HealthEquity, Inc. (HQY) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the HealthEquity presentation at the JPMorgan Healthcare Conference. My name is Annie Samuel, and I cover health care IT here at JPMorgan. We're thrilled to have HealthEquity with us this morning. We've got CEO, Jon Kessler. We'll be taking questions in the Borgia Room afterwards, and we'll have you joined with CFO, Darcy Mott. So let me turn it over to Jon.

Hi, everybody. Good morning. Thanks. I appreciate that. First of all, I want to say this Crystal Geyser water, this is excellent. I don't know if you guys -- I don't usually like this stuff. It's fantastic, in all seriousness. So listen, we have this presentation, but you'll be relieved to know I'm not going to go through it. Instead, I'd like to talk for a couple minutes and maybe I'll be even able to give you a few extra minutes of your time back. I'd like to talk about where we are on the points that I think you as shareholders really care about. And so first, talk about how our sales season went, how we think the market's doing and then how we feel about where we stand on our WageWorks integration. So let's start with sales. We reported our initial outlook towards our fiscal year-end sales in a press release that went out Monday morning, like every other firm in this lovely conference. So you all had a, I'm sure, busy Monday morning at 5, 6 or 7:00 a.m., welcome to Pacific Time. And at least my guys laugh at my stuff, come on. Like I hear the Darcy laugh. Give me a little -- give him a little company. But in all seriousness, we reported mid-teens account growth, 20-plus percent asset growth. And I think when the market -- when we see other market data over the course of the next coming months here, we'll have done our usual job of outgrowing the market by 400, 500 basis points, whatever it will be. And here's the way I feel about that. The way I feel about it is that as follows, is that I think that this is more than acceptable performance. We'll probably end up leading the market in account originations and that kind of thing again. But it's also evidence as to why we did the WageWorks transaction. Historically, we at HealthEquity have distributed through about half the market. Meaning we're on about half of the ball fields out there. We need to be on all the ball fields. And that's really what the WageWorks transaction did for us. It gave us the footprint and the product to play not only in our historical strength of distribution along with health plan and the retirement plan partners, but also to play in the direct-to-employer and broker-assisted markets, again, which are about half the total playing field. So we're not necessarily PhDs in economics, only Masters. But we knew that if, let's say, roughly speaking, we take about 20% of the market and we're approaching 20% market share, that that's not a formula for continuing to grow market share and that's what you expect of us. So that's how I feel about sales. One other note about sales, and I'll come back to this in a minute, but I think it's significant that from a WageWorks perspective, which -- a way you can measure that is our -- we reported for the first time a sales metric on total accounts, which includes HSAs as well as the ancillary consumer-directed benefits. And the CDB side obviously comes mostly not CBD even though it's in San Francisco. Actually, it's just C. It's not C, B or D, I think it's just the C part of it. But in any event, we kind of held serve there. And I think given that the company's revenues and so forth had been down, that as wages had in its first quarter of last year over the prior year were down 6% or 7%, we feel pretty good about the stability that we're seeing there. And I'll come back to Wage in a second. But that's how I feel about sales. And the numbers are what they are. So I neither need to comp them or throw cold water on them. But ultimately, the way I look at it is the team did what we expected them to do. You're seeing that in the results, and that's a good thing. Let me talk about the market since the second set of questions we always get is around how is this market doing? And I'm going to tell you from the -- at the beginning, the punchline at the end, which is the market is going to give us roughly 3 million accounts a year. And just like today, I can look back 5 years and say, that's pretty much what it did, notwithstanding all the discussion every year. I suspect the same is going to be true 5 years from now, right? But the evidence that this last year reaffirmed the long term of the market, in my view, is quite strong. And the best bit of evidence from my perspective is if you think about it, what drives the HSA market? What drives the HSA market is the underlying penetration of plans that are HSA qualified. And I use that term deliberately because I think now in the data, there's some confusion. We have HMOs that are HSAs. In fact, we at HealthEquity offer HMO policies from both Kaiser and Intermountain, right? They are HMOs, right, in the very traditional sense, but they're also HSA-qualified plans, right? So as an example, it's becoming somewhat difficult in the data. That having been said, right? If you look at what happened in the market for those plans, there was an uptick in take-up this year, which I think mostly just reflects a continuation of trend and survey noise. Whereas last year was, oh, there was no uptick. They survey 1,000 people and 10 of them answer differently, and you get a different answer. But if you look at it over the course of multiple years, you can see that those numbers are steadily growing year after year. Just as importantly, since the reason that these plans have grown consistently in popularity is that they do a somewhat better job of controlling cost is the evidence on premiums. Overall, according to Kaiser, Kaiser Family Foundation that is, premiums on group health plans grew at 6% last year. Premiums on HSA-qualified plans grew at 2%, right? 2 is less than 6. And all of us who, at some point in our lives, have been in the investment business, right, we talk about the magic of compounding. Compounding works negatively if you're in the health care business, right? 2 is better than 6. It's a lot better. And that reflects the fact that these products do what they are supposed to do, which is they are not magic, but they keep consumers thinking. And when properly done, they think -- they keep consumers thinking about all the right issues that everyone else at this conference is trying to get them to think about, right? And so that's a good thing. So my view is that the market -- so the punchline to that is, if I look at HSAs in comparison to the rollout of 401(k)s or what have you, the lines are remarkably similar. And there's -- if you really want proof of that, there's a slide in our presentation that you can enjoy that just shows you where we are. And I believe where we are is in terms of ultimate account penetration, we're in the fourth inning or so. In terms of asset penetration, it's still very, very early days. So talked about sales, I've talked about the market. Let me talk about WageWorks. I have to tell you that standing here today -- am I still standing? I am. Standing here today, I promised Richard I wouldn't walk around, right? And I'm -- he wants me to be more Warren Buffet than Jimmy Buffet. So I'm trying not to -- but -- so that's why my hands are -- I'm going to go like this. So my hands are like, I still have one hand on it. Is that okay, Richard? Are you good with that? You all still hear me, right? With regard to WageWorks, I can tell you, I feel much more confident today than I did at the time we closed the transaction. And that confidence is not bred of some magic bullet or what have you. It's bred of 2 facts. One is that I have the luxury of having a little more data, right? I am an economist by training and I like data. And we told you at the time that we closed the transaction that the company -- the WageWorks book was running at between $34 million and $35 million of revenue on a month-over-month basis. And during our third quarter, we beat that by a little bit. And our guide on CDBs into next year implies that we've, at the very least held serve, and that's pretty good, right, given again that the company's revenues were down substantially in the prior year. The second reason I feel confident is, very candidly, is the execution of the combined team. I really can't tell you, our culture is what it is. It's a very service-oriented culture. It's a culture that prides itself on understanding our place in the world and that our place is probably not at the center of the world, but it's our job to help make our community better and help people kind of make ends meet and afford health care for life and good stuff like that. And the team put every ounce of that culture into their execution over the course of this quarter and over the course of the last few months of the year. And where that really showed is, very frankly, in the last 10 days -- last 10 business days. So the first 10 business days of January are our busiest 10 days of the year. And the team managed to produce, over that period of time, service levels for our customers in terms of speed to answer and all those kinds of things that were truly extraordinary. And that reflected a tremendous effort over the course of every day from the day we closed this transaction on Labor Day to today to kind of make that happen, make it go smooth, make people who were new to us at HealthEquity feel like they were welcome and feel what we mean when we talk about Purple. If I talk about Wage in terms of the numbers, at the time of the transaction, we promised you that we would deliver $50 million in synergies, roughly half revenue, half cost. And that we would deliver those by, I'm going to use calendar years, by roughly mid-calendar '22. That is mid-fiscal '23 for us to make your lives confusing. We have now said that we will deliver that $50 million by the end of the current calendar year, roughly, which is another way to say roughly the end of our fiscal '21. That's sooner, right? And to break that down a little bit, here's where we are. On the revenue side, again, which is about half of that $50 million, right? Key components are we're moving accounts onto our custodial platform, right? We are negotiating with Mastercard and Visa, improvements to the interchange shares that we get on the basis of scale. And our team has done -- and Darcy and Tyson Murdock are somewhere in the room here -- have done tremendous work to get to the place where we are earning the money that we should be. We're beginning to earn the money that we should be on the funds of our clients that we hold on to, that is for the FSAs and commuter benefits and so forth. And so all those factors add up to the fact that by the end of this year, on the revenue side, I'm highly confident we will have gotten that 20 -- roughly $27 million that we promised. On the cost side, we promised $23 million. Here's where we are there, right? At the end of the third quarter, we told you we had already taken the actions to achieve. It hasn't all run out obviously, but taken the actions to achieve about $15 million of synergy. Most of that's cost. There were a lot of day 1 actions we took, and that reflected I think incredible planning by the team and by our partners on the advisory side over the course of 6 or 7 months before -- frankly, 4, 5 months before anyone in this room whose name isn't Darcy or Richard knew that this transaction was even a possibility. And so we were prepared and took early action. As over the course of the next few months, we'll do a number of other things along those lines that save us money. But at the same time, that's a net number. We are also over this period of time, going to complete the process that we promised our customers of bringing all of legacy WageWorks calls back onshore. There's nothing wrong with offshore per se, unless you're not really equipped to management, which we were not and are not. And so we will complete, I believe, by May, I think we're saying by the end of our fiscal Q2, but I think it's really going to happen in May, the onshoring of all of those calls. Our customers notice that. And obviously, we're making platform investments. We announced just this morning some new product, a new product feature function-type stuff on the investment side, the fastest-growing component of our business, which is our members who invest and so forth. And so I genuinely feel like, to close this, the last thing that I want to talk about is, okay, so what does all that mean in terms of the strategic reason we did this transaction, which goes back to something I said earlier. It was about getting more at-bats, raising our batting average in those at-bats, playing on the whole field. And what you should expect, and I've never -- I can guarantee you, I have never said anything like this at JPM. It doesn't mean that I know it's going to happen, but it's telling you my goals, right? You should expect us to see a meaningful improvement in our sales cycle next year because we have a lot more tools, right, that -- or I should maybe say rather than you should expect, you should judge us on whether we do. Because that's certainly what we're going to try and do. And so what I'm saying is you don't have to wait 2 years or 3 years or whatever to see whether the strategic synergies are going to happen. The financial side will pay for itself. We'll pay for the deal. I'm not worried about that. The question is, will all of that work have really been worth it to you beyond just meeting your IRR targets, right? Will it really have produced real value? And the first true piece of evidence of that will come with the sales cycle that is now already begun. And that when, hopefully, we stand up in this room or a smaller one next year or a larger one, depending on the results, we can talk about. So I'm going to stop there. That means I've given you 10 minutes of time. I'm pretty sure Anne is not going to let me do Q&A from here, or will you? What?

We're going to do it in the...

We're going to do in the other room. So I'm going to give you 10 minutes. That's enough time to go to Starbucks, right? If you use the app, it's enough time to get a snack, but please join us in the breakout room, which is...

The Borgia Room.

The Borgia Room, that's nice. Actually, it seems rather appropriate for this conference, the Borgia Room. But in any event, we'll be in the Borgia Room, and Darcy will be there, and Tyson will be there. And Richard will be there, and we will all answer any questions that you have. Thank you.