HealthEquity, Inc. (HQY) Q1 2022 Earnings Call Transcript

HealthEquity, Inc. (NASDAQ: HQY) Q1 2022 earnings call dated Feb. 22, 2022

Corporate Participants:

Richard Putnam — Investor Relations

Jon Kessler — President and Chief Executive Officer

Tyson Murdock — Executive Vice President and Chief Financial Officer

Ted Bloomberg — Executive Vice President and Chief Operating Officer

Stephen D. Neeleman — Founder and Vice Chairman

Analysts:

Anne Samuel — JPMorgan — Analyst

Allen Lutz — Bank of America — Analyst

Greg Peters — Raymond James — Analyst

Stephanie Davis — SVB — Analyst

David Larsen — BTIG — Analyst

Thomas Keller — RBC Capital Markets — Analyst

Mark Marcon — Baird — Analyst

Presentation:

Operator

Good day, and thank you for standing by. Welcome to the HealthEquity Year-End Sales Metrics Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. Richard Putnam. Sir, the floor is yours.

Richard Putnam — Investor Relations

Thank you, Chris. We appreciate it, and welcome, everybody. We appreciate you taking time this afternoon to be with us. My name is Richard Putnam, I do Investor Relations here for HealthEquity. Joining me today is Jon Kessler, President and CEO; Dr. Steve Neeleman, Vice Chair and Founder of the company; Tyson Murdock, Executive Vice President and CFO; and Ted Bloomberg, our Executive Vice President and Chief Operating Officer. Before I turn the call over to Jon, I have two important reminders. First, a press release announcing our sales metrics for fiscal year 2022 was issued after the market closed this afternoon.

The metrics reported in this press release include contributions from our wholly owned subsidiary of WageWorks and accounts it administers. The press release also includes definitions of certain non-GAAP financial measures that we will reference here today. A copy of today’s press release, including reconciliations of these non-GAAP measures with comparable GAAP measures and a recording of this webcast can be found on our Investor Relations website, which is ir.healthequity.com.

Second, our comments and responses to your questions today reflect management’s view as of today, February 22, 2022, and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates and 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 here today. These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from the statements made here today. We caution you 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 detailed in our latest annual report on Form 10-K and 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. And at the conclusion of our prepared remarks, the operator will provide instructions on how to do our Q&A.

With that out of the way, I’ll turn the call over to our CEO, Jon Kessler.

Jon Kessler — President and Chief Executive Officer

Thank you, Richard. Appreciate that. Hello, everyone, and thank you for joining us this afternoon. We have a few brief remarks from me on sales results and Tyson on our revised business outlook. But we want to reserve the bulk of today’s call to answering your questions. And so Steve and Ted will join us for that purpose. February one began our fiscal ’23, and we have entered fiscal ’23 with the benefit of record sales, record HSA and asset growth. Team Purple, our partners and our clients helped HSA members open 918,000 new accounts in fiscal ’22. That’s 34% more new HSA sold than a year ago and 27% more than our previous fiscal year record set before the COVID-19 pandemic began.

HealthEquity ended fiscal ’22 with 7.2 million HSAs, up 25% year-over-year and up 12% excluding the 740,000 acquired HSAs from Fifth Third and Further. Our HSA members experienced another strong year of balanced growth in FY ’22 as average HSA balances grew 10% despite January stock market volatility. Overall, HealthEquity HSA members ended FY ’22 with $19.6 billion in HSA assets, up $5.3 billion or 37% from a year ago that included $2.8 billion of organic growth as well. Our member education and engagement efforts produced strong contributions and 37% growth in investing HSA members.

The percentage of HSA members who invest reached 6.3% at fiscal year-end and HSA-invested assets, again, despite January’s volatility grew 58% year-over-year. And at the end of the year made — at the end of the fiscal year, made up 34% of total HSA assets. These are very positive trends for the long-term value of HealthEquity. More members using the full power of HSAs drive our profitability. Wins from cross-sell and from competitive takeaways spur outperformance, atop a still growing HSA market. These results speak to the return on our investment and integration to a total solution and a single proprietary platform, which drives cross-sell and in the engagement infrastructure and capabilities of that platform, which drive members to action.

We believe that HealthEquity once again took market share this year, but we’ll have more to say about that as various sources update their estimates of HSA market size and growth. Our ability to offer clients a total solution at scale, including ancillary consumer-directed benefit or CDB accounts was a major driver of HSA growth in fiscal ’22. However, CDB enrollment itself in terms of growth was modest. Net CDBs grew 2% versus a year ago to 7.2 million and were essentially flat year-over-year, excluding CDBs acquired with Further.

New CDB sales were offset by discontinuation of certain CDB offerings as we consolidated platforms, migration-related attrition and roughly 650,000 Commuter accounts still in suspense due to continuing full-time work from home. We enter FY ’23 and this year’s selling season with 185 network partners, made up of health plans, retirement plan record keepers and benefits administrators with whom we actively go to market. HealthEquity grew the number of its network partners from 174 in fiscal ’21 and from 165 in fiscal ’20 and beyond adding partners, we improved the quality of partner relationships and deepened our commitment to technology integration, examples of which you’ve seen from us over the last few months.

Now I’d like to turn the call over to Tyson to talk about our revised outlook for fiscal ’22 and to give a first look at fiscal ’23. Tyson?

Tyson Murdock — Executive Vice President and Chief Financial Officer

Thank you, Jon. We are today raising our outlook for the fiscal year ended January 31, 2022, as follows: revenue in the range of $754 million to $756 million versus our prior guidance of $750 million to $755 million; non-GAAP net income in the range of $108 million to $110 million within the range of our prior guidance of $108 million to $112 million. Non-GAAP diluted EPS in the range of $1.30 to $1.33 versus our prior guidance of $1.30 to $1.35 and adjusted EBITDA in the range of $232 million to $235 million versus our prior guidance of $230 million to $235 million. The revised outlook implies adjusted EBITDA margin for the full fiscal ’22 at about 31% EBITDA margin.

This is a remarkable achievement given the loss of high-margin Commuter service revenue, health care interchange revenue and lower yields on HSA cash during fiscal ’22 compared to the year ago period. Given the expected financial results for fiscal ’22 and the sales results released today, we have sufficient confidence to provide early guidance for fiscal ’23 revenue, which we expect to be in the range of $815 million to $830 million. I’d like to take a moment to describe key assumptions underlying this guidance, including those related to the unusual circumstances of the pandemic. Today’s guidance assumes an average yield on HSA cash at or above 155 basis points.

Importantly, as is our practice, today’s guidance does not factor in widely anticipated changes in monetary policy, namely Fed rate hikes or increases from current term placement rates for HSA cash, which would have a positive impact on revenue. As you know, however, most of our HSA custodial cash is deployed in multiyear fixed rate instruments, but between 5% to 10% of HSA cash plus CDB client-held funds are deployed in variable rate interest rate instruments tied to LIBOR. Policy driven rate increases this year will provide a greater lift in fiscal ’24 and beyond. The uptake of our members into our enhanced rate offering has helped in this year’s placement, and we have assumed a measure of continued mix shift during fiscal ’23 in our guidance.

As you know, we have been less than successful at predicting the impact on our business performance of the pandemics twist and turns and regulatory responses. Our revenue guidance assumes that revenues from Commuter benefits will remain depressed with only very gradual and modest improvement throughout the year. Guidance assumes no new variant impact that may cause further disruptions. With respect to health care spend and its impact on interchange revenue, we assume per account spend at about fiscal ’22 levels with health care services remaining broadly open to our members. We assume the normal roll off of prior FSAs in the first quarter of fiscal ’23 as normal grace and runoff periods close for calendar year FSAs.

And finally, we assume no additional COBRA subsidies in fiscal ’23 such as what we benefited from in fiscal ’22. And that with full employment, COBRA uptake rates will remain subdued. As expected, the Further business acquired on November one will contribute about $60 million to revenues with adjusted EBITDA contribution running at about 20%. We are already finding ways to improve profitability in this business and expect synergies to be realized over the next few years to align margins with our overall business. Today’s estimates also assume completion of the HSA administrators acquisition in Q1.

Based on these factors and assumptions, we expect adjusted EBITDA margins during fiscal ’23 will be at comparable levels to today’s revised guidance for fiscal ’22. Even with the revenue outlook prudently accounting for the effect of pandemic persistence, and we will report our Q4 earnings in the third week of March and with more information in hand, we look forward to providing additional fiscal ’23 guidance at that time.

And with that, I’ll turn the call back over to Jon.

Jon Kessler — President and Chief Executive Officer

Thanks, Tyson. Before going to questions, I’d like to just briefly say that today’s call is about reporting record sales and to some extent, raising our outlook and providing a first look at what we hope will be a very successful fiscal ’23. But the end of record sales is the busiest open enrollment season during this last quarter that we’ve ever had. And that’s — the deepest part of Purple is a remarkable service to our members, to our clients, to our partners and to each other.

And I just wanted to take a moment to thank all of our team members, all of whom whether they’re brand new to our organization or veterans really have given it at all in a very, very interesting and difficult period to make sure that we are making a difference and to say that we are as a direct result of their hard work and that of our partners and clients, HealthEquity closed the year setting new highs from network partners, for employers, for HSA members, for HSA assets and most importantly, there are 14 million families who are able to do something positive about health care and making ends meet in our country because of your work. So thank you.

With that, let’s open up the call for questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] our first question comes from Anne Samuel of JPMorgan. Your line is open.

Anne Samuel — JPMorgan — Analyst

Hi guys, congrats on the terrific results. I was hoping maybe you can talk a little bit about — you said that you saw your strongest selling season that you’ve seen so far. How much of that would you attribute maybe to a little bit of catch-up from last year? And then how much of that is coming from your ability to bundle new products or bundle more products together than you’ve been able to do in the past?

Jon Kessler — President and Chief Executive Officer

Ted, why don’t you take this one?

Ted Bloomberg — Executive Vice President and Chief Operating Officer

Thanks, Jon. Thanks, Anne, for the question. We have a feeling this one was coming, so we’re prepared. We have — I think there’s four primary reasons why we had such a great sales season. So I think the first one is the one you mentioned, which is the bundle that we are able to deploy to the market when we bought and integrated WageWorks is paying off for us, right? It gets us more at bat, it gets us more seats at the table, it makes us more useful to our partners, our brokers and consultants, etc. And so it’s working.

The second one is, we’ve invested more in deepening our relationships with critical partners, be they health plans, retirement record keepers or brokers and consultants. And we’ve really spent the last couple of years under Steve Lindsay’s leadership, understanding what they need from us and how delivering that will help us get what we need from them. And I think we’re seeing some really significant advances in our partner relationships, which are putting us on more shelves. I think third is we’re getting better at talking to consumers.

We’ve invested pretty heavily in marketing and communications capabilities, and we know how to talk to sort of end users, employees, consumers, whatever word you want to use, be they working at companies that offer HDHP plans, but they’ve never had one before or whether they can’t get their health care through work, so they get it some other way. That’s been a huge area of growth for us as well. And the fourth one, which is really important is we have great employers.

And last year, those employers struggle with the pandemic, along with everybody else. And this year, kudos to our employer clients, they had a tremendous year. So when our employers grow, we grow along with them. When they hire more people, they bring us along for the ride. So I think those four variables were what we think contributed to our — to a significant growth year-over-year on sales.

Anne Samuel — JPMorgan — Analyst

That’s great to hear. And then just on the yield, how much of your assets are within the enhanced rate product now to kind of get to or 1.55% yield? And then how should we think about that progression in the future and how that will impact your yields for the future?

Jon Kessler — President and Chief Executive Officer

Tyson?

Tyson Murdock — Executive Vice President and Chief Financial Officer

Yes. We’re moving into about 10% in enhanced rates, and I would plan to add about that much over the next couple of years here and then see kind of where we want to be from a diversification perspective at that point.

Anne Samuel — JPMorgan — Analyst

That’s helpful. Thank you.

Tyson Murdock — Executive Vice President and Chief Financial Officer

Thank you.

Operator

Our next question comes from Allen Lutz of Bank of America. Your line is open.

Allen Lutz — Bank of America — Analyst

Thanks for taking the questions. Tyson, I think last quarter, you mentioned that FSA card spend slowed in the third quarter and you expected it to slow in the fourth quarter. I guess, what have you observed during November, December? And then has that improved in January and February as those accounts sort of roll over?

Tyson Murdock — Executive Vice President and Chief Financial Officer

Yes. We still saw — Allen, thanks for the question. We still saw softness in the quarter as — more so as expected after the revision and January time frame, January through the early season Q1 and Q4, the heavier spend periods for that. So I certainly think that Omicron played a part in that with regards to medical spend is what we were seeing, where the transaction amounts were maybe higher, but less transactions. So people had to do what they had to do. And so we did see that. And so again, as we built forward guidance, we’ve been a little bit cautious about that just because I think that we’re — we got pandemic behind us, but I’m kind of done trying to forecast that.

Allen Lutz — Bank of America — Analyst

Got it. And then kind of a broader question on the CDB business. So you mentioned that FSA, it seems like there’s some conservatism there. COBRA, there was a benefit in fiscal ’22 that probably won’t repeat and then Commuter it sounded like there wasn’t — there isn’t going to be a material uptick. But I guess what’s embedded in fiscal ’23 guidance versus fiscal ’22 in those three businesses? Is there an assumption that that’s going to stay relatively flat year-over-year? Is the assumption maybe it declined slightly? Or directionally, can you help us out where that’s going?

Tyson Murdock — Executive Vice President and Chief Financial Officer

Yes. The first thing I’d say is absolutely the COBRA subsidy will not take place again. So we’ve talked about that. It’s about $10 million in the middle part of the year there. And so that won’t happen again. Now with the legislation behind us and employment hot, that also has an impact on that service line as well, less people use COBRA when there’s more employment. And so I thought about how to potentially build a little bit of that in.

And then I would say just overall, from a perspective of the CDB businesses, it’s all about the bundle and the sale of HSAs, and that’s, I think, what’s been playing out as I just talked about. And so the way I think about it is those are not necessarily going to be the growth areas. We’re just going to hold serve there, kind of like what we did, maybe hopefully a little better than this last year, and I would kind of think about it that way.

Allen Lutz — Bank of America — Analyst

Great, thank you.

Tyson Murdock — Executive Vice President and Chief Financial Officer

Thank you.

Operator

And next, we have Greg Peters of Raymond James. Your line is open.

Greg Peters — Raymond James — Analyst

Great. Good afternoon, everyone.

Richard Putnam — Investor Relations

Hello.

Greg Peters — Raymond James — Analyst

I feel kind of liberated that I don’t have to hold my questions to just one question. Thank you, Richard. It’s a glorious day to be a sell-side analyst covering HealthEquity.

Richard Putnam — Investor Relations

You didn’t even have to get in a truck and blockade something for us.

Greg Peters — Raymond James — Analyst

Well, depending on your answers, be careful what you wish for — just teasing. So I guess one of the things, and I know you were talking about yields on cash assets. And I know you had a presentation out earlier this year, and it was on slide 12, where you talked about just 10% of the HSA cash earning an enhanced rate product in fiscal year ’22. But then you also said there was a bullet point that says improving rates on bank term deposits. And so I guess what I’m trying to get at is, what do you mean by that?

Because as I understand it, and I’m not a bank analyst, but from what I gather, banks have been really under a lot of pressure because they’ve had a huge inflow of deposits. And not a lot of opportunities to invest. And so maybe 10% to 11%, 12% of their earning assets are just squeaking by with like 12 to 13 basis points. So maybe that’s wrong or right. But either way, I’m just curious what you mean by improving rates on bank term deposits.

Jon Kessler — President and Chief Executive Officer

Yes. I’ll take this one and then invite Tyson to add, if he’d like. So a couple of thoughts. If I just sort of put the question in context, what we’ve tried to do over the course of the pandemic period is ultimately to create more competition for our members’ deposits or our members’ cash, said differently. And in the olden times that would have been pretty much exclusively among FDIC member institutions. You’ll recall a couple of years ago, we were able to expand to include credit unions that are insured by NCUA. And now this year, we’ve added insurance-backed products under the banner of enhanced rates. So the general point here is that the result of all of that is that there’s just more competitors for those funds.

And I think that has actually helped us out a bit relative to sort of the depth of the post-COVID period. What I mean to say, if I look at the last few months, we have seen a little bit firming in the rates on which we place cash in FDIC deposits. But also because of that competition, we’re able to — as you said, we were able to grow from essentially almost nothing at the beginning of the year to about 10% of total assets at the — total HSA cash at the end, the portion of our HSA cash that is in enhanced rates products. And that product again, has the virtue of as its name suggests better rates for our members and better rates for us, but also provides — it allows us to not have to go sort of as far into the demand on the cash deposit side of things.

And I think that’s been somewhat helpful. I guess I would say, I think I would agree with the premise of your question, which is that if I’m solely looking at the deposit market, there are factors that are structural in nature that will cause the improvement in that market from the perspective of a depositor to lag things like treasury rates and all that sort of thing. And that’s what you see in every upturn and certainly this time around. But that’s also why we’re — but we’re sort of at the edge of that and doing our best to get the best deal we can for our members and for us and then also providing more competition through the enhanced rates product, which will only grow over time. So that’s kind of the plan. Tyson, anything to add to that?

Tyson Murdock — Executive Vice President and Chief Financial Officer

Nothing to add. That was good.

Greg Peters — Raymond James — Analyst

Just a point of clarification. I know in the past, you’ve mentioned that your depository partners have asked in the past or have been expressed interest in you extending the duration of your contracts instead of going for like an average of three years to extend it up to four or five years. You’re not suggesting that you’re going to do extend durations of those contracts? Or maybe your substantial size that you can now, I don’t know what the right answer is, but that’s why I’m asking.

Jon Kessler — President and Chief Executive Officer

No. I think with regard to deposit agreements we’re — well, I should back up and say, our policy has always been to — or has been for a very, very long time to that as far as duration goes, we will stick to between three and five years average duration. And in practice with our deposit products, we’ve always hugged kind of the three-year side of that, and that’s still true today. With enhanced rates, it’s a little bit different because you have — you can build some of those adjustment mechanisms into the agreement so that your actual duration and the interest rate risk associated with that are slightly different. But it’s still — you’re still talking about within that to three to five-year range.

And so we’re not getting — we haven’t altered in any way our basic approach, which is to kind of stick to our policy. It’s worked in terms of, sort of, on the one hand, for lack of a better term, cushioning things when you see very rapid declines in interest rates, as you saw at the beginning of 2020. And the flip side of that is it takes you some time to get up, but we’re — we’re very happy to feel comfortable that in fiscal ’23, this is the end of that three-year cycle, and we’ll be on the upswing from here, we certainly hope.

Greg Peters — Raymond James — Analyst

Got it. My second topic and the last question.

Jon Kessler — President and Chief Executive Officer

Are there subs to the subs? I didn’t know that.

Greg Peters — Raymond James — Analyst

I reserve the right to ask a follow-up or maybe 5… I’ll stick with two topics, Jon. All right. So the second topic would be, one of the things we track is the interchange revenue per total account. And obviously, the last couple of years have been pretty tough on that metric for a number of reasons, including the lower utilization, what’s happened with this — the Commuter business, etc. And you haven’t announced it. You’ve given us big picture numbers, but it looks like your interchange revenue per total account could be up in fiscal year ’22 or at least stabilized perhaps. I don’t want to put words in your mouth. But I guess what I’m looking at is, it feels like maybe in your guidance that you factored in sort of that starting to improve, albeit at a very minimal pace going forward. But again, any color you can provide around that metric would be helpful.

Jon Kessler — President and Chief Executive Officer

Tyson, do you want to start on this one?

Tyson Murdock — Executive Vice President and Chief Financial Officer

Yes. I mean I think if you’re looking at the overall year, you’re right. I mean, the middle part of the year was pretty strong and appeared to be sort of a comeback when you thought about interchange. I think the growth rate was 23% or something like that in Q2. And then, of course, surprises coming down the back side of the year and was on with what we revised to for Q4, so kind of down. But I would say that I am being measured about how I forecast interchange coming out, I mean, especially after coming through the month of January.

And it’s just — again, once again, you kind of get people in locked down and it’s all around you. And it does have an impact when you’re watching it day to day. And so — but as I think about the forward, I would say, I didn’t — as I said in our comments, I’m thinking that we’re kind of normalizing into this year. And I think you used the words coming back through and similar words that I used in the script there that just talked about that kind of making progress. And I would say, too, commuter again, is a small part of our revenue and the interchange is much, much smaller as well.

But it is an indicator of what people are actually doing. And so I almost see it as an indicator more than anything else. And you sort of see that very slowly kind of stepping back up and then in January comes back off again. So anyway, just there’s some volatility there that’s tough to forecast.

Greg Peters — Raymond James — Analyst

Got it. Well, thank you for opening the floodgates and for your answers.

Tyson Murdock — Executive Vice President and Chief Financial Officer

Well done. Thank for your questions.

Greg Peters — Raymond James — Analyst

Thank you.

Operator

And up next, we have Stephanie Davis of SVB. Your line is open.

Stephanie Davis — SVB — Analyst

Hey guys, congrats on a strong balance sheet.

Jon Kessler — President and Chief Executive Officer

Thank you.

Stephanie Davis — SVB — Analyst

So I know I just asked you a bunch of questions last week. So I’m just going to leave this to one question and one follow-up. The first one is for Jon, because I have to reframe my thoughts on kind of your new account sales. Historically, when I remember modeling out the net new HSA membership, you always historically said that it topped up on an organic basis, kind of around a little bit sub $400,000 for the fourth quarter. It was just kind of the cadence of how your model worked.

Jon Kessler — President and Chief Executive Officer

Yes.

Stephanie Davis — SVB — Analyst

But you had a lot of headwind and still on an organic basis, it looked pretty healthy this fourth quarter. So is there anything about the combined HealthEquity wage that maybe changes that fourth quarter capacity?

Jon Kessler — President and Chief Executive Officer

Well, I think, Stephanie, the way I would look at it is that I would take — I think — and Ted mentioned this in his earlier response, I do think that particularly in Q4 we obviously had a strong selling season, but it’s also true that our clients, in particular, has a strong hiring season, very strong. And as a result of that, that certainly was a very helpful tailwind in Q4, in particular. And so just as it was a headwind, brutally so in Qs two and three of the prior year, right? And so I think the way to look at it might be to take the last two years as a whole and kind of like average amount.

And if you look at that and compare that to what was going on pre-wage, right? That kind of tells you what the impact of having that total solution really is. And I mean it’s not that complicated in the sense that what we said at the time was that we were — there were shots on goal that we just weren’t getting. And we weren’t getting them principally from the broker side of things, and the middle market, because they wanted to buy a total solution and either we or our partners pretty much we’re just selling an HSA and didn’t have the like stuff around it.

And so — and that made things harder for them, and that’s what they told us, which is why we embarked on that odyssey. And so we — you’ll recall the language about figuring — we were selling like 20% of the market and like that was great until you got the 20% market share, and then you’re not growing market share. So I don’t know what percent of the market we will have ended up selling this year, but I don’t have market data. But I think that’s probably a good way to frame it is in fiscal ’21 we had obviously some truly unusual headwinds.

Those were somewhat offset in fiscal ’22. But if you take those two together and kind of average them and compare that to what was going on before then, you can see that there’s a fairly significant delta, and that’s precisely the delta that we would have expected as a result of having greater access. And so that’s sort of the way I look at it going forward.

Stephanie Davis — SVB — Analyst

So averaging this to all, I mean, you do still get to low double-digit growth. Is that a safe way to look at your net new HSA member growth going forward? Or should we take — or take a more conservative cut given some market dynamics?

Jon Kessler — President and Chief Executive Officer

Well, I think the market is going to give us — again to your point, it depends what the market gives us. But let’s say that the market gives us 7% account growth or whatever it is, we should continue to outperform that. And so I don’t think what you’re saying is entirely unreasonable, but I also think it requires us to consistently outperform. And so — but I don’t think it’s like — it’s not crazy. So I’m not going to give you a number to put in the model, but I think you’re in the ballpark and you’re thinking about the right things.

Stephanie Davis — SVB — Analyst

I’ll take the ballpark. I’ll do that.

Jon Kessler — President and Chief Executive Officer

I would just say one thing before we leave that one. I invite Steve Neeleman to comment, too. One of the things that we saw this cycle was strength in areas where people have said, “Hey, our HSA is really penetrating, particularly the middle market and the sort of higher end of smaller employers.” And Steve, you’ve talked a lot about and worked a lot on helping clients and brokers and others really understand how to use an HSA. So maybe you could comment a little bit about what we saw there and what we worked with our partners and some stuff we’ve worked with our partners on in that topic that does kind of go to Stephanie’s question about what the market can deliver and what we can deliver.

Stephen D. Neeleman — Founder and Vice Chairman

Yes. I mean, Stephanie, if you recall, and I think a lot of the consulting firms and stuff like that either because of COVID or just — this HSA has been around for 18 years now. I think a lot of them have quit publishing these kind of detailed reports, but the last time we looked at this, and I think this is true with our own book, you kind of saw really high adoption among the largest employers in the country and then quite high adoption for HSAs in the smaller, the tiny employers, right? But it was that kind of mid-market that had enough folks working for them and enough market leverage where maybe they could negotiate for different types of benefit options, and yet they weren’t as strategic as the big ones, like some of the ones we’ve named in the past that we work with it — we’re saying, look, we strategically want to go to a consumer-directed plan and we’re going to have a whole team of people to do that.

Mid-market doesn’t have that kind of luxury. And the small employers we’re kind of doing it because they just need the lowest priced premium, right? But that mid-market is now starting to come alive. And when we see our people out there in market and with the wage merger and acquisition, we’ve really extended our footprint. So now it’s not just working the channel that’s been so great for us for so many years, which is the health line channel, but we’re also able to get in front of a lot of the consulting firms and broker firms throughout the country and talk to them about what they need. And then obviously, that was the feedback they gave to us, well, we need the full bundle.

Because if you’re a mid-market employer, I mean, in HealthEquity, sometimes we think we’re so big. We’re effectively a mid-market employer, right, 3,500 teammates. And so in certain settings, we would not be considered to be a large employer. We wouldn’t. In fact, even in our own account management team, they sometimes make that breakpoint around 5,000 where they’re really dedicated a lot of resources to it. And yet, we have a lot of sophisticated needs. And so our ability to come to the market with a full bundle and be able to really help those employers through some of the things that Ted talked about is effectively direct-to-consumer marketing, right? It’s just the consumers within our clients doing a better job of educating them, taking that message back to the employers is what really is, I think, helped that mid-market start to take off.

And when we started down this pathway of wage, we looked at it and that was the segment that we were not reaching. We were reaching the larger ones because of our efforts with the big consulting firms, and we are getting a lot of the smaller ones because of all of our channel partners. But it’s that mid-market, and so we’re pretty thrilled with the effort and also the results, and we’re also pretty excited that we’re coming up with a scalable way to educate those folks and get them to start to choose the health savings account, which is great.

Stephanie Davis — SVB — Analyst

Thanks, Steve. Appreciate you having that thank you.

Operator

Our next question comes from David Larsen of BTIG. Your line is open.

David Larsen — BTIG — Analyst

Hi, how much revenue is Fifth Third and Further are going to be adding in fiscal 2023, please?

Tyson Murdock — Executive Vice President and Chief Financial Officer

You said, Further and Fifth Third. Okay, yes. So you got Fifth Third at about $1 million. And I said on the call, Further was $60 million annual run rate. So we got about 1/4 of that in the fourth quarter. So 45, something like that.

David Larsen — BTIG — Analyst

Okay. Great. And then let’s say the Fed raises interest rates by 100 basis points in calendar ’22. Is it fair to assume that you’re going to get 100 basis points of incremental yield in your fiscal ’24? And would that be about $100 million of custodial revenue lift, all of which would flow through to EBITDA?

Jon Kessler — President and Chief Executive Officer

Tyson, do you want to start on this one?

Tyson Murdock — Executive Vice President and Chief Financial Officer

Yes. The answer is no. I mean, again, it goes back to deposits and also how — obviously, you got the enhanced rates program playing in there as well. But you think about that 3- to five-year ladder and those deposits rolling off from three-plus years ago that are at much higher rates than the average rate now. So even if we place them at a higher rate due or Fed increase of, like you said, 100 basis points, we’d still be placing some of those at lower rates. And so there would still be essentially a — they may be higher-than-that average, but they’re still a headwind relative to what they were placed at before.

And so it moves a little slower than that. So it moves, as Jon was saying before in the call, it moves a little slow — moves up maybe a little bit slower than it came down over the past three years, if you look at the rate of change from three years ago to now and kind of the declines of those average rates and then it will move back up as we utilize the new placements that those — again, higher rates based on where the Fed comes out next January, so having an impact on that placement of about 1/3 of our assets is sort of what we’ve said.

Now we’ve got enhanced rates playing into us. So maybe it’s a little less because there’s some competition in there, but it’s essentially 1/3 of the assets rolling over. So that get placed and then we do that in the subsequent year as well. So more than what you’re kind of outlining there, but I would go back and look at history as to how that kind of comes up and goes down.

Jon Kessler — President and Chief Executive Officer

The way we used to answer this question at the time of our IPO, and I think the answer still kind of holds. It’s — the way to think about it is, let’s say, you had exactly as you say, 100 basis point increase. What you would see is two things. First of all, that increase would show up in our deposit placements over the course of, give or take, three years, maybe 3.5 years as contracts rolled over relative to where they are, right? And over time, a portion of that would likely flow. And I think in the past, we’ve said maybe it’s 25% would flow back to our members and clients either in direct deposit beta as it were, where our competitors raised the rates they paid and/or you saw the benefit in terms of increased service fee competition or the like.

But nonetheless, I mean, the point you’re making is that over an extended period of time, 100 basis points ends up given our current amount of cash equaling something — if you just want to think about it as 75 basis points on existing cash, that’s still I don’t know, $80 million, $90 million. It’s not some change, it’s just — the part of your question that was, will that all happens in fiscal ’24. No, that would take time to occur. And there would be some offset on either the cost — the custodial expense side or in greater service fee competition. And you’ve historically said, I think we’ve seen that, that offset is over time is in the nature of about 1/4 of the total rates.

David Larsen — BTIG — Analyst

Congrats on a good guide.

Jon Kessler — President and Chief Executive Officer

Thank you.

Tyson Murdock — Executive Vice President and Chief Financial Officer

Thanks.

Operator

Thank you. Our next question comes from Sean Dodge of RBC Capital Markets. Your line is open.

Thomas Keller — RBC Capital Markets — Analyst

Good afternoon. This is Thomas Keller, on for Sean. Thanks for taking the questions. So maybe staying on deposits, is there any way to parse out the contribution to HSAs from the employers versus what employees are contributing. Has there been any sort of shift in that trend or employers, maybe raising a contribution to incentivize adoption or anything like that?

Jon Kessler — President and Chief Executive Officer

It’s been remarkably steady actually through different economic climates and job climates. The average annual employer contribution among those employees who contribute has remained very steady, and you’ve seen this in our stuff, but also in third-party data that are out there. And the percentage of employers who contribute has remained steady, which we’re particularly pleased about given that you’re seeing penetration into, as Steve Neeleman was discussing, segments of the market that are beyond the enterprise. And then individual contributions as well have remained steady even at times where individual is spending less.

So you think about second and third quarter of last year or of 2020, I should say — of calendar 2020, where we obviously had significant reductions in spending. You still have people contributing and the same has been true during periods of market volatility not dissimilar to what you see in the 401(k) markets where people will set those contributions and think about it in a little bit longer term, and they won’t stop contributing just because there’s some short-term volatility in assets or whatnot. So I think through this entire period, where we’ve had more volatility on the CBD side of the business as a result of the pandemic’s twist and turns, the HSA business, broadly speaking, has continued to grow and outside of changes in custodial yields, which for better or worse, at least we can predict them, before they show up, has been remarkably steady, and these are just aspects of that behavior that’s been steady.

Maybe I’ll add one other point, which is, one thing that has changed a little bit is the nature of employer contributions. So historically, you had — your contributions were — the rationale for the employer contribution sort of boiled down to getting people started, etc, etc. Today, there are two rationales that really govern the whole thing. The first is, employers have incentive programs and so they will have incremental dollars available for members who do certain things, right? Typically, those are various healthy behaviors or what have you. And so we’re able to administer that on a seamless basis for employers, and that’s good. And then the second is, employers are trying to, to some extent, assure that people use these plans properly. They don’t want people to just go in for the lower premium.

And so they’re effectively giving a portion of that premium back to the member or essentially saying, okay, you get this lower premium, it could be even lower, except that we’re effectively forcing some savings here. And I think that’s a positive thing for employers to do. It’s something we encourage. I think it — you don’t want to be in the circumstance where people come in just for the premium, don’t use the HSA and then the plan is just a truly high deductible plan. That’s not a great answer. But I guess the big picture to your question is, it’s been remarkably steady over the course of both months and years during pretty different type situations.

Thomas Keller — RBC Capital Markets — Analyst

All right. Very helpful. And then a general one on policy. I know you all are pretty active at the federal level. How critical overall do you see policy playing over time? Are there any changes that are necessary for the industry to sustain its 2.5 million, three million new HSAs per year?

Jon Kessler — President and Chief Executive Officer

Steve, you want to hit this one?

Stephen D. Neeleman — Founder and Vice Chairman

Yes, great question. Look, I mean, clearly, if we could get some policy changes, not unlike what happened with 401(k)s when they were doing some different accounting procedures and things like that, that seem to accelerate those away from more of the kind of the defined benefit plans towards employer contribution, I think it could certainly accelerate the market. As far as kind of maintaining this two million to three million new HSAs, I mean at some point, obviously, if we continue to, let’s say, three million per year, then you’re going to keep cutting into those 100 million households that have available. The ability to have an HSA, it’s those in commercial insurance, right? Last time we looked at the numbers were 31 million HSAs out of about 100 million households that could have them.

And yet there’s another 130 million Americans that don’t have access to them. And so as much as we’re happy with the growth right now, and as much as we believe, there’s still a lot of room to grow within those 70 million households in the commercial insurance that don’t have an HSA, we will never rest until we can expand to other populations. I mean it’s just unfair that vets that have been working for 20 years for the military, they go out into the private sector, their employer wants to give them money into an HSA and they’re ineligible because they’re still covered with the TRICARE benefit that makes them ineligible. It’s just not fair. Same thing with folks that are on Indian reservations, Indian health service plans and things like that. Same thing for people who have VA benefits. And so we continue to chip away at that.

I can tell you we’ve had many, many discussions about some of the thoughts that we think can get us there, which — and get us there being defined as, effectively decoupling the health savings account from the high-deductible plan, that would allow us to go into a lot of union populations within that kind of 70 million folks that don’t have — 70 million households that don’t have HSAs right now, even though they’re in commercial insurance. Jon always teases me because one of the largest employers in the state of Utah is a religious organization, and they are not able to have HSAs because they’re still on a grandfathered plan going all the way back to Obamacare, pre-Obamacare. As long as they don’t change their benefit, they don’t have to incorporate some of the things that people could debate whether they should or not into their plan, but this allows their people tens of thousands of workers from having an HSA.

And so we’re going to keep beating that down. Jon, I think it’s fair to say that we don’t see in the next five to 10 years the need to have significant regulatory changes in order to maintain the market and, including if I’m wrong, Jon. But I think if we want to accelerate the market, dig on it, we’ve got to do this, but more than just accelerating the market, we’re going to do it to help more Americans because — it’s not really fair right now, because the person in your next cubicle can take an HSA from their employer and a contribution and you can’t because you went and served in the military. It just makes no sense at all.

Jon Kessler — President and Chief Executive Officer

I just want to say something about like profit in his own country or something like that to Steve, when we talk about that Utah situation. The problem is, there’s a profit in the country that is higher ranking than me. That’s the profit…

Stephen D. Neeleman — Founder and Vice Chairman

We are actually getting profit in this country. We all got that problem. Yes, but in any event, I mean, I think you kind of get the picture. There are opportunities to expand things like Steve was mentioning, plus Medicare, and then there are opportunities to accelerate to simplify and make more existing commercial plans eligible because most people have relative to what was the case when these plans started, most people have significant out-of-pocket expenses now and everyone will in Medicare and does in Medicare. And so giving people a tax-efficient way to handle those seems to make a ton of sense. And we have some very specific ideas. But we’re also cognizant of the current atmosphere in Washington, which is poisonous, that is probably a nice word for it.

And so we’re not going to howl at the moon on this stuff, we try to — when things are like that, we use that time to quietly educate and take feedback very seriously. And try and improve our ideas on that basis and look at the research. And when the time is right to get something done, then we can push on it. And we’ll always only do what we think is right. We’re not just doing stuff to sort of the company’s interest, if that’s all it does. We can pass on that. There’s plenty of stuff we can do that also serves the interest of people who are out there working hard. So that’s kind of how we approach it.

Thomas Keller — RBC Capital Markets — Analyst

Thank you.

Stephen D. Neeleman — Founder and Vice Chairman

Thank you.

Operator

We have Mark Marcon of Baird. Your line is open.

Mark Marcon — Baird — Analyst

Hey, good afternoon. Let me add my congratulations on the strong selling season. We had a couple of your competitors that ended up giving some data. And it seems like you have grown stronger than others. So we’ll see what the year ends are coming out with. But it looks like you’re gaining share. Wondering when we take a look at the HSAs that you ended up adding over the year from sales as well as from — over the quarter, what percentage of that incremental bump ended up coming from your current employers just hiring more versus new accounts that you ended up signing.

Jon Kessler — President and Chief Executive Officer

It’s a little bit difficult to break it out only because particularly in the health plan side of things, you get some back and forth there. But particularly when you look at the fourth quarter, that’s when you get both new employers and new members from employers, and those members can be either new hires or new people into HSAs. So if you look at the fourth quarter outperformance, I think it’s probably fair to say that, that outperformance is more about like, I got to say, sustainable ads whereas it might be the case to some of the outperformance we saw in the earlier quarters of the year, relative to say, two years ago, however many years it’s been since the pandemic started. that’s probably a little more of a hiring effect that you were seeing, again, particularly in the third quarter.

So I don’t have a precise answer for you, Mark, but I think it’s fair to say that that hiring thing kind of helps, but it’s also true that in the same bucket, you have all of the work that our marketing team has done and our account executive and sales and I should say, our service delivery manager going to present to clients tools that, I mean, at this point, electronic open enrollment has become the norm, and we’re hoping it stays that way because it’s certainly more efficient, but really what it does is it allows us to personalize and that’s been very, very helpful. So I think that’s — I don’t have an exact number for you. But as I said earlier, I think if you want to look at a trend that is like economics neutral or macro neutral, I think you can probably average the last two years…

Mark Marcon — Baird — Analyst

Okay. And going back to the earlier comments with regards to the middle market and your penetration there, can you give us a sense for like what percentage of the HSAs are coming from employers that are — that would typically be considered to be large employers or enterprise-wide versus enterprise size versus the mid-market. What inning are we in in terms of penetrating the mid-market and the upper small market.

Jon Kessler — President and Chief Executive Officer

I think we’re in about the fifth or sixth inning on the upper market where you’ve got the majority, but not by much of large employers who at least offer an HSA and your opportunity — in some cases, there are reasons they’re not offering it, so they might ultimately not get there. But like Steve’s example, it will take the waning of time or whatever or he’s going to have to advance in his piety.

But broadly speaking, I think the large employers are in there like fifth or sixth innings, I think the middle market and then you can define middle market pretty broadly to be, let’s say, everything that’s not within the fully insured small groups. I think you’re in the — you’re still in the third inning, maybe fourth inning, maybe, I guess. We definitely got a good chunk out of it this year, and then small market’s a wildcard. As Steve said, it’s a little bit of, what’s the word, dumbbell. What’s the thing with the two ends? In that that.

Stephen D. Neeleman — Founder and Vice Chairman

Barbell.

Jon Kessler — President and Chief Executive Officer

Yes barbell — Who adopted — thank you, who adopted high-deductible plans because like that was the only choice. And there — those are some of the folks we’re trying to get to with something that Ted mentioned about working with our partners to speak to consumers directly whose employers might not even be touching the issue of an HSA partner, but they’ve got a high-deductible plan and that’s been particularly successful in some of the small employers that are professional fields. And then there’s sort of — so that’s kind of one end.

And then the other end is the folks who have been, I think, historically been steered away from these plans because they were lower commissioned, and then some of that’s being corrected now with the way that the commissions are being paid. And so we’re still early there, too. But again, I think the way Steve put it is right, which is, we got about 30 million accounts today. We’ve — our view is that at kind of key market maturity, you’re looking at about 60 million accounts. So we’re halfway there. And if we grow between two million and three million accounts over the course of the remainder of this decade, we’ll pretty much be there by the end of the decade.

Mark Marcon — Baird — Analyst

Great. And then just with regards to kind of the initial thoughts with regards to next year, how should we think about the monthly service fees? And I know that there’s obviously a bundle that’s occurring and everything like that. But just you gave us how we should think about the average yield. And you — and obviously, that’s the primary focus and obviously interchanges isn’t changing. So just wondering as we factor different things into the model, how should we think about that that monthly fee.

Jon Kessler — President and Chief Executive Officer

Tyson?

Tyson Murdock — Executive Vice President and Chief Financial Officer

Yes. And Mark, you’re talking about from an overall perspective and — now we’re starting to get some history with breaking out service fee relative to a number of total accounts. So you can sort of start doing that and looking back and seeing year-over-year. But what I would say is that we can — I mean it’s still about bundling that, right? And so I guess the best thing that I’ve kind of shared with people to help them understand it is just the level of the fees. And so you’ve got Commuter as the highest revenue and then FSA and then you got HSA and then you got HRA that are kind of going down through as far as the amount of revenue that they generate per month per account.

And then COBRA is sort of unique in there, and then it does it by number of employees in the business, and there’s the element of the 2% premium that’s in there too. So basically putting all those things together is what we’re trying to sell from an offering perspective. And I think to get a little more pointed towards your question, there is, of course, always that underlying opportunity for us to win in the market when we can go find customer that we can underwrite that has a significant amount of assets, and therefore, we can offer a service fee table that essentially has a much lower dollar HSA service fee on it. And so therefore, essentially mining the revenue off of those assets and then widening the margin with an FSA or an associated HRA with that HSA.

Mark Marcon — Baird — Analyst

Great. And then with the middle market accounts that you’re penetrating, you’re typically selling more of a bundled offering just because that’s what their natural proclivity is for anyways, right?

Tyson Murdock — Executive Vice President and Chief Financial Officer

Yes, I would say that’s true. I mean that’s what we always want — I mean that’s what Ted and Steve who are on here; I mean, that’s what we’re trying to do is make sure that we can get the opportunity to have some when we already have a relationship with. That’s in middle market and move it forward, move the ball forward on the field with regards to a number of accounts that they’re utilizing from us.

Mark Marcon — Baird — Analyst

Great. And just with the new employers that you ended up taking on, what percentage of those were companies that were brand new to taking on an HSA or a CDB offering versus competitive wins? Because it seems like you’re winning more. But I just wanted to confirm.

Jon Kessler — President and Chief Executive Officer

Yes. It’s interesting, over time, that percentage of takeaways has grown. But what’s tricky about it is very often takeaway means that they had a program, but like they weren’t real serious about it, they didn’t have too many numbers. And so — and I’m speaking specifically to HSA here. But I think I commented last year that — or two years ago to say that we have reached the point where looking at enterprise, right, that we had as many takeaway wins as greenfield wins. That’s probably come down a little bit since then because one of the effects of the pandemic has been whoever you have, like just everyone is a little stickier. We’re all stuck in the mud a little bit for better or worse.

But I think particularly where you see a lot of the greenfield and we were talking about case this morning on sales huddle, I won’t say who the client is, because they are going to want to like really get a deal here, but I’m teasing. They’re going to get a good deal. But it’s a 4,500-person group. So that’s not small exactly, that’s a greenfield HSA opportunity. And so — and certainly, as you get smaller that’s where you’re seeing more of the greenfield activity. And I guess I’d say one more thing there, which is this has something to do with the balance growth that we’re seeing. I mean, we, of course, focus on and the major contributors there involve engagement and people actually growing their contributions and whatnot. But it’s also kind of helpful when you get brownfield or takeaway business, that comes with mature accounts.

I mean those aren’t starting out at $300. And that’s one of the reasons that we could grow accounts on an organic basis 12%, right? And still grow balance 10%. The fact that — I mean that’s a pretty — if you had gone back a few years ago, I would have said, and you may recall this discussion, Mark, we would have said, “Look, as long as you have double-digit account growth, you’re never going to have double-digit balance growth, as the accounts start out so small.” That’s less true today in part because of the sort of opportunities for takeaway.

Mark Marcon — Baird — Analyst

I appreciate that. Congratulations.

Jon Kessler — President and Chief Executive Officer

Thanks, Mark.

Operator

Thank you. And I see no further questions in the queue. I will turn the conference back over to Jon Kessler for final comments.

Jon Kessler — President and Chief Executive Officer

Well, somehow, Mark Marcon always ends up to get the last question. He’s the like the last guy and price is right. You get the strategic advantage there. I don’t know how that works. But in any event, thank you all. We particularly wanted to just spend a minute, thanking both our analysts and our long-term investors who kind of stuck with us after what was a very difficult announcement for us in December.

We hope that folks appreciate the visibility we’ve tried to provide both in January and now. And we will look forward to an uneventful announcement of the fourth quarter in when we all — final results when we speak again in almost exactly a month. And to the extent we have greater visibility, we will expand on our fiscal ’23 guidance and it will be good fun. Until then, again, thanks, everybody. Stay safe and stay same.

Operator

[Operator Closing Remarks]