result, we caution you against placing undue reliance on these forward-looking statements. We encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock which are detailed in our latest year’s annual report on Form 10-K filed with the SEC, last March in 2018, along with subsequent periodic other current reports including this year's fiscal 2019 10-K that will be filed by the end of this month. We are not obligating ourselves to revise or update these forward-looking statements in light of new information or future events.

And with the introductions and cautionary statements out of the way, I'll turn the call over to Mr. Jon Kessler.

[Jon Kessler, President and Chief Executive Officer]

Thank you, Richard. It gets better every time. Hello, everyone. Thank you for joining us today. We know you have a choice and entertainment for the late afternoon and we hope we can deliver improve that we’ve made a wise one -- that you’ve made a wise one.

The HealthEquity team is pleased to deliver strong Q4 and full fiscal 2019 results and we're excited to share with you investments that these results set us up to make -- to drive future growth. I have a few prepared remarks on the team's performance, Steve will talk about investments and then Darcy will detail results and guidance for fiscal 2020 before we open the line for questions, one at a time please.

At the time of HealthEquity’s IPO we committed to aggressive full year growth and profitability targets, and we delivered. Then we doubled down promising to outpace market growth while continuing to grow profits even faster than revenues. With today's results I'm pleased to say that the team has delivered on these commitments as well.

First, outpacing the market. We topped sales results in February but without market comparison. Devenir released its year-end 2018 marked survey a few weeks ago, reporting in Devenir, the market grew HSAs and custodial assets by 13% and 19% respectively. And HealthEquity during the same period handedly beat those figures, growing HSAs and custodial assets 18% and 26% respectively. HealthEquity added more HSAs and more custodial assets than any of its competitors’ period according to Devenir -- I guess that wasn't a period.

The strong growth in HSAs and custodial assets helped fuel revenue growth of 25% year-over-year in fiscal 2019 to $287.2 million, which brings me to our second promise which was to increase profitability even faster than revenue growth, we did. We reported today adjusted EBITDA of $118.4 million for fiscal 2019, up 40% year-over-year. Adjusted EBITDA margin of 41% grew 430 basis points year-over-year, driven by gross margin improvement. Q4 was particularly strong as the team and our partners and clients absolutely nailed the busy season execution. Thank you, team.

The team's performance has put HealthEquity in an enviable position for fiscal 2020, a position to deliver strong profit margins again, while making significant new investments in growth.

So I'd like to turn the call over to Steve now to describe a number of those investments. Steve?

[Steve Neeleman, Founder and Vice Chair]

Thanks, Jon. HealthEquity's vision is that every American family connects health and wealth by embracing HSAs and ultimately making them as widespread as 401(k)s and similar retirement accounts. A nation of HSA empowered consumers will not only personally benefit from more tax efficient savings for healthcare and retirement, but it will also generate enormous rewards for the broader American healthcare system.

We believe our vision can happen in the next decade. Let’s quantify this vision a bit. According to Devenir today there are about 25 million HSAs holding approximately $54 billion in custodial assets which generate about $2 billion in market wide revenue. Our vision implies a market with 50 million to 60 million HSAs holding $600 billion to $1 trillion in custodial assets.

To get there by 2030, from where we are today implies annual market growth rates in the high single-digits for HSAs and in the mid 20s in custodial assets. This is a vision not a forecast.

Let me take some time today to outline five areas of investments on which the team is focused to realize that vision.

First, we are connecting health and wealth investing along with our retirement industry partners in developing platform enhancements and tools to drive consumers and employers to use HSAs and retirement accounts together to their fullest potential.

Second, member engagement which of course has been a HealthEquity strong suite from day one, and is now more than ever core to our growth strategy. For HSAs to realize their market potential, more consumers must see them as part of a lifetime strategy, not just an annual election and open enrollment. Whether it's deciding how much money to contribute to HSAs throughout the year, relative to other accounts, deploying thoughtful investment strategies or spending less on necessary medical care, our total engagement efforts seek to deliver the right information at the right time to the right member to help them make better decisions.

Third, we're broadening the solutions HealthEquity can deliver to employers of all sizes. In just the past few weeks, we've added two significant tools, COBRA and expanded FSA/HRA administration for employers of all sizes. These new tools allow our sales team and our network partners to say yes more often, helping employers and advisors simplify their business partnerships or giving employees the industry's best support resource as a key point in healthcare finance decision making.

Fourth, to realize the full market opportunity HealthEquity is for the first time investing directly in education and advocacy for the healthcare consumer in Washington D.C.

HSAs meet healthcare and retirement goals that are shared on a bipartisan basis. In that spirit, we are pleased to see the President's 2020 budget include specific proposals to expand consumer access to HSAs and congressional ground work on price transparency and fairness in healthcare consumer billing. When consumers have access and they're empowered HealthEquity's market opportunity grows.

And finally, over the next several years, we will be investing in our proprietary code base and the security of our platform. The goals of these investments are to achieve continuous deployment capability, which increases speed to market and enterprise class security. This is not only prudent planning for continued fast growth, it's also a power move versus subscale competitors, who will not or perhaps cannot deploy technology capital effectively.

The return on these investments is long-term sustainable and profitable growth. We expect to expand the footprint of network partners and employers to grow consumer penetration within that footprint and to increase the value of each consumer relationship.

HealthEquity's Investor Day is on June 19th at the NASDAQ Market site at New York Times Square. This will be an opportunity for more in depth discussions with our leadership team on these investments and on our growth strategy. We hope to see you all there.

Now to some much shorter term, I'd like to turn the call over to Darcy review our operating results for the fourth quarter and fiscal year just ended and to provide guidance for the year ahead. Darcy?

[Darcy Mott, EVP and Chief Financial Officer]

Thanks, Steve, I will discuss our results on both the GAAP and a non-GAAP basis. A reconciliation of non-GAAP results that we discuss here to their nearest GAAP measurement is provided in the press release that was published earlier today.

I will first review our fourth quarter and year-end financial results in fiscal 2019, and then I'll provide guidance for fiscal 2020. Revenue for the fourth quarter grew 25% year-over-year to $75.8 million.

Breaking down the revenue into our revenue into our three components: We continue to see growth in each of the service, custodial and interchange revenue during the quarter and full year. Service revenue grew 10% year-over-year to $25.8 million in the fourth quarter. Service revenue as a percent of total revenue was 34% in the quarter, down from 39% of total revenue that are represented in the fourth quarter last year as custodial revenue became more predominant. Service revenue growth was attributable to a 20% year-over-year increase in average HSAs and during the quarter, partially offset by an 8% decrease in service revenue per average HSA during the quarter.

As discussed on our last several earnings calls, the expected decline in service revenue per account was offset by growth in custodial revenue per account as our average custodial asset balances and custodial cash yield increased during the fiscal year 2019.

Custodial revenue was $35.5 million in the fourth quarter, representing an increase of 45% year-over-year. The driving factors were 20% growth in average custodial cash assets and a higher annualized interest rate yield on custodial cash assets of 2.3% during the quarter compared to 1.9% for the fourth quarter last year. Custodial revenue accounted for 47% of total revenue in the fourth quarter compared to 40% for the fourth quarter last year.

Interchange revenue grew 15% in the fourth quarter to $14.5 million compared to $12.6 million in the fourth quarter last year. The interchange revenue benefited from the 20% year-over-year increase in average HSAs in the quarter compared to the fourth quarter last year.

Gross profit for the fourth quarter was $44.4 million compared to $31.6 million in the prior year, with a gross margin expanding to 59% in the fourth quarter, up from 52% last year.

Operating expenses were $27.9 million or 37% of revenue compared to $23.2 million or 38% of revenue in the fourth quarter last year. Income from operations was $16.6 million for the fourth quarter, an increase of 97% year-over-year and generated an income from operations margin of 22% during the quarter. We generated net income of $13.1 million for the fourth quarter of fiscal 2019 compared to $5.9 million in the prior year.

Our GAAP diluted EPS for the fourth quarter of fiscal 2019 was $0.21 per share compared to $0.09 per share for the prior year. Excluding stock compensation expenses net of tax and the tax impact of stock option exercises, our non-GAAP net income and net income per share for the fourth quarter of fiscal year 2019 were $17 million and $0.27 per share compared to $6.7 million and $0.11 per share for the prior year.

Our adjusted EBITDA for the quarter increased 60% to $27.3 million compared to $17.1 million in the prior year. Adjusted EBITDA margin in the quarter was 36%.

Full year results for fiscal 2019 include: Revenue grew 25% to $287.2 million; gross profit margin was 63% compared to 59% last year; income from operations grew by 43% as we continued to scale our business model. Operating margins were 27% compared to 24% last year. Adjusted EBITDA grew 40% year-over-year to $118.4 million, growing our adjusted EBITDA margin to 41% compared to 37% last year. Non-GAAP net income and net income per share were $75.6 million and $1.19 per share.

Turning to the balance sheet. As of January 31, 2019, we had $361 million of cash and cash equivalents with no outstanding debt. We generated $113 million of cash flow from operations during fiscal 2019 compared to $82 million during fiscal 2018, a 39% year-over-year increase.

Turning to guidance for fiscal 2020. As Jon and Steve have just outlined, we have identified several investments for fiscal 2020 that will continue to broaden our capabilities and distance us from our competition. However, even taking these investments into consideration, our guidance still notes that we expect to deliver adjusted EBITDA margins in fiscal 2020 at or near those reported today for fiscal 2019.

Based on where we ended the year, we are iterating our revenue guidance for fiscal 2020 between $333 million and $339 million that we initially provided last month. We expect non-GAAP net income to be between $80 million and $84 million, non-GAAP net income per diluted share between $1.23 and $1.29 per share and adjusted EBITDA between $133 million and $138 million.

Our non-GAAP net income per diluted share estimate is based on an estimated diluted weighted average shares outstanding of approximately 65 million shares for the year. The provided outlook for fiscal 2020 assumes a projected effective income tax rate of approximately 24%.

Before I turn the call back to Jon, I would like to highlight four items reflected in our guidance.

First, the investments that Steve outlined will result in increased operating expenses and capital expenditures for a combined investment of approximately $30 million for fiscal 2020, split evenly between operating expense and CapEx.

Second, we are increasing our interest rate guidance on the custodial cash assets to be approximately 2.45% for fiscal 2020 compared to 2.15% for fiscal 2019 just completed.

Third, we have consistently guided that service revenue per HSA will decrease between 5% and 10% per year. We believe we will be at the high end of this range in fiscal 2020.

And four, as we've done in recent periods, our full year guidance includes a detailed reconciliation of GAAP and non-GAAP metrics at the end of today's press release. This includes management’s estimates of income taxes, depreciation and amortization, and anticipated stock compensation expenses, but this does not include a forecast for stock option exercises for the fiscal year.

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

[Jon Kessler, President and Chief Executive Officer]

Thank you. A wise person once told me that when you can say thank you more often than I'm sorry, you've had a good day. So in that spirit, before we go to questions, I'd like to again take a moment to highlight and thank the HealthEquity team, both veterans and newcomers and our partners for a highly successful fiscal 2019 open enrollment season from our customers perspective.

During Q4 the team spoke to more of our members and prospective members, they did work hard, they handled more transactions, they provided more education, et cetera, than ever before in the company's history., and they did it in purple style and as we say, deep purple style.

Service metrics such as the speed with which we answer calls or chats were extraordinary for our busy season. Members, clients, partners rated the quality of their interactions with HealthEquity from simple phone calls to complex implementation projects, very, very highly. And the rapid growth in custodial assets is evident of the high value of the education we and our partners provide together. And how it drives members to connect health and wealth. So again, thank you.

With that operator let's take some questions with the reminder that we're going with one at a time.

Thank you. [Operator Instructions]. Our first question comes from Anne Samuel with JPMorgan. Your line is now open.

[Anne Samuel, JPMorgan]

Hi guys. Thanks for taking the questions. I was hoping maybe you could speak a little bit to the inclusion of HSAs in the President's recent budget and what you think those two items kind of means for the market and for HealthEquity?

[Jon Kessler, President and Chief Executive Officer]

Sure. Steve?

[Steve Neeleman, Founder and Vice Chair]

Yes, happy to, Anne, thanks for the question. We've been talking for a long time that there's an inequity on folks that are currently working and are in an unqualified plan but maybe they're eligible for Medicare. And so we think that the best proponent of what's in the budget is the ability to not only continue the contributions to HSAs or to the Medicare MSA component of this and that would be up, they will elevate the limits up to the HSA and your contributions. Right there -- right now, there is the ability to have a Medicare MSA. The problem is that individuals can make contributions up to the HSA allowance. And so that would be great if we can get that done. And then the ability to have these working seniors which some estimates there as much as 15% to 18% of the total population, these are folks that are Medicare eligible but are still working full time to allow them to continue to make contributions to HSAs even if they fall into a Medicare plan. We think there’s absolutely expansive market. I mean there's about 11,000 people every single day that become Medicare eligible.

And a lot of those people now because of their growth in HSAs are in HSA qualified plans, are still working, they still have income to defer and so that would be an absolute market expander for us.

The other component around the actual value, there's a couple different ways to view this. Our opinion has always been that anytime we can make it easier for employers who want to offer some richer benefit to allow for things like direct coverage of asthma, meds and diabetic meds and things like that, that have never been very clear in the current law or the current regulations, then that's a good thing.

You can kind of quibble over whether it should be an actuarial approach for what's been out there in the past in some of the other bills that have just said covered drugs and that cover preventive care and medicine things like that. And so again, we think it's a step in the right direction but the kind of the benefit of both of these areas of focus would be to expand the market and to have more people that ought to be in HSAs deferring income, creating long-term tax savings, so they can spend either on healthcare or on just their overall retirement needs. And we think market expansion is a great thing, it’s something that's been long overdue. It's been 13 years really since we've seen this type of expansion in the HSA line.

[Operator]

Thank you. Our next question comes from Donald Hooker with KeyBanc. Your line is now open.

[Donald Hooker, KeyBanc]

Great. Yes, I'll ask about -- I’ll just -- I guess we all asked this last conference call and I’ll ask it again this one. I think we were all interested and excited to see these larger retirement tech companies like Vanguard, Nationwide and last quarter I think you talked about principal. Just curious any kind of update there in terms of timing, I know there is a lot of expenses upfront going into those relationships as you mentioned in your prepared comments but maybe an update as to when the revenue from that might start kick in?

[Jon Kessler, President and Chief Executive Officer]

Yes, this is Jon, Don, thanks for the question. As we’ve commented elsewhere, the primary impact on fiscal 2020 will be in sales going into '21. However, I can say that we will see our first customers on these partnerships in the second quarter and -- I want to say either second or first depending on whether it's calendar or ours and -- in any case. So these are starting to ramp up. We see some really interesting pipeline activity. Obviously this is still work in progress. And as we talked about before, one of the biggest issues is what you're really trying to do here is you're trying to get people who are retirement people and talk about things in terms of lifetimes and people who are health average people and talk about things in terms of annual elections to work together more effectively. And I think Steve put it really nicely in his opening comments in saying that this is really about understanding that an HSA is more than one annual election to another. And I think that's really where the value is here. But we do feel pretty good about what we're seeing there as well as what we're seeing from our -- both our direct selling as well as our offline channels going into the new cycle.

[Operator]

Thank you. Our next question comes from Mohan Naidu with Oppenheimer. Your line is now open.

[Mohan Naidu, Oppenheimer]

Thanks for taking my question. Steve, I want to go back to Anne's question there. What is your comfort level in expectations I guess getting this through the purpose in D.C.? And can you repeat the Medicare beneficiaries that could get benefit from this if it gets through?

[Steve Neeleman, Founder and Vice Chair]

Yes. So, I mean, trust me, whenever we think about D.C. I have -- yes, I know no idea what comfort level, it’s like watching the Kentucky Derby. But I think that the nice thing is, is that these really are becoming a consumer benefit. And, when you compare Mohan with President's budget even what’s come out and more recently with some of the bipartisan efforts to address consumer drug pricing and transparency on billing and things like that. I think you're starting to see the weight of millions and millions, I mean 25 million, if you're going through numbers, American families that are behind this. And so, that's where we feel like there’s traction. They keep talking about it, obviously, there will need to be some trade-offs. And so I can't by any means put any type of number on what our confidence was. Other than the fact that they know about it, they keep talking about it, these are things that have been priced a bit, you're from budget office level and things like that. So we feel comfortable with that.

Getting back to the Medicare side, I think your question was -- is -- what would be the benefit to the market Mohan or was it something different?

[Mohan Naidu, Oppenheimer]

No, that’s right.

[Steve Neeleman, Founder and Vice Chair]

Well I mean think about it like this. If you're looking at baby boomers, I think there were 80 million baby boomers that were born between 1946 and 1964. And some estimates suggest that that about I mean if you do the math, about 20% of these people are still working. So 20% of 80 million or 16 million families at some point -- at some point they're going to stop working but even if they're starting to -- I think my parents for example, they’re still, they have income, they had turned their mid 80s and they still have income that are having to take mandatory distributions out or 401(k)s and then you say to me all the time, why can't we put that into an HSA take our distribution out of our 401(k), put it into an HSA and pay for their $3,000 or $4,000 a year that they're having to pay for it in their current Medicare plan design. And we talk a lot about the fact that if you really want to look at a plan that’s out there that apparently is bipartisan, it's Medicare that happens to have a fairly high consumer out of pocket spend, and you can buy different types of coverages to put yourself in the best way to fill in the donut hole in the pay for that that would be through the HSA.

So I can tell you, it's tens of millions of people that would benefit and it would expand the market. Jon, do you have any addition to this?

[Jon Kessler, President and Chief Executive Officer]

I just thought I always find it useful to administer sort of a category even with education. So remind people in Washington that that Medicare is in a fun way the ultimate high deductible plan, I say that a little bit tongue in cheek, but it is certainly from an out of pocket expense perspective, there's a significant amount of consumer responsibility in Medicare and by the way that’s one reason why is one factor that has controlled some of the potential challenges that there might be and there exists another federal programs. And so the question comes, why can't working seniors or those that are fully in the Medicare system against the same tax plan, is why should you have to pay with your healthcare without your tax dollars? And the answer to your question is, you shouldn't. And so I think particularly -- this is particularly relevant for those who've gotten a little bit later start on saving and the HSAs are going around the year, so they haven't had the opportunity to really build a balance. This makes some kind of sense I think from whatever part in prism one looks at it. And that's what the team is really trying to bring to Washington or maybe a little less than -- I mean look as Steve said, we're naive, we just might be hopeful, a little less ideology with regard to healthcare and a little more practical, hey, there's 70 odd million people on Medicare and there's 200 million of give or take in the employment based system, let’s help people out, let’s figure out a way to get them informed and empowered, which is a piece of the puzzle. And then give them the tools to help save money and get healthcare for the family. So we're just going to keep hammering a way out of it. And the message we want you to have here was that whether it's the President's budget or some bill introduced in Congress, what have you is, is that we have determined that now is an appropriate time where we can put additional resources to our education efforts in Washington and we think give you return.

[Operator]

Thank you. Our next question comes from Alex Paris with Barrington Research. Your line is now open.

[Chris Howe, Barrington Research]

This is Chris Howe in for Alex. So as we look at where you are as far as building the level of awareness with face-to-face and you mentioned some of the key like platform enhancements. As we look at these two factors and how they drive member engagement, what specifically are you seeing internally that's driving momentum within engagements?

And as we move towards these long-term vision goals that you’ve outlined, how should we think about the optimal mix between cash and investments as a higher proportion transitions to the healthy saver category?

[Jon Kessler, President and Chief Executive Officer]

Those are excellent questions. Let me kind of start with your second part of your question, work backwards. I would say if you think about the vision of the market that Steve outlined in his comments, it really lays there the importance of evolving -- and the opportunity in evolving how people use these accounts that is using them for a lifetime versus annual election to annual election. I mean, as Steve discussed, you talk about, you can get to essentially full penetration on accounts from our perspective with sub 10% growth, right? So that's great, but it's not bad over a decade. But really increasingly the growth in the market is going to come from growth in assets. And that requires people to understand how to use these accounts.

And to your point a big piece of that is when they understand that one thing to do is invest which is why we've been reporting our invested members since day one. Our view is that at market maturity it’s likely that we know this from our mature accounts is that, give or take two-thirds of the balance will be in investments and perhaps one-third on average will be in cash, but the good news is either way that's -- it’s a win-win. The investments are in fact additive to the cash balances that non-investors build.

We’re now kind of working, so that's kind of our view of where the market can get to and why this area so important and why we're investing in it.

Getting back to the first part of your question which was really about, okay, what are the things that need to occur from a consumer’s perspective? As we’ve said often when it comes to driving mindsets, and how people use these kinds of products, there's no single answer. There's no one PowerPoint or whatnot that will make that occur. And maybe that's a good thing from our perspective because if it was, someone would have just put it up on the Internet 15 years ago and exactly that, but it takes effort. And it takes effort but that effort has to be personalized, it has to be supported by a platform that takes information about you and tries to deliver as much as possible something that's relevant to you. And it has to be delivered in the context, at a point where you have -- you’re paying attention, that is to say that you can send that all the emails you want, right? We all get emails, we get to lead all of that, right? And so it's about; one, being highly personalized; two, delivering that personalized education in the context of a service experience.

And we think that, that our platform is really uniquely suited to that. Because when you take in the kinds of information like healthcare plans and alike, they create search interact, they create reasons for people to come to us, right, which in turn, create opportunities for education. And then I think about what we're doing with our friends on retirement side right now really increases our ability to be relevant to our members. And yes that's a function of having the information that allows to be relevant.

And so from my perspective, those are really the keys, there are the things that our platform I think really uniquely support to the industry versus just being a better place to calculate debits and credits, and fund balances and alike.

And so that's kind of -- our investments in this area really are about doing that in more ways and for more people, and so forth. So, whether it's having our voice systems and call routing, be more specific, so that based on what we know about you, we can route you to the agent that is best able to handle your situation, something that we will be rolling out enhancements on later this year, as part of this investment activity or it's as simple as taking full advantage of the time we do get during open enrollment type processes to deliver more personalized, more relevant information, even to scale what we're doing for our largest groups into our smaller groups.

Those are all part of the puzzle there. But again I think it really starts with the notion that one. Education is sort of vacuum and it's not generic, it has to be personalized, and it has to be at a point where you are ready to receive it, not where it's convenient for us or for your employer or some other party who just provides you.

[Operator]

Thank you. Our next question comes from Mark Marcon with Baird. Your line is now open.

[Mark Marcon, Baird]

Hi, good afternoon. And congrats. I was wondering if you could talk a little bit about what you're seeing in terms of the evolution of the competitive environment. And how that's changed over the last couple of years and how you foresee it changing? And then if I could just sneak in and add on for Darcy, I'm afraid he's being left out. Could you talk a little bit about the margin profile from a longer term perspective? We understand some of the investments that are coming in the upcoming 12, but how should we think about that longer term in terms of the margin trajectory? Thank you.

[Jon Kessler, President and Chief Executive Officer]

You want to go first?

[Darcy Mott, EVP and Chief Financial Officer]

Sure. So yes, we've always talked about margin expansion really being facilitated by people becoming the savers and investors and that that margin expansion occurs when people have larger balances. And we've certainly seen that happen, although as we add new accounts, and that kind of dampens the average balance, but we have more and more people who are becoming not only investors, but even healthy savers, as we call them. And so we would expect that, that margin we got into -- our EBITDA margin was 41% this year, first time for a year that we've actually been into the 40s. And we expect that we can continue that. And we may have mentioned that on the call, notwithstanding the fact that we're making these investments. The reason we're making these investments is to expand that margin even further over time.

Now, there's always a little bit of a lag between the time you make these investments and when they start producing results. But we've been fortunate in the fact that we've grown custodial revenue, which helps to fund some of these investments that we're making and still maintain margin.

So, I would say over time Mark that we would see improvement like, we've shown pretty steady improvement over the last five years that we've been public and expanding that margin. And we will expect that to continue in the future. That's the reason we're making the investments.

[Jon Kessler, President and Chief Executive Officer]

And then Mark, on the first part of your question with regard to competitive landscape, I guess I’d say this, first of all, according to Devenir there are three competitors that make up almost 50% of the marketplace: ourselves, UnitedHealth Group, and Optum Bank and Webster's HSA Bank. And investors have heard from all of them and they make your own assessments as to how we're doing relative to each other, I suppose if I throw fidelity in there with a couple percent you get to the 50%.

Our view -- so we would encourage investors to take a look at what people are saying and make their own assessments. I'll tell you what our assessment is. We believe that where we are out there in the field and where we're planning, we can win and deal with. Looking at the data from Devenir, it's clear that we gain market share again this year, as I mentioned in the prepared remarks, added more HSAs, added more gross HSAs, added more assets than anyone. And we're not in plan on the field yet. A lot of what we're going to get from the investments we're making are circumstances as Steve said, where we want to be able to say yes, someone says, I want to buy this product from you. I'm just in a position wherein I were to merge stuff, can you do that for me? Yes, we want to be able to say yes.

In other cases people are saying, I get it. I'm not sure I understood this one. It was a health thing. But now I understand it’s a retirement thing and they're looking to help for -- helps their environments on the retirement side. And so it's about us being in a position to be leading authority with those folks and at the same time this continues to be a huge part of what's going on in healthcare. So continuing to build out there.

So I guess that's a way of saying from our perspective, I think looked at from a feature function, et cetera perspective, we offer the best product in marketplace, I really do. And it's about, I think about the investments we're making and how they drive growth from a market share perspective. It's really about being in more places being able to say yes, more often when we're asked. And if we do that we should be in position to continue to take market share year-after-year-after-year, which we have committed.

[Mark Marcon, Baird]

That's great. And then can I just sneak one more in. With regards to the smaller business effort. Can you just give us a little bit of an update there just in terms of as you go back and you break down and analyze the gains that you've had in terms of the HSA accounts that you ended up gaining over the last year and the prospects. How does that look in terms of just penetrating the smaller and medium sized business-market?

[Jon Kessler, President and Chief Executive Officer]

I feel like this is may be your Greg Peters is masquerading it one more time with the third -- the part three. I know Greg ….

[Mark Marcon, Baird]

I hardly ever do that, but just wanted to get back on it.

[Jon Kessler, President and Chief Executive Officer]

Without going into the details, I said in the call that we had in February on sales that I felt we made some good progress but it's definitely an area where we've got more work to do. And in particular I think the work that we are doing is in two layers. One I've already mentioned which is this is definitely -- a middle market is definitely one of the places where having a more complete product suite is helpful because having broader product which is helpful because your 500 person group that means may you have one or two people in HR and benefits and what fewer vendors matter, it's helpful and it also helpful to your broker. So the ability to again say yes, when people are saying I want to buy this from you also sit and you also do [technical difficulty] if the money is valuable. The second thing I would mention though here is literally the way we approach the advisory communities both advisors on the health side as well as now on retirement side. And were -- we've always been of a view that the advisors are incredibly important in the decision making process. But I think as we enter this marketplace, what we have learned is how important they are in the database administration of drug. And again to my earlier point there's only so many people in HR and very often late for me to the brokers and advisors to suffer support when they need. So we have added functionality that we pulled at to our sales team as well already that really expand what advisors are able to do in terms of helping employers administer the product on sort of day to day basis.

So those are areas that I think we still have some work to do. But we've been clearly committed to this, we talked about it now for -- this year maybe two. And we'll get there and I think it'll be an important part of our growth strategy.

[Operator]

Thank you next question comes from Stephanie Demko with Citi. Your line is now open.

[Joy Zhang, Citigroup]

Hi this is Joy Zhang on for Stephanie. Hi, in line in one of the largest contract coming up for bid this year. Can you talk to your how you’re positioning yourself for the RSP? Specifically if you could walk us through the different levers you can pull in a competitive RFP process whether a raising consumer rate, lowering your [PCM] or any other strategies that you have that's great?

[Jon Kessler, President and Chief Executive Officer]

Well thanks for the question and we do wish Stephanie well in her travels. I think in general, we approach and obviously we approach each opportunity that’s large uniquely. But I think there's really three key things we try and do as we look at opportunities. And then the first is as I said a moment ago, I think when it comes to the actual value that’s ultimately delivered to employers to consumers and to advisors, we want to be able to, I get to show that value upfront in the process. And that's ultimately leads me to do this.

You’re going to check all the box of course but I think first and foremost the nice thing about large opportunities is you have the opportunity to sell value and we have value to sell.

The second thing is an item I also mentioned which was checking boxes. So very often is the case that there are things that your larger opportunities just want you to do and that's something seems robotics but sometimes it's supporting specialized population, supporting specialized educational needs, I think we're better suited to do that to be honest with you. And I look at some other things we've done for some of the largest public and private employer in United States and I'm sure that they will tell me tell you and will tell reference takers and kind of in RFP process that we are there to deliver and we bring meaningful education resources to their team members whether they are all in one place and therefore you can be reached with first impressions or highly distributed and therefore it's all about train the trainers as well as providing online and telephone resources. And we I think that's an area we really excel and ultimately again produces better outcomes.

And then lastly as it relates to pricing and so forth, there the key is -- and something Darcy talks about a lot including on these calls. And the key is understanding the value of the relationship you're getting for the long-term. And so, we have always been willing to reduce costs for the employer or provider to the extent that we have greater certainty about the assets that we're getting and the commitment to grow that balance. And so we will for a lack of better term underwrite cases, I think very effectively and be extremely competitive in that regard. We think that's what the market wants to see. And it's really what we try to do and I think it's been helpful. Darcy mentioned in his guidance that we're going to continue this year with our strategy with regard to fees, and strategy is we're going to drive the fees that our customer sees down.

And we would rather be paying our customers money that really works as a strategy. And in a funny way I mean, in terms of interest of course, we do. We don't set interest rates on a discretionary or individual basis, anything along those lines as your question suggests but on the key side, certainly our view is that we can be highly competitive and I think effective in understanding when it's appropriate. So, those are really the keys to, I think, winning business and why we want more of it than anyone else.

[Operator]

Thank you. And our next question comes from Allen Lutz with Bank of America. Your line is now open.

[Allen Lutz, Bank of America]

Hey everyone, thanks for taking the questions. Jon you talked about partnerships coming online. Now I know it's early. But what's the feedback then like, where are you guys winning, why do you think you're winning and if you're not winning in certain areas, why do you think maybe you didn't get to the finish line? And then what do you guys learning throughout the process so far?

[Jon Kessler, President and Chief Executive Officer]

So I'll take the status on this and then invite Steve to as well as he's been out of market quite a bit on this one. From my perspective, I have to say, and on these call, we're always cautious about meeting expectations that we can’t meet. But I have to say, the feedback thus far from the marketplace, on the new links, products that we're offering with retirement partners has been really, really fabulous. And then use the word extraordinary, but then seems too good for you. And in midway as well I think given what we're used to is a world in which it takes a lot of time for people to get comfortable with what you're doing, understand what you're doing, this feels like a group of products, that at least in terms of interest that the marketplace was very much ready for it. And so market gets it that is to say that if you look at these products over a lifetime, and you look at them together, you can drive better outcomes for members and actually save money for employers, because the dollars that go in are not subject so their pass. And so moving contribution in the HSA really has some very tangible value as well, aside from the success of helping the members save. So I think that's been very positive. And then the second thing has been really the way that our partners have thought about this. In each case, the partner is bringing something unique to the table. And that's rather than say, well, we're just not as merchant, whatever, we're trying to focus on partnerships that truly brings something needs to segment of the market. And because, we're not, we can reach employers, that's not the problem.

And so we think the issue here is, can we reach them with products that they can't get anywhere else, and based on the market feedback, it’s still that something people are ready for it. I'll say, I think the biggest challenge overall is a one that I sort of mentioned earlier. And that is, it's still the case that within employers, even not terribly large one. The decisions about the retirement plan, and the decisions about health benefits are made by -- typically by two different people. And they don't talk to each other enough in terms of how they are ultimately serving the long term needs of their employers. And this is probably some of that to happen, which is fantastic. But in many cases, those are new conversations. And I'm sure it will take several cycles before they have a familiar past to them. And our people in the field, understand that, so forth.

So that's, I think, you know, whenever you do something -- doing something -- we're not, I'm not saying we're in this alone, we have trade partners and I think there are other people trying to roll in the same direction. But whenever you're doing something that truly is about bringing together to constituencies for single goal is there's always a certain amount of learning how to work with each other as even within the customers themselves and within their advisors. And so that's those are the positives and challenges that I see. Steve anything?

[Steve Neeleman, Founder and Vice Chair]

Yes the only thing I can add, I certainly share Jon’s enthusiasm for the retirement channel and we've been at this health line channel for 15 plus 16 years, and it continues to really yield good results. And when we did this analysis as we're starting to think about our strategy over last couple years, we really thought that we're really covering I think a broader slot of the market and we were. I mean, in fact, probably about a third of the market is covered by health line partnerships. And so really, this is this other two-thirds of the market, how do we -- one way to get in front of part of that other third of the market is through these retirement plan relationships, they'll take us there. They want to keep that business, they want to win more, and so will take us there. And then we're also by expanding our suite being able to say yes as I said to more people Allen in our expanded offering with COBRA and FSAs and HRAs and all of that we’re able to now go sell directly to that other two-thirds of the market. So I think that's the thing that excites us.

It would have been really easy for us to just kind of rest on our laurels and say wow we've got 125, 130, 140 health plans or just keep kind of focusing on that opportunity but that's never where we've been at HealthEquity. It's always been how do we get what we believe is the best solution in the market in front of more people and help them save on in terms of retirement and whether it's approaching tthat through health plans or retirement partners or direct to employers. I really think we have filled up and I appreciate Darcy letting our teams and all of this new invested bank, Darcy and Jon, of course.

[Jon Kessler, President and Chief Executive Officer]

We thought it was you.

[Steve Neeleman, Founder and Vice Chair]

No, no, no. There was this joke before the call but it sound like these were my investments, these were the team’s investments, both of those investments.

[Jon Kessler, President and Chief Executive Officer]

Everyone knows and it’s a little campy but look we -- achieving our mission around camping up health and around American families having financial plan around healthcare that is as part of the financial fund after retirement. You can't do that if education stops at, you have this account and it kind of goes along with sort of life with your health plans. And here's all the way you can spend your money, and we're going to put $1,000 in it, now please don't ask any questions, right? And we think that relevant to our competitors and this goes back to question asked earlier on, we feel like we have to carry this fold on the field. Where you think we're the only ones to do it. And I'll tell you what, right, if I look at the health plans that compete with us, it's pretty clear that they -- with their own products, it's pretty clear that their primary interest in those products, that they would put it is, it's almost like a secondary insurer, they're interested in agency, simply as a source to pay bills, and all of that but unlikely to carrying the education all down the field.

We see a lot of the banks that are in the space, continue to look into account as a source of just deposits. Nothing wrong with that but unlikely the education down the field, particularly when it comes to investing for the longer term. We see a lot of folks who compete with us on the retirement side, simply saying well, we don't really care where the money comes as long as it shows up in our managed fund.

Nothing wrong with that but unlikely to be the kind of folks who are really going to educate people about how to efficiently allocate and really take that next right down in terms of the effective cost of investment. What we like about the partners that we have in everyone one of these segments is that they are committed as we are frankly and pounding on the podium as we speak, it sounds that way. They are as committed as we are to the vision of this marketplace. And I really can't stress enough how important we believe, as an organization it is to stay focused on that outcome. And how educating the people and driving how they using these accounts over an extended period of time is central of achieving that.

[Operator]

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

[Jon Kessler, President and Chief Executive Officer]

Well again, thanks everybody. Welcome to spring. Let's hope we all don't get melted away. And again, we will see you all in early June -- we'll see -- we'll talk in early June I suspect with regards to our first quarter and then we really do while encourage everyone, we're promoting heavily here and we don't get -- we're not paid for ticket or anything but we're promoting heavily our Investor Day. There is a lot of work being put into it. We are not -- as you all know we are not super fancy glamorous types here, we're not going to spend your money on fancy stuff. And then NASDAQ even taking in a little bit to make this happen. But we are -- I got a high role there. But it is going to beg informative about this company's growth strategy over the -- both the near term and the long-term. And it's must -- it's an appointment part of it, it’s an appointment for Investor Day. So we hope you will join us in June here in New York. Thanks everybody.

[Operator]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your program. And you may all disconnect. Everyone have a great day.