HealthEquity, Inc. (HQY) Q3 2021 Earnings Call Transcript

HealthEquity, Inc. (NASDAQ: HQY) Q3 2021 earnings call dated Dec. 06, 2021

Corporate Participants:

Richard Putnam — Investor Relations

Jon Kessler — President/Chief Executive Officer

Tyson Murdock — Executive Vice President/Chief Financial Officer

Ted Bloomberg — Executive Vice President/Chief Operating Officer

Stephen D. Neeleman — Founder/Vice Chair

Analysts:

Anne Samuel — JPMorgan Securities LLC — Analyst

Greg Peters — Raymond James & Associates, Inc. — Analyst

Sean Dodge — RBC Capital Markets — Analyst

George Hill — Deutsche Bank Securities, Inc. — Analyst

Donald Hooker — KeyBanc Capital Markets, Inc. — Analyst

Scott Schoenhaus — Stephens, Inc. — Analyst

David Larsen — BTIG — Analyst

Glen Santangelo — Jefferies — Analyst

Allen Lutz — Bank of America — Analyst

Stephanie Davis — SVB Leerink — Analyst

Mark Marcon — Baird — Analyst

Presentation:

Operator

Please go ahead, Mr. Putnam.

Richard Putnam — Investor Relations

Thank you, Justin. Good afternoon. Welcome to HealthEquity’s Third Quarter Fiscal Year 2022 Earnings Call. My name is Richard Putnam. I do Investor Relations here for HealthEquity. Joining me today is Jon Kessler, President and CEO; Dr. Steve Neeleman, our Vice Chair and Founder of the company; Tyson Murdock, the company’s Executive Vice President and CFO; and Ted Bloomberg, 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 financial results for the third quarter of fiscal year 2022 was issued after the market closed this afternoon. The metrics reported in the press release include the contributions from our wholly-owned subsidiary WageWorks and the account it administers.

The press release also includes definition of certain non-GAAP financial measures that we will reference here today. A copy of today’s press release including the 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 question today reflect management’s view as of today, December 6, 2021 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 risk and uncertainties that may cause our actual results to differ materially from 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 and that they are detailed in our latest Annual Report on Form 10-K and in subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information or future events. And at the conclusion of our prepared remarks, we will turn the call over to the operator to provide instructions and to host our Q&A.

And I’ll turn the call over to our CEO, Jon Kessler. Jon?

Jon Kessler — President/Chief Executive Officer

Thank you, Richard and hello, everyone, and thank you for joining us. Today we’re reporting results for HealthEquity’s fiscal third quarter which ended on October 31. Core HSA sales account asset — accounts and assets continued the strong growth pattern that we have seen throughout fiscal 2022. Well ancillary consumer directed or a benefits or CBD administration slowed and weighed on operating performance. I will dive into both aspect of — aspects of Q3 results and Tyson will review the financial details of the quarter and provide updated guidance for the full fiscal year 2022. Steve and Ted will join us as we take time for your questions.

Let’s start with the five key metrics that drive HealthEquity’s business. Q3 revenue of $180.0 million was up slightly from a $179.4 million in the third quarter of last year. Adjusted EBITDA of $61.1 million was flat year-over-year 13.3 million total accounts at quarter’s end were plus 6% versus a year ago. And as in recent periods total accounts exclude commuter accounts and suspense. HSA members at quarter’s end reached $6.2 million up 14% from a year ago including 11% organic growth plus new HSA members from the transition of The Fifth Third’s portfolio just before the end of the quarter and HSA assets at quarter’s end has reached $16.4 billion, up 32% from a year ago, including 28% organic growth and approximately $490 million in deferred assets transition.

Spurred by total solution, cross-sales HSA captured — has captured a greater share of HSA growth during both during the pandemic impacted fiscal 2021 than ever before, and is now delivered record organic HSA openings and asset growth during the first three quarters of fiscal 2022. Team Purple delivered a fiscal third quarter record of 151,000 new HSAs, up 45% from 104,000 new HSAs open in Q3 of last year. In the three quarters of fiscal 2022 the team has welcomed 446,000 new HSA members across its diverse sales channels as 41% more than in the same period of fiscal 2021 and 29% more than during the same period in the pre-pandemic fiscal 2020. The migration of Fifth Third Banks HSAs added another 160,000 HSAs on top of the strong sales results and HSA assets grew a total of nearly $1 billion during the quarter, and that includes assets of course, transferred from Fifth Third.

Investing HSA members at quarter’s end were up remarkable 43%, with 74% growth in investors — invested assets from a year ago. HealthEquity members average HSA account balance grew a robust, network robust, 16% evidence that members continue to catch the vision of long-term health savings and to connect health and wealth. HealthEquity’s organic and total year-over-year HSA and HSA asset growth in Q3 compare very favorably to the most recent industry data. Devenir estimate 6% account and 26% asset growth market wide for the year ended June 30. HealthEquity delivered 14% account and 32% asset growth year-over-year in Q3.

Comparison with Q3 reports from publicly traded HSA peers tell the same story, saying that the team continues to make market share to take market share, as we have done every year for more than a decade now. Our formula for doing this, as you know, is simple. It’s a total HSA solution at scale, bundling the services that are clients want proprietary technology, delivering the ecosystem, connectivity that our partners demand and purple service and education that our members deserve. As you know, HealthEquity acquired WageWorks’ market leading CDB capabilities and client footprints few years ago to drive core HSA growth, and that is precisely what’s happened.

However, CDBs have proven more sensitive to near-term external factors than we expected. We believe that most of these factors will recede as the pandemic’s effect on the economy continues to wane. But Q3 results from administration of FSAs, Cobra and commuter accounts were particularly impacted and resulted in lower than expected interchange and service revenue, leading overall revenue down $5 million to $10 million versus our expectations as implied in prior guidance when we speak about each of these.

Interchange was the biggest surprise. Year-over-year, interchange revenue grew just 8% in Q3, down from 23% growth in Q2. FSA spend on our debit cards and platform in Q3 slowed more than was anticipated from seasonal factors. And the final user lose deadline for calendar 2020 and 2019 FSA. Improvement from here is going to depend on the choices of members during open enrollment and on enrollments from new sales that we’ve made this year. We anticipate that members who did not add to their balances for calendar 2021 will do so for calendar 2022, which leaves us cautiously optimistic as we head into the new fiscal year.

Service fees from COBRA administration experienced a similar reversal after Q2 gains. In addition to the end of one time revenue from administration of the federal COBRA subsidy, which we did expect and did discuss with you last quarter, COBRA uptake itself fell off more than we expected when the subsidy ended. Tight labor, markets and high churn conditions led to more COBRA eligibility in this account, but not necessarily additional fees.

Commuter accounts and fees had a small uptick sequentially for the first time since the start of the pandemic, and that is good and welcome. But with employers taking only very tentative steps towards return to office to free commuter fees were still lower even than in the year ago period. And finally, our decision to walk away from certain legacy CDB administrative engagements for one-off services that our go forward platform will not support will ultimately help streamline and simplify the business, but hurt short-term service revenue nonetheless.

So scale CDB capabilities are spurring core HSA growth, which is strong in its own right. And team looks forward to turning the page on CDB integration and the pandemic’s various impacts on revenue. We’re going to do that first and foremost by focusing even more on the expanding revenue generation capabilities around our fast growing high margin HSAs and sales execution through portfolio M&A and through product innovation.

I already mentioned the record sales results in the transition of the Fifth Third Bank HSA portfolio completed in Q3. After the quarter ended, we announced the closing of our acquisition of the HSA business up further, which brings with it approximately 580,000 thousand HSAs and 1.9 billion in HSA assets. Further, as you know, expands our HSA partnership footprint and commitment to — within commitment to the Blue Cross Blue Shield Association and its help plans and as technology to help partners embed HealthEquity more deeply into their product spec you’re going to see — you should expect to see real examples of deeper integration of HealthEquity HSAs with partners in the coming quarters.

This morning we announced an agreement to acquire a portfolio of $1.3 billion in HSA assets from health savings administrators, a leader in marketing HSAs to individual investors and to small employers. I’m pleased to report that initial member uptake of our innovative enhanced rates offering is beating our expectations which will support custodial yields going forward and the inherent profitability of HSAs.

FY ’23 will be the third year of the downward custodial yield cycle that began around the onset of the pandemic and of which are all familiar. But we’re cautiously optimistic that it will be the last. While tightly focusing on the HSA core, we are streamlining elsewhere, migration of business from duplicative legacy CDV platforms acquired with WageWorks will be completed substantially in Q4 and entirely in the New Year.

I mentioned earlier the decision to discontinue one-off services that won’t help us grow and we’ve also agreed with further sellers to terminate our agreement to buy the VEBA accounts which was an ancillary and severable component of the overall further acquisition that frees up $45 million of corporate cash, the core growth opportunity.

I’ll now turn the call over to Tyson for additional detail on Q3 and year to date operating performance and updated guidance for the current fiscal year. Mr. Murdock.

Tyson Murdock — Executive Vice President/Chief Financial Officer

Thank you, Jon. I will review our third quarter GAAP and non-GAAP financial results a reconciliation of GAAP measures to non-GAAP measures is found in today’s press release. Third quarter revenue, as Jon indicated, was up less than 1% year-over-year, with service revenue declines partially offsetting growth in custodial and interchange revenue.

Service revenue declined 2% to $102.8 million, representing 57% of the total revenue in the quarter. Service revenue in the third quarter was aided by 10% growth in average HSA accounts, offset by CDB service revenue declines in FSA s, commuter and COBRA services. Lower CDB revenue and continued success in our bundling and cross-selling efforts led to lower service revenue per account.

Custodial revenues grew 1% to $49 million in the third quarter, compared to $48.5 million in the prior year second quarter, 16% growth in average HSA cash with yield more than offset a 36-basis-point decline in the yield on HSA cash from the comparable quarter of last year. The annualized interest rate yield was 172 basis points on HSA cash with yield during the third quarter of this year. This yield is a blended rate for all HSA cash with yield during the quarter.

As Jon mentioned, our HSA members continue to invest their balances, which resulted in 81% growth in average HSA investments with yield. The HSA assets table of today’s press release provides additional details. Interchange revenue grew 8% to $28.2 million, representing 16% of total revenue in the quarter. As Jon indicated, earlier, FSA spend decreased as 2019 and 2020 rollover FSA accounts were depleted and closed faster than we expected.

Gross profit was $102.2 million, compared to $104.6 million in the third quarter of last year. Gross margin was 57% in the quarter. Operating expenses were $103.7 million or 58% of revenue. Amortization of acquired intangible assets and merger integration expenses together represented 18% of revenue. Net loss for the third quarter was $5 million or a loss of $0.06 per share on a GAAP EPS basis.

Our non-GAAP net income was $29 million for the third quarter of this year compared to $32.2 million a year ago. Non-GAAP net income per share was $0.35 per share compared to $0.41 per share last year. Adjusted EBITDA for the quarter was $61.1 million and adjusted EBITDA margin was 34% compared to $61.1 million and 34% margin in the same quarter last year consistency of those numbers is an indication of the HealthEquity’s team’s focus on improving the efficiency of our operations and carefully managing costs towards the ongoing profitability of the business.

For the first nine months of fiscal 2022 revenue was $553.3 million up 1% compared to the first nine months of last year. GAAP net loss was a $11.5 million or $0.14 loss per diluted share. Non-GAAP net income was $93.2 million or $1.12 diluted share and adjusted EBITDA was $185.6 million up 1% from the prior year resulting in 34% adjusted EBITDA margin for the first three quarters of this fiscal year. Turning to the balance sheet as of October 31, 2021 we had $649 million of cash and cash equivalents with $930 million of debt outstanding net of issuance costs with no outstanding amounts drawn on our line of credit.

The cash balance of course still includes $455 million of cash that was used to close the further acquisition on November 1. As a result of the sale of unsecured debt and reduction and rollover of secured debt during fiscal 2022 the tenor of our outstanding debt has been dramatically extended reducing risk and giving us the flexibility to invest in growth opportunities. The new debt will obviously increase interest expense by about $4 million at a quarter.

Based on where we ended the third quarter and our current view of the economic environment, we are revising our guidance for fiscal 2022 to include revenue for fiscal 2022 to range between $750 million and $755 million. Non-GAAP net income to be between $108 million and $112 million resulting in non-GAAP diluted net income between $1.30 and $1.35 per share based upon an estimated 83 million shares outstanding for the year and adjusted EBITDA to be between $230 million and $235 million.

Today’s guidance includes our most recent estimate of service, custodial and interchange revenue based on results to date. Our guidance includes a more conservative outlook for service and interchange revenue to reflect fewer commuter and FSA accounts and lower balances through calendar 2022 and reflects continued conservative spend patterns that we saw in the Q3 for the remainder of this year.

Guidance also includes the addition of Further which closed at the beginning of Q4 and also reflects a ramp up in the service cost associated with onboarding new clients and members for both Further and HealthEquity as a whole. Our guidance assumes a rate on HSA cash with yield of approximately 175 basis points for the full fiscal 2022 year and includes the migration of further assets to HealthEquity depository and insurance partners at prevailing rates. Guidance also includes the benefit of $75 million of run rate synergies achieved from WageWorks to date as we finalize the placement of HSA cash assets into depository contracts we will be able to provide initial interest rate guidance for fiscal year 2023.

This outlook also includes certain cost HealthEquity that we expect to incur as a result of President Biden’s Executive Order on ensuring adequate COVID safety protocols for federal contractors, referred to as the federal contractor mandate. As you may know, the federal contractor mandate is more stringent than the wider OSHA mandate. The federal contractor mandate brings with it significant cost for compliance assurance and for recruitment and training of team members to replace those who can either provide proof of vaccination nor eligibility for exemption under the president’s order.

The outlook for fiscal 2022 assumes a projected statutory income tax rate of approximately 25% and a diluted share count of $83 million as we have had fewer equity awards exercised this year than expected. As we have done in recent reporting periods our full year guidance includes a detailed reconciliation of GAAP to the non-GAAP metrics provided in the earnings release and a definition of all such items is included at the end of the earnings release. In addition while the amortization of acquired intangible assets is being excluded from non-GAAP net income, the revenue generated from those acquired intangible assets is not excluded.

With that I will turn the call back over to Jon for some closing remarks.

Jon Kessler — President/Chief Executive Officer

Thank you. Look we’ve always tried to humanize these calls with plenty of thought and today’s results are mixed and then what — and I mean that it’s not quite literally like a blender, I mean it truly. Our core HSA outcomes were very strong and the varied written capital letters so that’s why I’m saying it like that but also because it’s true. Our ancillary CDB services performance was not crucial. We’re taking action on both results to deliver the long term growth, profitability and visibility that we know you rightly expect. We truly welcome your tough questions on our results and on our plan.

Let’s get to it. Operator?

Questions and Answers:

Operator

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

Anne Samuel — JPMorgan Securities LLC — Analyst

Hi guys.

Jon Kessler — President/Chief Executive Officer

Hi, Anne. Happy Holidays.

Anne Samuel — JPMorgan Securities LLC — Analyst

Happy holidays and thanks so much for taking the question. You guys got a little faster and there was a ton of detail, so I was hoping maybe you could just circle back and provide a little bit more color on what happened with the interchange? And then you said you expect the dynamic to shift in your cautiously optimistic for next year. So what are the dynamics that are happening there? Thanks.

Jon Kessler — President/Chief Executive Officer

Tyson, you want us to get started on this one?

Tyson Murdock — Executive Vice President/Chief Financial Officer

Yeah. Yeah, and thanks for the question. Yeah, the interchange revenue and the interchange spend was the leading lager. Again, on the HSA side, we have a lot more accounts. I feel really good about what we’ve done there and especially with even interchange there. But on the FSA side, we’ve seen a decline in those 2019 and 2020 accounts more quickly than we had thought. And so, not only does that affect service fee, but it also affects the interchange because there’s less of a balance for them to spend.

And we saw the spend and the revenue related to interchange increasing pretty dramatically in the Q2, Q1 timeframe. And so, the thought was, is that that would persist more so than it did. And so, as we saw that come down in the months during Q3 that really how does — that put us in a place where we needed to shift Q4 as well because Q4, obviously is a higher spend quarter when you think about December, it lose in January, when the accounts are replenished. And so that that’s really one of the biggest challenges there on the interchange side. Jon, any more thoughts on that?

Jon Kessler — President/Chief Executive Officer

No, I think you hit it.

Anne Samuel — JPMorgan Securities LLC — Analyst

Great. That’s really helpful. Thank you.

Tyson Murdock — Executive Vice President/Chief Financial Officer

Thank you Anne.

Jon Kessler — President/Chief Executive Officer

Well, actually, I will — I have one thing, which is to say the cautiously optimistic part is it was which really way to summarize what we — what we just said is that we had very strong impacts, particularly in Q2 that were in part, the fact that you had this sort of unique situation where you were running off two years of unsettled balances. And so the third quarter is kind of what remains and then in to December is what remains and of course January part of the year.

But as we look into the new fiscal year you know that will be impacted by people’s decisions that are being made now with regard to elections and you know while we’re looking at early returns on that and we’ll have more to say when we provide a fiscal 2023 outlook later, we’re optimistic that we’re optimistic that we’re going to see some snapback there relative to the elections that people were making or not making back at the — during some of the darker days of the pandemic, you know a year ago and so forth. So that’s why we — that’s the cautiously optimistic part.

Anne Samuel — JPMorgan Securities LLC — Analyst

That’s great. Thanks, guys.

Operator

Thank you and our next question comes from Greg Peters from Raymond James. Your line is now open.

Greg Peters — Raymond James & Associates, Inc. — Analyst

Good afternoon.

Jon Kessler — President/Chief Executive Officer

Mr. Peters [Indecipherable].

Greg Peters — Raymond James & Associates, Inc. — Analyst

Well, unfortunately, the stocks getting beat up in the aftermarket and I know you just covered some of the reasons for the mixed results, maybe you could spend a minute and just talk to us about custodial revenue and the outlook for that line item. The three-year jumbo CD rate just hasn’t budged at all and it doesn’t seem like there’s a lot of new loan demand and so I’m just, it just begs the question in your comment, you said you think this might finally trough out next year, but I have to wonder about that. And the second part of the question and this will be the only thing is just you spent a lot of money on further and you know where I guess, trying to see where the positive impact of that is in the results going forward. So that’s my question, sir.

Jon Kessler — President/Chief Executive Officer

Okay. Those are great. Why don’t — how about I’ll hit the first one on rates and Tyson, why don’t you and Ted, if you’d like to add in to the second one on further. So with regard to rates, both Tyson and I comment a little bit on our thinking forward. If you recall Greg, when this cycle began, we pointed out that we have three years’ worth of sort of latter and the benefit of having that latter is that it gave us time. And so we have notwithstanding the fact that, I mean in this quarter is sort of an example of that, notwithstanding the fact that that we’re 35 basis points down in terms of yields are custodial revenues, of course, were actually higher and our overall EBITDA was flat year-over-year.

And so fiscal 2023 will be the third year of that cycle, we’ve commented previously that are historical lows in terms of the rates we receive are the lowest that we’ve ever gotten 150 basis point, 152 basis points after the 2008 crisis, after kind of our latter had unwound there. And we’re kind of heading into that same territory and we’ve commented elsewhere that, that’s likely where we would be. But I think what we’re adding that commentary today is that we feel much more comfortable than for example, we did three months ago that, that, that’s the bottom. And again, we don’t — we’re not perfect predictors any better than anyone else.

But I want to tell you why, because first of all, is not because we have some magic ball or we’re breaking into our thinking, but for rate, for overnight rate hikes or what have we. As you know we do not bake those things into our thinking. It’s really because of exactly what we’ve said over the last couple of quarters, which is that the introduction of our enhanced rates product has done is doing two things for us. The first is it’s helped generate higher yields and higher spreads.

And second of all, it just creates more competition for money and effectively reduces our need to place, you know, through the marginal bank, if that makes any sense. And it’s for those reasons that we think we’re in a better position from a sort of what the terms of our placements are going to be going into those going into fiscal 2023 and then at the end of fiscal 2023 and 2024 that we’re feeling quite a bit more sure footed and optimistic that we can meet the promises that we have more or less making over the course of time with regard to the likely shape of these yields.

So that’s kind of my that’s the basis for our thinking we’re not looking at. I want to be clear, we’re not looking out there and saying, well, you know, economist Zack says that they’re going to be for rate increases next year or whatever they say. And so that’s going to make it all better. That would be nice from the perspective of our business.

But what we’re really looking at is we’re looking at the offers that we’re getting from our banks as we go into play, as we’re in the placement season, though obviously we have some with the chop there. But we’re but we’re also looking at the fact that competing against those offers in effect is the uptake from our members of our enhanced rate cut. And that’s again both has, as its name implies, enhanced rates and also again, just reduces our need to hit the marginal bid and then that helps us out quite a bit. So hopefully that was helpful. And the second question was about further and Tyson why don’t you start there?

Tyson Murdock — Executive Vice President/Chief Financial Officer

Yeah. I was going to make one other comment on the rates thing as well, Greg. I think this is important to know you know, when you think about contracts and placements we’re making earlier in the year versus now, those rates are higher whether you’re talking about FDIC or even an enhanced rates program, that they’re higher now than they were then. So there is that term now. You know, we’re still working against that average in the higher placements from two or three years ago.

Of course, right, we’re FDIC, but those are different now, they’re higher. So I wanted you to know that, and then you know, on the further, on the further business, this is — this is again an HAS centric business, right. The Blues plans are going to be very important. How? Our ability to be able to penetrate those plans, like we’ve done with other health plans is really one of the ideas that I think will work very well for us over time.

You know, the other thing what further is that really gave us the jump on enhanced rates because they are part of the assets that we place got us to scale there. And scale is what matters when you think about how to put together a program like that’s hard to do without scale and so do this, the scale there. So there’s obviously not just the, the yield associated with those particular assets, but the impact that I have on the inherent profitability of the overall HealthEquity business in the long run. And I think that’s, that’s a very important part of that further deal.

When I think about its impact, you know, on the immediate quarter and right now, it doesn’t have as much impact because it’s going through its Q4 enrollment business season. So of course, margins are at a low point for that business. So I can’t put a bunch of margin in there for Q4 of the revenue. But you know, we talked about earlier in the year, you know a $60 million revenue run rate for that business on a 20% EBITDA margin business and then you know $15 million in synergies. I think we tracked that over the long term.

And so from a starting point of a Q4 seasonal starting point, that’s not great when you do the math on the numbers, you can see that especially based we made in guidance. But over time, I think there’s a lot of opportunity for us to create a lot of efficiencies for that businesses — business whether it’s in the technology side, how it’s run, it’s carved out of a much larger organization. I think we have a lot of — a lot of ways to think about how to run a major statewide business relative to the how that’s been run. And so, there’s that opportunity for us. I don’t know, Ted, you want to comment any more comments on that.

Ted Bloomberg — Executive Vice President/Chief Operating Officer

No, I think Tyson you have it. The only thing I would add relative to the numbers that Tyson just alluded to is we did announce today that we’re not completing the VEBA portion of the transaction, which is, you know, the easiest way to think about it rough numbers is 10% of the transaction. So, that you kind of you know help you get a sense of what we’re aiming for next year. But again, early days haven’t even completed a monthly cost on further yet. But, you know, I share Tyson’s long-term optimism that similar to what we did with Wage, we’re going to be able to take this business and integrate it, grow it, realized from synergies from it and an expense margin.

Greg Peters — Raymond James & Associates, Inc. — Analyst

Ted, can I just ask a clarification on what you just said is that the cancellation is 10%, so if you use $60 million and $20 million of EBITDA, I should take 10% off both those numbers as we think about further going forward for the cancellation is that right?

Ted Bloomberg — Executive Vice President/Chief Operating Officer

Yeah, I think that either is a VEBA — the VEBA business was about 10% of the business, Greg. So, we’re paying about 10% less than we were — than we had publicly announced. You’re paying and that’s what we should say. In any case, I think that’s a — that’s a reasonable estimate. You know, with the asterisk that Q4 is always a relatively low margin quarter for both our business and for the existing.

Greg Peters — Raymond James & Associates, Inc. — Analyst

Got it. Thank you for the answers.

Operator

And thank you. And our next question comes from Sean Dodge from RBC Capital Markets. Your line is now open.

Jon Kessler — President/Chief Executive Officer

Hello Sean.

Sean Dodge — RBC Capital Markets — Analyst

Thank you. Hello. So, Jon, I guess going back to your comments around the enhanced rates product, can you give us a sense of the yield differential you can earn on that versus the more traditional FDIC insured placements and then just maybe a quick kind of education and mechanically how that that rollout looks different that you’ve got to get the employers to sign off on and then the employees to opt into. And so I guess maybe some, some idea with the timeline or the ramp looks like for the enhanced rate?

Jon Kessler — President/Chief Executive Officer

Yeah. The spread there is it does depend a little bit. But let’s just say we’ve commented elsewhere that that, that the benefit of enhanced rates adoption in current terms is kind of in the 50 basis points to 75 basis point neighborhood. In terms of the adoption approach and actually a little bit of that gets eaten up by the fact that you’re also paying enhanced rates to the members, but in terms of the adoption process, the answer depends a little bit, and this will be a multi-year process.

We’re still know very much at the beginning of it, but very encouraged by what we’re seeing, as Tyson mentioned with regard to the further business, further came over with a material amount of this already baked in. And so, that just came over and that did help us in terms of you know if you think — if one were to think back to the earliest days of our business and negotiating with one bank with very little assets and all of it kind of on the come, we didn’t have to do that here because we had money to start with but it is a process that’s going to take time and ultimately it’s the member that elect into the enhanced rates product.

But there are a couple of ways that can happen one is that is their initial election sort of for lack of a better term unless they take a different action it’s the default, if they’re new or it can happen when they come onto our site or what have you, they can be presented with that option and elect to it and but of course, we also are — we — this is something where our employers have some flexibility as well. So — but I think what you’re going to see over the course of the next few years is that a larger and larger percentage of our, for lack of a better term, new cash needs are getting soaked up by the election of both new money and existing money into the Enhanced Rate product.

It’s a good product and it’s — it has some tradeoffs but it’s a — but it’s a very good product for the members and a very good product for us and allows us to keep other costs low and deliver outstanding service. So I hope that’s kind of helpful. I would say the way to think about it is the case of adoption is going to reflect sort of the soaking up our cash means over the course of time.

Sean Dodge — RBC Capital Markets — Analyst

Okay. That’s very helpful, thank you.

Operator

And thank you. And our next question comes from George Hill from Deutsche Bank. Your line is now open.

George Hill — Deutsche Bank Securities, Inc. — Analyst

Yeah, good evening guys and Jon, Tyson thanks for taking the question, I have a couple. I’ll try to keep them real quick. Tyson, I guess the first one was, did you detail how much CDB revenue that you guys walked away from both in the quarter and on an annualized basis And then I guess my two quick follow-ups, which would be for both Jon and Tyson would be.

Jon, do you have any feedback yet on what the adoption of HDHP has looked like at the end of this open enrollment season going into the next calendar year? And then Tyson to the degree to which you’re willing to talk about it, if we’re able to frame how we should think about the big headwinds and tailwinds for fiscal 2023 as you see them right now, I’m not going to ask you for guidance, but if you could just kind of flesh out how you see the big moving pieces I think that be super helpful.

Jon Kessler — President/Chief Executive Officer

Why don’t we start with your last question and we’ll work our way backwards, Tyson?

Tyson Murdock — Executive Vice President/Chief Financial Officer

Yeah, that’s a good question, just I’m pulling some up here. I think when you think about what headwinds really do become tailwinds or vice versa, I mean we’ve been talking a lot — I won’t [Indecipherable] everything we just said about enhanced rate, but really, really that shifts that mix shift is the biggest tailwind that we see when you think about balances continue to grow. We look at the outsized balanced growth that we have relative to market and just the acquired assets that we get as well. So we’re really positioning ourselves to have a lot more assets and a better way to place them and that is really going to be the long-term.

Again, like I said before, I mean, the probability business in my mind has changed inherently, we’re positioning ourselves to take advantage of what I see in the news this morning, if that rates are going to shift up and they will you know eventually and we’ve already sort of seen that as we’ve computed those rates against the various partners that we work with. And so we’re expecting those rates to eventually rise and it sounds like they may be slowing sooner. When I think about that the real headwinds for the business you know I think that employment can cut both ways when you think about how you think about how Cobra is utilized versus how you think about you know at this stage are utilized and so you get that the kind of swirled waters of the CDBs, which you know that’s not necessarily the growth area of that business but what it does do is it really it helps us to cross-sell.

And so the deals that I signed now are always you know for the most part multiple deals with multiple types of accounts supporting HSA growth where we’re able to provide something to HR benefit offices to where they’re not managing multiple vendors and that’s really powerful for Ted and Steve and the sales team. And then you know the other kind of headwind you know that we have is just trying to manage through how we think about what the pandemic does to spend and how people spend.

And really you know kind of even to go back to the first question how we sort of you know and on there’s some places where we maybe don’t want a particular client where it’s not profitable and where it doesn’t necessarily work for the platforms that we’re going to go forward on. And those are very, very small relative to our overall base of revenue. But those are decisions that now at the end of the long WageWorks act at you know integration you know that we’re making and we feel like we’re making the business healthier as a result of that. You know I mentioned a couple of other ones you know obviously got the child care accounts that are a headwind in those types of things. But those are some of the things that I think we think are on kind of those two I guess in the first and the last question.

Jon Kessler — President/Chief Executive Officer

Yeah. I’ll kind of hit them — I’ll hit the middle one and in a way it builds on not a very much so it builds on Tyson’s, the first part of Tyson’s answer. When I look at our sales over the first three quarters and HSA openings over the first three quarters and look at the source of those what I see is a market that is recovering from a tough year last year, you see more evidence and how tough last year was in the reports that have come out, which are sort of backward looking from Kaiser and others but what I’m particularly enthusiastic about in that regard is in the tough, it turns out, looking backward in a tough year, we took more market share than anyone ever has before, than we have or anyone has, as far as I know before.

And now this year, I mean, we’ll see what the total market ends up looking like and what all the enrollment numbers that come in for it for the next couple of weeks here look like but as I’ve always said, the best indicator of my next quarter sales is my last quarter sales and my last quarter sales were really good. And so in terms of consumer enrollment as well as overall and so and so, I guess my general view, George, is we try to manage as you know, we try to manage the business towards the long-term opportunity and the long-term opportunity has — is the same one that you and I and Darcy and Steve talked about.

I think Tyson was just a green arrow back then and Ted but that we talked about many, many, what’s now many years ago, I mean, from a decade ago, which is — these accounts are going to steadily grow. We’re going to end up when we’re done with about as many HSAs as there are 401(k) out there. Their balances are going to start small, but over time they’re going to grow and you can see that happening. And as a result of that, you end up with a business that has sustainably high margins and has a good long stay runway to it, and we are some steps that we take to make sure that we’re in position to see that growth turn out to be a tough one.

So obviously you saw that in this quarter with respect to what Tyson called some of the CBB swirl. But we’re going to keep taking those steps. And whether that’s building enhanced rates or solidifying our footprint in the blue system with further whether it’s what we’ve done today with the HSA administrators to kind of build on some of the momentum that our individual product has had and very small group product in for some of the kind of more investment oriented small groups of doctors and lawyers and the like. We’re HSA administrators as focused or whatnot.

We’re going to keep doing the things that position us to take market share in HSA so that as that market expands in revenue terms, in asset terms and account terms, we’re going to look up. And if we keep doing that year-over-year, we’re going to be just fine and our shareholders, our long-term shareholders are going to be just fine. And more and perhaps more importantly than all of whether we’re fine or our shareholders are fine, we’re going to have done a lot of good for a lot of people in terms of connecting health and wealth. So that’s kind of the way I look at it. I know that sounds like a little bit of blather, but it actually reflects my view of both next year and the year after that and the year after that.

George Hill — Deutsche Bank Securities, Inc. — Analyst

So Jon, I appreciate all the commentary. Thank you.

Jon Kessler — President/Chief Executive Officer

Thank you.

Operator

And thank you. And our next question comes from Donald Hooker from KeyBanc. Your line is now open.

Jon Kessler — President/Chief Executive Officer

Hey, Don.

Donald Hooker — KeyBanc Capital Markets, Inc. — Analyst

Hey. Good afternoon. So I guess you guys are really seeing maybe just an amazing growth in the percentage of HSA assets invested. And I mean that’s always been a difficult to model. And is there some reason — is that and it almost feels like that’s accelerating a little bit? And I was wondering, can you talk a little bit about trends or are you doing anything different to drive your HSA members to invest more into stocks and bonds or — and how should we think about that going forward?

Jon Kessler — President/Chief Executive Officer

We’ve worked on this for a long time and Ted I think this is a great one for you to hit in terms of what the — our product and education teams have done over the course of the last couple of years to really accelerate this trend and drive the industry in this direction.

Ted Bloomberg — Executive Vice President/Chief Operating Officer

Sure, happy to jump in and I think it’s this topic for sure, but it’s also all of the various ways that you can as a — as an employee of one of our clients optimize your benefits and we’re investing heavily in getting you to do that, right? Educating you in multi-channel ways both with marketing in the actual product itself and then in member services when you call just kind of sharing with you what the next best thing for you to be doing whether it’s spend your FSA dollars so you don’t lose them or hey, we noticed you built up a little stack of cash in your HSA.

Why don’t you start thinking about investing or we noticed you’re not contributing as much as you should be why don’t you contribute more education is going to be the huge operational focus for us. And I think in one of the places that it’s really shown up and then you just identified is in the percentage of members investing. It’s — we’re seeing in other places too and in the — you know in the number of members that are raising their contributions in the number of members that are spending through their FSAs. So it’s — you know I think we’re kind of in the middle innings here. You know, we’ve built a pretty strong program over the last couple of years, but there’s still a lot more of that that we can do across the board, but notably in this industry.

Donald Hooker — KeyBanc Capital Markets, Inc. — Analyst

So, I guess my follow up, and this is probably impossible to answer, but I’ll ask it anyhow and see if theirs — is there a way to think about it, is there sort of a natural threshold there? I guess any kind of updates I know in the past we’ve talked about this, but within in the updated thoughts, is there some what is the typical sort of natural threshold sort of cash and investments?

Jon Kessler — President/Chief Executive Officer

The typical my dog wants to chime in a little dog on this, but we’ve talked about this a little bit before. You know that and I think you see the same concept also, when you look at the most mature accounts, is that typically what you’ll see is people will build up enough cash or liquid asset to be able to handle kind of their near-term expenses. And so it’s important to note that that even among our max contributors right they are also spenders, and that’s by the way, one of the reason that you see really any drop off in HSA spend, the interchange that is even as balances of growth commented on that a little bit in the script.

So people tend to build up, you know enough cash to, let’s say, cover their annual deductible or you know some number of maybe for some folks, it’s their annual out-of-pocket maximum. So if you look at our longer term accounts that have kind of done that, what you’ll see is that that cash balance kind of tops off, you know, somewhere between $3,000 and $5,000 and then they continue to grow the investing side. And it’s not like there’s a switch flipped or whatever.

But that’s kind of, I think, a way to think about the typical behavior of an investor is that — when you look at and you can see this even in the further, I’m sorry, it’s administrators business that’s been very focused on individual investors and these very small groups of folks who were like, totally on to this, right where you see — and your average total balance is 15 to 20 grand, of which, you know, give or take three quarters is invested and one quarter is cash with — and so I think that’s kind of where you’d expect it to end up.

Donald Hooker — KeyBanc Capital Markets, Inc. — Analyst

Okay. Thank you.

Operator

Thank you. And our next question comes from Scott Schoenhaus from Stephens. Your line is now open.

Jon Kessler — President/Chief Executive Officer

Hi, Scott.

Scott Schoenhaus — Stephens, Inc. — Analyst

Hey, Jon. Hey, Jon, Tyson and Richard. Happy Holidays. So, I understand the moving parts around the more conservative guidance, so just wanted to continue this conversation on HSA, what’s driving the organic growth rate there? Where are you seeing the sales strength from and can you talk about where you are in terms of the cross-selling opportunities on the Wage legacy customers? I believe there was 70,000 employer clients and roughly 20 million employees that they touched. So I guess, what’s driving the organic growth? Where you’re seeing the sales strength from and where do you stand on the Wage legacy acquisition?

Jon Kessler — President/Chief Executive Officer

Great. Steve, why don’t I ask you — our Steve to start in terms of kind of what you see out in the market? You’re out there. For those who don’t know Steve Neeleman he will go anywhere for a deal. You call him this afternoon and you say I need you in Charleston tomorrow morning, he’ll figure out where to get it. So I’m going to start with Steve Neeleman and then Ted maybe you can comment on the cross-sell metrics.

Stephen D. Neeleman — Founder/Vice Chair

Thanks, Jon and thanks, Scott. Obviously last year was a tough year just with COVID and everyone kind of hitting the pause button. We’ve been really encouraged and I think it’s been — you’ve seen it in the numbers, I mean it’s amazing when I look at these numbers we just reported, you know, there were some acquisitions in there but still see $960 million during the quarter of new growth and kind of a 14% account growth and so we’re — we think these are great leading indicators and I can tell you in the RFP world — we felt really good about where the season started shaping up towards the end. And so, we think these are great leading indicators. And I can tell you in the RFP world, we felt really good about where the season started shaping up towards the end.

Some of the larger employers were still in pause mode a little bit at the very beginning of the year when COVID was still really raging, if you think about the sales cycle for the real big ones. This was kind of prior to everyone getting vaccinated and things like that. And yet the small groups were still closing a lot of deals right now. And if you were to — we’re not going to let Rich [Phonetic] review this by the way, but if you were ever listened in one of our sales calls, you would get a lot of energy and people saying that they really do feel like, especially in the small, mid-sized businesses that are still — I mean, one of the questions that was asked earlier was, how do we finish up our open enrollment season. We haven’t yet. I mean, this is a very busy time for groups that are still rolling people in.

And so, a lot of energy, I think it’s been — I think it’s pretty well illustrated in our numbers that you reported that the DHSAs are growing and there is some mixed results on the CDBs, largely because some are rolling-off, but I can tell you every time that we bring on an employer, then they have a bundle full of CDBs, then we start to do our education and really start to bring people over to the light of — have retained value account that doesn’t go away when they change employment, they can take it in a retirement, all the great things about HSAs, sometimes we’ll see initially the CDB start to go down, but the HSAs really start to going up. And so, I think that’s one of the reasons why you’ve seen some of the FSAs things like that going down, but with a lot of energy, Scott, I guess is the way I would classify that. Ted, how would you add to that since it’s all kind of part of your world as well?

Ted Bloomberg — Executive Vice President/Chief Operating Officer

Yes. Thanks, Stephen. And thank you for putting your shoulder behind our sales efforts like you do and getting on more plans than most people. I think to answer specifically the cross-sell question here, we’re very pleased with our cross-sell progress thus far and we don’t really break out the metrics. But I think a couple of things we’ve shared in the past that I would just reiterate are: number one, our close rate and our cross-sell opportunity versus de novo opportunity is 2 times to 3 times high, because the client knows us and they are accustomed to our service and that goes both directions whether no matter which legacy client base the employer was a part of.

And then the second is, last year the vast majority of our cross-sell, you can imagine — why do you rob banks? Because that’s where the money is. We focused all of our cross-sell efforts on enterprise to get started and that’s where we saw some early wins. And what I’ve been most encouraged by this year is that we’re starting to see that cross-sell capability to send down into employers into the small to medium sized employers. And Steve alluded to a place where through we had a lot of success this year and it’s hard to draw a straight line between cross-sell and that success. There’s lots of reasons for that success with cross-sell certainly one of them. So I think we’re getting — this was our second selling season being able to offer kind of a credible bundle and we’re getting better at being able to do it and we look forward to more progress.

And I think the last point I would make is that there is still a ton of white space for us. We have hundreds of our top 500 enterprise clients only have one product with us, right, and thousands of our small to medium sized clients only have one product with us. So the opportunity should nourish us for a long time. We have to continue to unlock it and thus far we’re experience a trajectory that needs to happen.

Jon Kessler — President/Chief Executive Officer

At the risk [Phonetic] of piling on, I’d make one other point here, which is, as Ted talked about, cross-sell white space. I think again looking both now and long-term, I really could not have asked for realistically a better outcome in terms of how the competitive white space is shaping up. Our largest competitors are the largest health plan in the United States, which has it’s kind of walled garden and the largest investment retirement plan management in the United States, which has its walled garden. And there are things that are good about walled gardens, but the nice thing about us is, if you are an employer, we’re going to work with you whomever. We are not part of their lock-in strategy, but even better.

If you are a partner of ours, right, you know that — or you’re looking at both of those and you’re trying to compete and that means you want to work with the best you can and that’s us. And I think not only is it the case that competitively the market is shaping up for that lane to be our lane and to be a very large lane. But also from a technology perspective and I alluded to this in the comments and we’ll see a little more of this in the next few quarters, but the technology is continuing to evolve in such a way and our platform is continuing to evolve in such a way that we can embed the HSA deeper and deeper and deeper into our partners’ products and/or in the language of APIs. HSAs can be consumed in so many different ways and that’s true in the individual market, it’s true in small group, it’s true in large group, it’s truly in retirement, it’s truly help them. So it’s true and been added. So, I’m — and in other channels that we haven’t even thought of yet as HSAs continue to mature and sort of penetrate customers. So, I think that’s another thing that has begun to help us in this cycle, but that will be a big helper as we kind of continue to try and sustain market share growth year-after-year over the next number of years.

Scott Schoenhaus — Stephens, Inc. — Analyst

Thank you.

Operator

And, thank you. And our next question comes from David Larsen from BTIG. Your line is now open.

David Larsen — BTIG — Analyst

Hi. Congratulations on the growth in a number of HSA accounts. That’s great. Just a couple of quick ones. Most of my questions were already been asked and answered. With the interchange revenue, was the Delta variant one of the reasons why like utilization may have been a bit lower than expected? And then do you have any thoughts on Omicron? Is that going to have an impact or not do you think? Just any color there would be helpful?

Jon Kessler — President/Chief Executive Officer

Yes. I’ll take a shot at this one and Tyson if you’d like to add to it. I think the main challenge that we had with Delta is it made it very difficult for us to interpret results that we were seeing. So, for example, when we saw very strong results in July, which was the last month of the second quarter and for the most part after your account run-off occurred and during while — Delta was going and really raging, we felt very confident about where spend trends were and it turned out that that was a bit of a false signal in the sense that wasn’t followed up as this quarter began and Q3 began.

So I think that did not give you too complex of an answer. It’s just another factor that creates variability and difficulty in interpretation, particularly for CDB spent. What I would note though is HSA interchange during the quarter was rock solid. And that’s one of the reasons why the interchange notwithstanding these challenges that we’ve talked about was still up 8% year-over-year. And so, that is to say HSA interchange was up substantially more than that. And so I think that’s an interesting dynamic that we need to continue to look at. And so — but I will — but it is fair to say that as we enter Q4, it certainly we don’t know any better than anyone else what the effect of Omicron is going to be, I’m not sure why they skipped Nu, but they did and it may have some impact. But I think fundamentally what we’ve tried to do is take what we have learned over the course of the pandemic and reflect that in a reasonable forecast for interchange for Q4. We’ll see what we get. We’ll learn and we’ll refine.

But we’re also taking the lessons that our HSA spenders are clearly more resilient to changes in economic conditions as well as less likely to be impacted by sort of in the weeds regulatory items then our FSA spenders, and also that — and other CDB spenders. But also that — our HSA spenders can also, they can top up their balances whenever the new to that kind of thing, whereas our FSA spenders are effectively if they didn’t top-up their balance, last December or November during annual enrollment for most firms, they can’t do it until now and it won’t have effect until January.

And so those are lessons that really reflect the point that, that I made in the earlier — in the initial commentary that is we’re going to spend our money, growing where we know the growth is and where we know we can deliver profitability and visibility to you. And we’re going to deliver to our clients, what they need in order to buy those HSAs. But we’re doing — that’s one way we can reduce uncertainty by growing that core faster than the employer [Phonetic].

David Larsen — BTIG — Analyst

Okay great. Thanks very much.

Jon Kessler — President/Chief Executive Officer

Yes, sir.

Operator

Thank you. And our next question comes from Glen Santangelo from Jefferies. Your line is now open.

Jon Kessler — President/Chief Executive Officer

Welcome back. Welcome back Glen.

Glen Santangelo — Jefferies — Analyst

Yes. Thanks. Hey, thanks for taking my questions, it’s good to be back. So I just wanted to follow-up gentlemen on some comments that you made. It kind of sounds like you know the effects of the pandemic are greater than maybe what you would have thought are lasting longer to use your words on the CDB business. And I heard your comments on COBRA, maybe fell up more than expected in the FSA business. Could you maybe put some numbers around the CDB shortfall, because if I hear you correctly, it sounds like your HSA business is trending ahead of schedule. Just listening to some of the comments to some of the previous questions. And so maybe when I put it in context of the $7.5 million revenue shortfall, or I think I calculated, I don’t know $11 million, $12 million — $11 million shortfall in EBITDA relative to the guidance, it sounds like it’s much bigger than that, maybe be an offset by some of the benefit in HSA.

Jon Kessler — President/Chief Executive Officer

Well, I’ll now ask Tyson to add on, but I mean, I think the key point to make is essentially all of the delta between our current outlook — now our current outlook and our outlook at the end of Q2 is a result of these factors in CDB. And the HSA business has performed as you say above either at or slightly ahead of where we would have expected it to be. I think particularly as we go forward, we’re feeling as I commented earlier more sure footed on the rate side of things. But by and large, I think the key point is that, the delta that you just described really boils down to the various CDB factors. Tyson, would you like to add to that?

Tyson Murdock — Executive Vice President/Chief Financial Officer

Yes, I mean, you did some math there, so I’ll just I’ll just go back to that. I think that’s exactly right, the CDB conversation that we’ve had. And again the largest portion of that was really related to the interchange softness that we saw, and then a little bit on service fee from the fall-off of those 2019, 2020 FSA accounts, and obviously our commuter still coming down year-over-year, but sequentially up just slightly. So you see how that [Indecipherable] in there. And then the other kind of big piece of that math there is bolting on that further business in Q4, really doesn’t provide a lot of margin, but much more — provides the revenue but not the margin particularly in that seasonal Q4 enrollment period. So that’s why you get the differential between the two pieces, the math that you’ve done that.

Glen Santangelo — Jefferies — Analyst

Yes. I apologize, maybe just one follow-up, and I’m sorry if I missed this. But the consolidated custodial yield in the quarter did you give that?

Tyson Murdock — Executive Vice President/Chief Financial Officer

We’ve 172 and then 175 guidance for the year.

Glen Santangelo — Jefferies — Analyst

Right. 172 versus 175. So if we look at three year CD rates sitting at about 1.5, right. And the benefits from your enhanced rates program being 50 to 75 basis points, where you kind of trying to flag that may be as we exit fiscal ’22 and head into ’23, that this should be the bottom in terms of your laddering strategy?

Jon Kessler — President/Chief Executive Officer

I would just say…

Tyson Murdock — Executive Vice President/Chief Financial Officer

I was just going to say, as I commented before, I mean, I’ll just say it again, I think it’s really important is that, when I think about where we replaced — we’re placing things, the year-ago versus now, because we do have assets come forward and our [Indecipherable] and places them. So we know the rates, those rates are higher for FDIC. And then I think we got a very good rate for placement when we did our placement on November 1 with two further assets and also sort of the real kick-off of our — we already started doing enhanced rates. But the real kick-off, was it — as we merge those Further assets in there.

And so, those were higher rates than they were the first part of the year, so that’s — part of that’s good negotiation on the part of our Treasury team and they’re doing that, competing those rates against each other. The other is that, there starts to be a little bit of light at the end of the tunnel. And you see this morning, talking about moving up the a rate shift that’s pretty exciting, I wish it was in December versus March. But it is what it is right, it’s still a long-term view on those rates coming up on assets, helps from not only next year being will be lower still, because we placed at higher rates two or three years ago. But again you’re starting to turn that corner and as Jon said too, we’re not going to be below sort of those all time lows that we saw as part of the last recession, but it takes multiple years to kind of turn that around based on the way the latter helps going down. It’s going up, but it also increases again, like I said, the inherent profitability from enhanced rates and how that works is, has been improved, based on how we’re doing that.

Glen Santangelo — Jefferies — Analyst

Okay. Thanks for taking the questions.

Jon Kessler — President/Chief Executive Officer

Yes, I mean, Glen, just one other thing on this endpoint emphasis on this topic. When we talk with investors as you do, they would love it if we would give them a forward rate curve or the like. And the reason we don’t do that, as you well know, is be like asking another firm, could you please tell us what your price, what price you’re going to offer to customers this year and next year? And we’re not going to do that. But not having been said, we’ve heard a ton of speculation on this, I sort of go back to Greg’s initial question. And over the course of the last year too, as CD markets have kind of stuck where they are and so forth. And I — to my mind again, I think about, I don’t have to talk about, Oh! it’s going to get better later. As Tyson said, it is getting better now. And it’s getting better in part as a function of market conditions improving. And in part as a function of the team taking action and bringing innovation to this [Indecipherable]. And like that’s what we do here. And whether it’s about rates or about HSA growth or about cleaning up what to me is some variability that doesn’t help us in clouds history, that’s what we’ll keep doing.

Glen Santangelo — Jefferies — Analyst

Okay. Thank you.

Jon Kessler — President/Chief Executive Officer

Yes, sir.

Operator

Thank you.

Jon Kessler — President/Chief Executive Officer

I’d like you say at the end of each one, it’s very confidence building. Thank you for doing that.

Operator

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

Allen Lutz — Bank of America — Analyst

Thanks for taking the questions. Going back to interchange, Tyson, I think you talked about the FSA winddown for 2019 and 2020 vintages. Basically causing a shortfall in interchange. But I guess, if there is more accounts that are closing, does that mean that the customers are spending more, so interchange will theoretically be higher? This is question one. And then question two, I guess, we’re looking forward from this level here, across the commuter COBRA, FSA. I mean, what would need to happen for things to deteriorate from this level here? And I guess, just expectations on what to think about even better than 4Q? Thanks.

Tyson Murdock — Executive Vice President/Chief Financial Officer

I think you — that’s a good question, because I think where we saw that spend, but I would have suspected that maybe it would have hungover — hang out a little bit longer was in that Q2 time period. And you saw that spend down if you will and therefore that increase was part of that. I think the other read-on it’s hard to get a reading on, right. Because I think the other read-on it was that year-over-year, it was a bounce back from pandemic and people are out doing more. So blending those two things together and then coming up with the second-half forecast proved to be difficult, right. And so we saw that. We still grew interchange, but it just we didn’t get the tailwind like we thought, because of those. So we saw those accounts go away, maybe a few more go away, but I think where I’m optimistic is now kind of the enrollment season where we go on to January and people are re-enrolled into these accounts and their top again and maybe we get two more normalization, if you will, over the next year, a bit little easier to forecast.

Allen Lutz — Bank of America — Analyst

Okay. And then a follow-up on Glen’s question about the implied 4Q guide. It seems based on my math that organic growth between 4Q ’22 versus 4Q ’21 is going to decline somewhere in the range of 25%. So just can you kind of clarify whether or not that’s accurate? And then be — and I know that you’re spending more on technology, but what else is embedded within that decline? Thanks.

Tyson Murdock — Executive Vice President/Chief Financial Officer

Well, I think the one thing — and then I don’t know if I’m not doing the math quickly, but I trust you’ve done some math to kind of get directional on that, but the thing that would drive that the most is just the fact that we’re putting acquisitions in the business that are acquisitions that we think we can improve margin on, but when we buy them they don’t necessarily have the types of margins that we have. And so that’s the job is to improve those to synergize them, to get them onto a single platform, single service, single processor, all the different things that our operational team does to improve the margin related to that.

I do like the deals that our portfolio acquisitions, because those come in without people, they come in with just assets and yield and obviously higher margin. And so you get some of that playing through into that. And then, again, you go back to the CDB businesses and the low-hanging fruit to talk about there is the commuter business and the fact that there is tens of millions of dollars of missing high margin revenue on our — one of our highest service fee line items in that commuter business. And so I’d like to see that come back as that will create a nice tailwind and we did see a turning point. That is insignificant turning point, but at least it went sort of the other way and sort of to come back. So those were kind of the two things that I think are in there.

I mean, the other one that’s really there too, I guess you’re making me think of some other things and these are, I know, Allen, we’ve talked about these things before, but if you think about the custodial revenue and the margin generated by that and the 36 basis points of decline of that yield year-on-year and it’s kind of makes within all these comments that that is fundamentally how this business is going to produce profits and when that rate starts to turnaround we will start to produce profits and I think that, again, we’re getting to a point where that’s starting to happen.

Allen Lutz — Bank of America — Analyst

Got it. Thank you very much.

Operator

Thank you. And our next question comes from Stephanie Davis from SVB Leerink. Your line is now open.

Stephanie Davis — SVB Leerink — Analyst

Thank you guys for taking my question.

Jon Kessler — President/Chief Executive Officer

Yes, ma’am.

Stephanie Davis — SVB Leerink — Analyst

It has been a really long year, Tyson. So talk to me about your learnings from this? Do you have any changes to your guidance philosophy? And how should we think about your forward views then on CDB account recovery? Is this going to be kind of the level set assumptions for step forward spend patterns remaining weak and commuter basically getting erode out of total returns, or is there any thought towards improvement as we glove the funky fourth quarter?

Tyson Murdock — Executive Vice President/Chief Financial Officer

Yes. I think I’d go back to, there are lot of crosswinds and you see this even in a lot of the articles read about — as Ted trying to get this straight. I mean, there is — there are crosswind that’s difficult to come up with forecast, particularly for CDBs. Not so — I mean, again HSA, if you think about that, that — when I think about forecasting yield on HSA, we can do that and we can do that out. We can see what we think enhanced rates will do for that revenue stream and we can get a pretty good idea of being able to tell you what we think that is too within a very immaterial amount.

The same is true when you can about HSA service fees, because they stick around and so you don’t have this ebb and flow of those in some of these annual decisions that get made. So to me the answer to getting forecast even more accurate is to grow the HSA business larger than these other services that we have, which is exactly what we’re doing with acquisitions and exactly what the organic business is doing as well. And so, I think, my learning from that is, that’s what I — Ted and I talk about to the team. That’s what the team wants to do. It fits the mission and it will solve some of these issues that we’ve had with some of the swirl. But given the pandemic and everything else, it’s tough to kind of get there. So yes, I have learned a lot over the last year, Stephanie.

Stephanie Davis — SVB Leerink — Analyst

Would it then be safe to say that you’re going to focus most of the guidance on the HSA side of the world and then kind of use this as more of a level set run rate for CDB since it’s so unpredictable literally, do you think there is more upside?

Tyson Murdock — Executive Vice President/Chief Financial Officer

Well, I think there is — when you think about CBDs, of course you talked about some of the things you are turning to, it’s not only just that commuter segment, it’s 4% of revenue, right. So it’s not enough for us to talk a lot about here, but it’s something that I think helps us sell HSAs. So, I think I can say you’re probably right. I’d like to focus more on how we think about HSA growth in forecasting that and fundamentally that’s what we’re trying to do.

Stephanie Davis — SVB Leerink — Analyst

Okay. And if I can sneak in a quick one just on EBITDA for the 4Q guidance, is there a way to tease out the deal related impact to that fourth quarter number? And how long should it take to turn around the acquired margins? Is this something where it’s just only one quarter and we’ll see an improvement or is 4Q EBITDA — how we should think about run rate?

Tyson Murdock — Executive Vice President/Chief Financial Officer

Well, there’s two things that happened with 4Q. I mean, it’s really the fact that the further business that we have doesn’t drag margin if any in Q4 relative to the revenue number that we put out there, which is $12 plus million essentially on something less than $1 million of EBITDA and that’s because they got the costs going into season. But when you think about that business in a Q1, Q2 timeframe, when we think about rightsizing it, for example, for the fact that we won’t have Aviva’s services in there, so we know there is some cost in there associated to that part of the business that we can take out and just the ability and all the learnings we’ve had from the wage business on how to create efficiencies within the business and we’re going to be able to do those. We haven’t seen as much in wage, because it’s some of the degradation of some of these CDBs, but they certainly are there and we’ve been able to make those improvements and I think that kind of gives us a base to build off of and so actually the same thing is true for that — for the business.

Stephanie Davis — SVB Leerink — Analyst

Okay. Super helpful. Thank you.

Tyson Murdock — Executive Vice President/Chief Financial Officer

Thanks, Stephanie.

Operator

And, thank you. And our next question comes from Mark Marcon from Baird. Your line is now open.

Mark Marcon — Baird — Analyst

Hi. Good afternoon, and thanks for taking my questions. Wondering with regards to the rate discussion, as we think about next year, Jon, when you were answering Peter’s question, you mentioned the 152 bps and kind of the low, I’m wondering how do we think about that relative to the enhanced rate program, because it sounds like one way of interpreting things would be, hey, we’re going to stay steady in terms of the effective yield for ’23, another way to interpret things would be, hey, probably it still comes down a little bit because of we’re still rolling off investments from two to three years ago. However, you could provide some sort of help in terms of thinking about that, because that’s obviously going to be important in terms of setting ’23 expectations?

Jon Kessler — President/Chief Executive Officer

Yes. I can. What we said in the past and I would repeat here is that ’23 will be — will still be a downcycle or part of the downcycle. It feels like it’s forever and it is, but we started this process in our fiscal ’21 and ’22 and ’23, and so it will be the third year of that cycle. And so, I think when all this is said and done and when the smoke clears, our expectation remains that we will lose, that we will still have a headwind from a yield perspective. But as was the case this year that headwind will be smaller than it was in the prior year.

And then, I think, what I tried to add to that is, I think, we’re kind of — particularly with the benefit of, A, the fact that the underlying sort of competitive dynamics in the deposit product market are improving and the fact that the enhanced rates uptake means that we don’t have to necessarily go to the end of the rope in terms of what banks are offering, we can be a little more selective. That is — that we can kind of see that being the end and we kind of know where that end is going to be, which is, as I commented and you repeated, somewhere kind of near and perhaps better than the lows that we saw over the last, in the last — the post 2008 period. So, I guess, that’s the way I would interpret, I wasn’t trying to suggest that we’re going to do 175 next year. Or that with an improve from that, but I think for folks who have modeled this stock for a long time, if you have, knowing with a relative with a greater degree of confidence where we think the sort of — end of that cycle is and where we think it is in time as well as in rates, it seems like a pretty valuable thing.

Mark Marcon — Baird — Analyst

That absolutely is valuable. And then can you just tell us what the most recent placements were in terms of the effective yield that you were getting for those?

Jon Kessler — President/Chief Executive Officer

Yes. We’ve been asked this question before, as you know and we don’t comment on it because it effectively reveals the price we’re willing to take, and we would rather let banks compete for that price. But I will say, it’s if I think about it as, in terms of premium to someone mentioned earlier, the three-year five-year CD, that premium which was both the market was low in the premium, is at the low end of our historical ranges earlier in the year and at the end of last year, that premium hasn’t improved a bit over the course of the year. And even though the underlying market hasn’t changed very much. And again, I think that reflects a greater competition for our kind of money and perhaps a view of — on the part of the banks of what’s going to happen going forward, I don’t know about that. But — so it’s gotten a little better and that should give you enough that you’ve been kind of interpolate.

Mark Marcon — Baird — Analyst

That’s great. And then there was an earlier question which I didn’t get the answer to — missed on how you’re thinking about HDHPs for this enrollment season for lot of companies have gone through it, what are you seeing in terms of that shift?

Jon Kessler — President/Chief Executive Officer

Yes. We’ll talk about this a little more in January when we get to the JPMorgan Conference and all of that but. But as I said earlier on the call, I think to some extent the Q3 results are an indicator there, because they do reflect firms that have earlier play in your cycles and the like. The September enrollment on the like and those were really good. And my general view of the market, if I sort of go back a year, the question was, well, is the market going to grow by something closer to $3 million or something less than $2 million like it did in the pandemic period? And I was arguing that, well first of all, I was acknowledging that I didn’t know. But second of all, arguing that the broad forces that are leading to market growth are much more, about to say endemic than the pandemic. But they’re are much more, they are — they’re long lasting indicative in nature and they continue. So, I guess on that basis, I’m trying to taken a view that we’re seeing what looks like a more normal enrollment cycle this year. Certainly the fact of high employment is a net helper in that regard. But in the sense that there is just more people, not as many still, we’re still not back to pre as everyone knows. We’re still not back to pre-pandemic employment levels on the whole, but we’re getting closer. And the more people that joined the labor force, we joined the labor force, extremely helpful in that regard. But I guess my basic remark is, I sort of look at it and say, we said all over time that that the market is going to grow at a rate of $2.5 million to $3 million accounts, and has for a long, long time. And then we had this exception in calendar 2020. I think this year is going to look a lot more like prior reality than like that exception.

Mark Marcon — Baird — Analyst

That’s really helpful. And then the last one from me, just with regards to at the enterprise level, you’ve been gaining share on the whole, how would you describe the competitive dynamics at the enterprise level currently? And do you anticipate continuing your great track record of gaining share, even at the largest enterprises?

Jon Kessler — President/Chief Executive Officer

Yes. Ted, you want to hit this one?

Ted Bloomberg — Executive Vice President/Chief Operating Officer

Sure. I think that as you would expect in any industry, it looks like ours, the competition intensifies first at the enterprise level. And we’re no different and we see that. I think that our competitors are — this has been an interesting year from enterprise sales perspective, in large part because of the high number of stay with income. As many people benefit, teams are continuing to be sort of burdened by return to office, COVID management, etc. And so they’ve been sort of less willing to make a decision. But despite that, I think we’ve more than held our own in the enterprise space among those business-to-business, those cases that have, that have moved.

And then probably similar to other people in the industry, our retention rates have been very high, if we indeed by the fact that, some people are just. And so, I don’t think we’ve seen anything unexpected, we haven’t seen anything crazy or shocking, there is from an enterprise competition perspective, there is not someone hasn’t come out with the iPhone 17 and we’re still trying to sell the iPhone 12. It is sort of preceding a pace with what we would expect, price competition is higher in the enterprise space in the mid-market, small market. And that’s one of the reasons why that’s become we’re trying to put our chips where we expect the best return. And so, to a large extent that’s in that small market mid-market space. But with our value proposition and our brand and our reputation for service, we continue to perform or outperform in the enterprise space, even though it’s been an interesting year there. Nothing crazy competitive-wise. Steve, I don’t know if you have anything to add there, if you see anything worth mentioning.

Stephen D. Neeleman — Founder/Vice Chair

I think that’s right. One of the things we’re really excited about is with the Further acquisition, we’ve got another 10 Blues plans that we’re going to be working with. And I think our team is getting a lot better at working through these health plan partnerships, not just to go after the small, mid-sized businesses, but also to go after the large employers, because a lot of the further plans plus, our base plans of another [Indecipherable] we brought to the table, plus a bunch of other TPAs and large health plans throughout the country.

I mean, they also bring us to a lot of enterprise type employers. And so there is always been this push-pull in our business, I mean, going back like, oh man, 15 years. In fact, Jon, you remember when we first started working together in 2009, I was always talking about your fantastic work with the enterprise employers, and you were talking about health equities fantastic work with the health plans. And now we’re really starting to see those forces converge where we’ve got this national footprint. We’ve got the full bundle. And we have the ability to not only deliver full bundled solution to the health plans, but to their largest and most important clients. And so, Jon, I guess, we both got our wish. We have a full stable of health plans and that in a full stable of large enterprise employers. So, it’s coming together nicely.

Jon Kessler — President/Chief Executive Officer

I was kind of — I was having, I don’t want you to think I spend a lot of time on this. But I have to admit them, there is an Internet site in my moments from kind of strike that to myself. I look at that has sort of unusual maps and I think they call it Matt Korn [Phonetic], I don’t, I think I can say that here. And so yesterday’s thing from that site was the largest employer by state. And what I’m getting at is, what’s the enterprise. And first of all, the point the chart was trying to make was that there is one employer, that is the largest employer in a lot of state, and they happen to be a client of ours and that’s great. And they’re are a private sector employer and so forth. But what was actually really interesting was, in essentially all of the states in which they were not the largest employer. Largest employer was not some Fortune 500 company. It wasn’t Amazon, it wasn’t — it was a health system, a hospital system in something like 30 of the other states, incredible. And that’s a market where we do real well.

So, for us, when we think about enterprise it’s worth remembering that we’re looking at number of employees and those kinds of factors, not just whereas other firms might be looking at size of the IT budget. And so, I think particularly when you look at it that way, Steve’s comment about the relationships with more Blues’ plans comes into focus, because those are local relationships to start on that. And it’s not just Blues plans and I think about Providence Health Care in the Northwest or St. Luke’s in Idaho or Presbyterian in New Mexico or Centra in Virginia. These are huge local employers that are also effectively our partners in other ways. And so, that helps us in the enterprise hopefully.

Mark Marcon — Baird — Analyst

That’s very helpful. Thank you so much.

Jon Kessler — President/Chief Executive Officer

Thanks, Mark.

Operator

And, thank you. And I’m showing no further questions, I would now like to turn the call back over to Jon Kessler for closing remarks.

Jon Kessler — President/Chief Executive Officer

Guys, thank you for your good questions and tough questions and for going through this with us. Really Happy Holidays to everybody. As Tyson mentioned and Ted alluded to on this call, these are very unusual times for us at HealthEquity and for our team, because not only is it in unusual holiday with some joy at the fact that things are returning to normal, but also some trepidation with Omicron and all that, but we are — as many employers are working through, but certainly as a small number of federal contractors are working through federal contractors mandate. And far be it from us to grouse about the difficulties of doing that given the importance of the past and no matter how one feels about these mandates, it’s our job to comply with the law and we are doing that.

And I wanted to just take a moment to both thank our team members who have kind of worked through this from the perspective of both thinking about it and dealing with the compliance side of it and also very candidly thank our — both wish well those who have made different decision, but thank our team members for helping us get ahead of that as much as we can and in Q4 and have the team prepared to deliver the best possible service we can under what is a really unusual circumstance for us. We care about this a lot. We’re not going to ignore it. We can’t ignore the impact on our team of losing some people due to the mandate and we’re not going to. So I think it’s a special area of banks, for companies like ours, everyone in the healthcare sector is affected in the same way as you all know, so many of our partners are affected in the same way, and certainly our friends in the federal government who were a client are affected in the same way and so I very much appreciate all the work that every member of our team is doing to keep the wheels turning as we go through a most unusual business season for us. Happy Holidays. See you everyone soon.

Operator

[Operator Closing Remarks]