HealthEquity, Inc (HQY) Q4 2022 Earnings Call Transcript

HealthEquity, Inc  (NASDAQ: HQY) Q4 2022 earnings call dated Mar. 22, 2022

Corporate Participants:

Richard Putnam — Vice President of Investor Relations

Jon Kessler — President and Chief Executive Officer

Ted Bloomberg — Executive Vice President and Chief Operating Officer

Tyson Murdock — Executive Vice President and Chief Financial Officer

Analysts:

Anne Samuel — J.P. Morgan — Analyst

Greg Peters — Raymond James — Analyst

George Hill — Deutsche Bank — Analyst

Scott Schoenhaus — Stephens — Analyst

David Larsen — BTIG — Analyst

Mark Marcon — Robert W. Baird — Analyst

Allen Lutz — Bank of America — Analyst

Joy Zang — SVB Leerink — Analyst

Glen Santangelo — Jefferies — Analyst

Presentation:

Operator

Thank you for standing by. I’d now like to turn the call over to Mr. Richard Putnam.

Richard Putnam — Vice President of Investor Relations

Thank you, Valerie. Good afternoon, and welcome to HealthEquity’s Fiscal Year 2022 Earnings Conference Call. My name is Richard Putnam, Investor Relations for HealthEquity. And joining me today is Jon Kessler, President and CEO; Dr. Steve Neeleman, Vice Chair and Founder of the Company; Tyson Murdock, 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 fiscal year 2022 was issued after the market closed this afternoon. The financial results reported in the press release include the contributions from our wholly-owned subsidiary WageWorks and accounts it administers. The press release also includes definition of certain non-GAAP financial measures that we will reference today, including recent definitional changes to those measures. A copy of today’s press release, including reconciliations of these non-GAAP measures to 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, March 22, 2022, and we will talk about forward-looking statements as defined by the SEC, including predictions, expectations, estimates, or other information that might be considered forward-looking. There are many important factors relating to our business, which could affect the forward-looking statements made today. These forward-looking statements are subject to risks and uncertainties that may cause our future 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 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 results.

At the conclusion of our prepared remarks, we will turn the call over to Valerie to provide some instructions and she will also host our Q&A. With that, I’ll turn the mic over to our CEO, Jon Kessler.

Jon Kessler — President and Chief Executive Officer

It’s better every time, Richard. Hello, everyone, and thank you for joining us. Altogether in person, the whole crew here for the first time in a long time, which is really cool. Today, we are announcing results for HealthEquity’s fiscal fourth quarter and for fiscal ’22 ended January 31, and we’re providing guidance for fiscal ’23. I will discuss the FY ’22 results, with Ted reporting on Q4 operational milestones. Tyson will provide financial details of fiscal ’22 and provide our fiscal ’23 guidance based on the results we are reporting today. And then Steve will join us for Q&A.

Starting, as we always do, with our five key metrics. Fiscal ’22 revenue of $757 million is up 3% year-over-year, tampered by rate headwinds and the effects of the pandemic. Adjusted EBITDA $236 million and adjusted EBITDA margin of 31%, both down slightly from fiscal ’21, reflecting the pandemic’s impact on high margin custodial, commuter, and interchange revenues during the year. Record HSA Sales and portfolio acquisitions. Health — HSA members grew to 7.2 million. HSA members ended fiscal ’22 with $19.6 billion in HSA assets, and we ended fiscal ’22 with 14.4 million total accounts.

Beyond key metrics, allow me to speak for a moment on FY ’22 highlights and opportunities for us to improve. Leading the highlights is the growth of the HSA core, continued double-digit balance growth. HSA members, up 25%; custodial assets, up 37%; HSAs with investments, up 37%; invested custodial assets, up 58%; member-driven growth, client-driven growth, partner-driven growth, portfolio-driven growth. This is delivery on the team’s mission to connect health and wealth and its progress towards our vision of HSAs being as ubiquitous as retirement accounts, and we also believe it is a significant durable contribution to the value of our enterprise.

However, ancillary consumer-directed benefits delivered uneven performance in fiscal ’22. CDBs, as you know, are services within our total solution for employers including FSA, COBRA, and commuter benefits administration. As Ted will discuss, the total solution bundle drove record HSA opportunities in FY ’22, but pandemic, macro, and regulatory factors and platform migration weighed on our CDB results and net growth. Now, many of these challenges are behind us. Fast HSA growth is reducing our exposure to standalone CDB performance, and we’re exploring ways to accelerate that process. As a final note, the team launched innovations that we believe over the longer term are game-changers in fiscal ’22.

Enhanced rates are raising custodial yield on HSA cash, customer facing APIs, deepening product integration with network partners, and Prospect Boost [Phonetic], part of our Engage360 platform, spurring new HSA adoption among our clients’ employees. We’ve added technology leadership, including our new CTO, Eli Rosner, arrived this week, to drive these future innovations.

I will now turn the call over to Ted to talk about Q4 operational milestones. Mr. Bloomberg.

Ted Bloomberg — Executive Vice President and Chief Operating Officer

Thank you, Jon. Good afternoon, everybody. It is my pleasure to report the attainment of several key integration milestones. The WageWorks integration is substantially complete, with 20 plus migrations behind us and $80 million of annual run rate synergies achieved, well beyond our initial goal of $50 million. Moreover, our hypothesis proved correct. We are a better partner to our clients, health and retirement plans, and other benefit administration partners when we offer the total solution bundle. And we were able to prove it through increased HSA sales.

Team Purple, our partners and our clients, helped HSA members open 918,000 new accounts in fiscal ’22, 34% more HSAs sold a year ago and 27% more than our previous fiscal year record. Cross sales and bundle total solution sales grew 19% year-over-year. I could not be prouder of our integration efforts to which every member of Team Purple has contributed over the past two and a half years. We continue to leverage our scale and proprietary platform and generate additional cross-sell opportunities from the HSA portfolios purchased from Fifth Third early in fiscal ’22 and just this month from Health Savings Administrators. Both of these migrations are complete.

Integration of Further is underway, with an early focus on deepening relationships with our partners among Blue Cross Blue Shield plans. As noted, when Further closed, we now partner with a great majority of the Blue Cross Blue Shield licensees. We will fully complete the carve-out of this business from the seller this year.

Finally, I’d like to say a bit about service delivery during the just completed peak season. We entered Q4 concerned about our Purple teammates on the front lines of service due to the combined impacts of record growth and platform migrations I just discussed, increased team turnover and absenteeism from the then pending federal contractor vaccine mandate, and the Omicron variant delivering the highest infection rates of the COVID-19 pandemic across our workforce. What investors see as seasonally lower Q4 margins, we experience as remotely hiring, training, and equipping roughly 1,500 new internal and external team members to help meet the peak season needs of our members and clients.

Members, many of whom are new to HealthEquity, gave us high marks even on peak days. Clients experienced longer resolution times and serving their disparate needs was challenging for new team members. We avoided the worst-case scenarios regarding team member attrition. While the peak is now behind us, we’ve had more to do in Q1 than in other years and more peak season staffing and other costs to wind down. We’ve adopted a conservative Purple approach to this process, prioritizing service. Tyson will discuss the implications for seasonality and margins in a moment.

I’d like to conclude with a huge thank you to our teammates who have worked so hard, as well as our broker, consultant, and network partners who work tirelessly with us to serve both our clients and members. Now, I will turn it over to Tyson to talk about our financial results and outlook.

Tyson Murdock — Executive Vice President and Chief Financial Officer

Thank you, Ted. I will review our fourth quarter GAAP and non-GAAP financial results. A reconciliation of GAAP measures to GAAP measures is found in today’s press release. Fourth quarter revenue increased 8%, even as the economic effects of the pandemic negatively impacted each of our three revenue categories and includes the benefit of Further. Service revenue increased 1% to $112.5 million, representing 55% of total revenue in the quarter. Strong growth in HSAs helped average total accounts grow 13% year-over-year, while CDBs grew 2% year-over-year, benefiting from acquired and new open enrollment accounts that start in January.

Custodial revenue grew 20% to $58.1 million in the fourth quarter, representing 29% of total revenue in the quarter. The 25 basis point year-over-year decline in the annualized yield on HSA cash with yield assets was offset by 33% year-over-year growth of average HSA cash with yield and 60% growth in average HSA investments with yield in the quarter. The annualized interest rate yield for Q4 was 172 basis points on HSA cash with yield and 175 basis points for the year. This yield is a blended rate for all HSA cash with yield. The HSA assets table of today’s press release provides additional details, and as previously mentioned, we will not be breaking out HSA assets without yield going forward.

The interchange revenue grew 16% to $32.8 million, representing 16% of total revenue in the quarter. The interchange revenue increase was primarily due to HSA spend associated with 25% year-over-year growth in HSAs. Gross profit was $105.3 million, compared to $100.9 million in the fourth quarter of last year; and gross margin was 52% in the quarter and 56% for the year. Service costs were higher in the quarter, as we ramped up to welcome over 900,000 new HSA members from this year’s selling season and from the Further, Fifth Third, and Health Savings Administrator acquisitions and additional 827,000 new HSA members.

Operating expenses were $132.5 million or 65% of revenue, including amortization of acquired intangible assets and merger integration expenses, which together represented 24% of revenue. The loss from operations was $27.3 million, compared to a loss of $1.6 million in the prior year and including exiting out of a superfluous asset contract inherited from WageWorks.

Net loss for the fourth quarter was $32.8 million or $0.39 per share on a GAAP EPS basis, compared to net income of $5.4 million or $0.07 per share in the prior year. Our non-GAAP net income was $17 million for the quarter, compared to $34.6 million a year ago. Non-GAAP net income per share was $0.20 per share, compared to $0.44 per share last year. Adjusted EBITDA for the quarter decreased 11% to $50.4 million and adjusted EBITDA margin was 25%. Fourth quarter adjusted EBITDA margins were impacted by service costs ramp, as Ted discussed.

For the full fiscal year, revenue was $756.6 million, resulting in gross profit of $423.7 million or gross profit margin of 56%. Loss from operations was $24.2 million and adjusted EBITDA was $236 million or 31% margin.

Turning to the balance sheet, as of January 31, 2022, we had $225 million of cash and cash equivalents, with $930 million of debt outstanding, net of issuance costs, which is a $56 million reduction in debt from fiscal ’21. The Company’s $1 billion line of credit remained undrawn at fiscal year end. The year-end cash balance, of course, includes roughly $60 million used in the HSA Administrators acquisition, which closed on March 1, and will be reflected in Q1 of fiscal ’23.

Based on where we ended fiscal ’22, we now expect the following for fiscal ’23. We expect to generate revenue for fiscal ’23 in a range between $820 million to $830 million. We expect our non-GAAP net income to be between $102 million and $110 million, resulting in non-GAAP diluted net income per share between $1.21 and $1.30, based upon an estimated 84 million shares outstanding for the year. We expect HealthEquity’s adjusted EBITDA to be between $245 million and $255 million for fiscal ’23.

Today’s guidance includes our most recent estimate of service, custodial, and interchange revenue based on a successful fiscal ’22 selling season and early fiscal ’23 results. Guidance assumes a yield on HSA cash with yield of approximately 160 basis points. This includes the benefit to the yield from last Wednesday’s decision by Fed officials to raise the benchmark Fed funds rate.

Importantly, as is our practice, today’s guidance does not factor in further changes into monetary policy such as widely expected additional Fed rate hikes or increases from the recent placement rates of our HSA cash. These would have a positive impact on revenue and income. And as you know, however, most of our HSA custodial cash is deployed in multi-year fixed rate instruments. So between 5% to 10% of HSA cash plus GDP client-held funds are deployed in variable rate instruments tied to LIBOR. Policy-driven rate increases this year will provide a greater lift in fiscal ’24 and beyond. We have assumed a measure of continued mix shift from deposits products — from deposit products to our enhanced rates offering over the course of fiscal ’23 in our guidance.

Our term loan A is also connected to LIBOR and interest expense associated with it will increase the future Fed rate hikes. 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 very variant impact that may cause further disruptions.

With respect to healthcare spend and its impact on interchange revenue, we assume per account stand at about fiscal ’22 levels, with healthcare services remaining broadly open to our members. We assume the normal roll-off of prior year FSAs in the first half of fiscal ’23 as normal grace run-off periods close for calendar year FSAs. 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. Our guidance reflects the effects on depreciation and amortization expense of increased capitalized technology and development spend in recent years, as can be seen in our fiscal ’22 and historical statements of cash flow. As you know, we don’t provide quarterly guidance.

However, I want to highlight that we expect results to differ seasonally from past years. Specifically, we expect to deliver a smaller share of full year profits in Q1 and conversely, a larger share in the second half than historical patterns would suggest. This is because we will incur $5 million to $7 million of expense primarily in Q1, due to maintained elevated servicing capacity in Q1 in response to record sales volume, portfolio acquisitions, platform migration activity and pandemic related attrition, and other risks. To be clear, these expenses are reflected in our full year guidance.

The outlook for fiscal ’23 assumes a projected statutory income tax rate of approximately 25%. As we have done in recent reporting periods, our full year guidance includes a detailed reconciliation of GAAP to 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’ll turn the call back over to Jon for some closing remarks. Jon?

Jon Kessler — President and Chief Executive Officer

Thanks, Jon. Yeah, I want to just put an exclamation point on comments that both Ted and Tyson made regarding the peak season activity that we’ve gone through over last three, four months and are now kind of starting to wind down. This has been a really, really unusual season with a combination of record sales, an incredible effort on completing substantially the wage platform migrations for CDBs, all done within the midst of Omicron and illnesses and trying to keep our team members safe and healthy and happy and retain, and it was pulled off.

And so, that’s no — there is no one person who is responsible for that. But I do want to take a moment to thank both our team and our partners; our partners for being patient and reasonable with us and our team for its determination to be Purple and do Purple, notwithstanding the challenges that we faced during this period.

So, thank you to everyone. And with that, let’s open the call up to questions. Valerie?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Anne Samuel of JP Morgan. Your line is open.

Anne Samuel — J.P. Morgan — Analyst

Hey, guys, thanks for taking the question.

Jon Kessler — President and Chief Executive Officer

Hi, Anne.

Anne Samuel — J.P. Morgan — Analyst

I was hoping maybe you could provide a little bit more color on the EBITDA guide. What are the headwinds and tailwinds embedded within that guidance?

Jon Kessler — President and Chief Executive Officer

Tyson?

Tyson Murdock — Executive Vice President and Chief Financial Officer

Yeah. So, just pointed out in script, right, the $5 million to $7 million. That’s going to come in Q1. So that is definitely embedded within guidance, and that really, again, relates to the fact that we had portfolio acquisition going on, record sales, we were completing all the migrations of the CDBs. We had the vaccine mandate and the increasing attrition over that period of time. So there were a lot of factors going into that. So that just runs over into the current year. And that hasn’t been the case, Anne in other years. We — I wanted to point that out specifically, related to that $5 million to $7 million.

Then if you think about the puts and takes for the rest of the year, of course, we haven’t built in into our guidance the Fed rate increases that you hear about every single morning when you turn the television on. So, you hear about those; those aren’t baked in. We baked into 25 bps. And as you know, we would get a tailwind from increasing rates on that variable portion of our portfolio, which is around $1 billion, just under. And so, you can kind of do the math on a basis point increase like that. So that, of course, would be a tailwind into that guidance, but not included in the guidance.

I think the other factor that you want to take into account, and we’ve said this a lot of times before, so I’m kind of being repetitive, is that we don’t have the COBRA subsidy in this current year. And so, that was a $10 million revenue upside in the prior year as a comparable to this year. So you have to take that into account as well. I think I’ll stop there. Jon, do you have anything else to add?

Jon Kessler — President and Chief Executive Officer

I would just add — I mean, I think you know this, of course, Anne, but it may not be obvious to everybody, because we’re at a moment of relative optimism with regard to rates. That being the case, when you look at fiscal ’22 — fiscal ’23 compared to 2022, right, rates are still a headwind in our fiscal ’23 guidance and, of course, all of that kind of drops down to the bottom line. So the way to look at it is that now you’ve got $13 billion of cash and what’s now looking like 15 basis points rather than 20 basis points, right. But you can do the math, that’s a high teens to approaching $20 million headwind in fiscal ’23 relative to ’22. Fortunately, it’s — we said this back in December and it’s become more true since, it seems pretty clear that that is turning around and that our cash balances continue to grow. And so, that one is, I think, going forward, going to be a nice tailwind for us.

Anne Samuel — J.P. Morgan — Analyst

That’s really helpful. And then maybe if I could just ask one follow-up to that, now that WageWorks is fully integrated, you’ve captured all the synergies from that, how should we be thinking about what kind of normalized margin expansion should look like going forward?

Jon Kessler — President and Chief Executive Officer

You want to start with this one?

Tyson Murdock — Executive Vice President and Chief Financial Officer

Sure. I think it goes back to, of course, the reason why we bought that was the CDBs and the cross-sell and the bundle, right. And so, being able to do that increased, obviously, our new sales this year, we believe. But I would look to margin expansion on the backs of how the custodial rates improve over time and also just the inherent change that we’ve made in the way that we placed assets in the enhanced rate products. And so, we’re continuing to work our way through that. We have 10% plus in those programs now. We were able to put acquisition cash in there, in most cases, and so, we’ll continue to do that as we get the opportunity.

Jon Kessler — President and Chief Executive Officer

Yeah, I think that’s right.

Anne Samuel — J.P. Morgan — Analyst

That’s great. Thank you.

Richard Putnam — Vice President of Investor Relations

Thanks, Anne.

Operator

Thank you. Our next question comes from Greg Peters of Raymond James. Your line is open.

Greg Peters — Raymond James — Analyst

Good afternoon, Team Purple.

Jon Kessler — President and Chief Executive Officer

Hello.

Greg Peters — Raymond James — Analyst

Glad to hear that you’re all in person.

Jon Kessler — President and Chief Executive Officer

We’re back as one Purple though, Greg. We’re back — like the old rules are back in place.

Greg Peters — Raymond James — Analyst

No, I didn’t hear that in the — I didn’t hear that in — no, I think you’re just picking on me, Jon. I think you’re just — I just think you’re using that rule for me, Jon. Let’s be honest.

Jon Kessler — President and Chief Executive Officer

It’s very possible.

Greg Peters — Raymond James — Analyst

Yeah. Hey, so I know you’ve covered some of this in the script, but I wanted to focus on two areas of expenses that are in the income statement. Just look at the annual number and I’m looking at specifically, sales and marketing and technology development as a percentage of total revenue. And so, just watching the trends of both of those numbers in the income statement, they’ve been — certainly for fiscal year ’22 versus 2021, they’re up. And technology and development, it’s up a lot. And it seems like you are forecasting that those numbers as a percentage of total revenue might be up again in 2023 versus 2022, but not to put words in your mouth, can you talk to us about what’s going on in both of those line items and what you’re thinking about for 2023?

Jon Kessler — President and Chief Executive Officer

Yeah, why don’t I start?

Tyson Murdock — Executive Vice President and Chief Financial Officer

Sounds great.

Jon Kessler — President and Chief Executive Officer

So, the — two thoughts. First of all, we — as you know, we are going to base T&D expense on the opportunity for return. And if you look at what we’ve talked about from an innovation perspective, I sort of see that return as having been there and continuing to be there. From a sort of quantitative perspective though, the thing that is really driving the observation you make is really increased capex flowing through the income statement. So if you — and this is where I maybe will turn to Tyson to kind of walk you through it, but because we talked about this a little bit before, and then maybe I’ll come back and talk about sales and marketing.

Tyson Murdock — Executive Vice President and Chief Financial Officer

Sure. I mean, a good place to go and look at this, Greg, is in the cash flow statement in the investing section and capitalize and develop — capitalized development line item. It flows nicely with how we’ve been investing. And you can see back when we were a much smaller company what that number was in there. And then as we added the Wage acquisition, it essentially doubled over that period of time and then it went up again last year as we made additional efforts on our platforms and really made some vast improvements there.

So, that has come up over time. Of course, then that has the amortized through the technology and development line items that you have that investment going through because of that. And so, I think that’s probably the biggest thing that’s rolling through there and like Jon said, we’re not going to do stuff like that unless we think we can get at higher ROI.

Jon Kessler — President and Chief Executive Officer

Yeah. And on sales marketing expense there, the biggest thing is, frankly, we’re just a bigger company. And particularly, as I think about it going forward, right, we — and with the discussion you may recall from the last — both the February call and then back in December, really putting the pedal to the metal in terms of driving sales through our partners, right. There is expense there that’s just expense. That’s what it is.

And so, that’s been a big piece of the puzzle there. I almost — I’m tempted to go try and find the recordings of prior earnings calls, where it probably wasn’t you but somebody was like, why aren’t you spending enough on sales and marketing expense. So — and then of course, there is the record sales that have come from it. So I think that’s kind of where we are. I would not expect — without wishing to make any particular forward-looking statement in this regard or whatnot, just kind of thinking about it, I don’t see that sales and marketing trend line kind of really continuing very far.

T&D, it’s going to be a function — I mean, in both cases it’s a function of what the return is, of course. But in T&D, I think we still have some whatever the term is that runs through the snake when you are eating it in terms of — you don’t eat the snake, the snake eating the bubble, right? Whatever it is, it runs through the snake. But I — so your observation is probably right there. But that’s kind of how we’re thinking about it. We’re certainly unaware of any [Indecipherable].

Greg Peters — Raymond James — Analyst

You know how to paint a picture, that’s for sure.

Jon Kessler — President and Chief Executive Officer

[Speech Overlap]

Greg Peters — Raymond James — Analyst

That’s going to leave a mark for the rest of the day. So — but it — I guess, this is all embedded in the stock-based compensation guidance you offered for the fiscal year ’23 and the number is a lot larger for the projected number for fiscal year ’23 then for 2022. And so, I was trying — getting into the pieces of what’s causing that to be higher. Sales and marketing is sort of running at sort of steady state, maybe up a little bit; tech and development’s up, but it was up last year. What’s moving the number of higher for fiscal year ’23 versus what you reported for 2022?

Jon Kessler — President and Chief Executive Officer

You want to start on stock comp?

Tyson Murdock — Executive Vice President and Chief Financial Officer

Yeah. I mean, one of the things is the way that we’re paying people and that is with performance RSUs. And so, when we value those using the simulations, they actually value a lot higher amount. So — and then you value that amount and then it runs through with that amount, you don’t ever change it, right. So that aligns our interest with investors’ interest, because we want the stock to go up, obviously, because it’s going to perform — the performance is based on the stock increase. So that is one reason why that happens with leadership comp. And then of course, if you just go back through history, we have a lot more people. So you go back two and a half years, three years now, we’ve had less than 1,000, and now we’re 3,500. So that’s a pretty big increase. Not everyone gets equity, but a lot of people do. So that makes an increase.

Jon Kessler — President and Chief Executive Officer

Yeah. I mean, I just wanted to highlight. Let me first say, this is a topic that we’re talking about, because we know that it’s not so much that we’re talking about the percentage increases. We sort of look at this in terms of things like burn rates and the like, and we know that those have been in reasonable ranges. But like, we can’t just pat ourselves on the back on that topic and move on. So this is definitely a conversation, and keeping it under control is three factors that I would highlight.

One — the ones Tyson mentioned in particular. I mean, just think about myself. As you know, Greg, others may not. I mean, my compensation is 100% PRSUs. They are valued at the time they’re granted. It doesn’t matter if they’re ever earned, it doesn’t matter what the price is when they’re earned. That’s it. And I don’t understand why the accountants do it that way, but that’s the way they do it and I can’t argue with that. And it increases the price of those things by some large amount.

The second point I want to — or the other additional point I want to make here is that, as I mentioned earlier, we are also doing some significant, let me say, adding both bench strength and forward strength within our technology organization as we do more and more work and are seeing more return from the work in tech transformation. And so, we have in our fiscal ’23 guidance reflected some of those anticipated expenses. Those hires, as you know, tend to be equity-heavy. That’s just kind of what happens. And so, that’s a piece of the puzzle that’s relevant to all of this and that probably accounts for actually a fairly material component. Those two factors alone are probably the bulk of the delta here.

Greg Peters — Raymond James — Analyst

Got it. Well, I don’t want to overstay my welcome and then Richard calling me later. So I’m going to stop there and thank you for your answers.

Jon Kessler — President and Chief Executive Officer

He’s never called you. Has he?

Greg Peters — Raymond James — Analyst

Oh, come on. I get a call every once in a while.

Jon Kessler — President and Chief Executive Officer

Richard is the enforcer. He just does stuff we don’t even — we have plausible deniability. Jon point extra, this operation. Okay.

Greg Peters — Raymond James — Analyst

Thanks, guys.

Jon Kessler — President and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from George Hill of Deutsche Bank. Your line is open.

George Hill — Deutsche Bank — Analyst

Hey, good afternoon, guys.

Jon Kessler — President and Chief Executive Officer

Hey, George.

George Hill — Deutsche Bank — Analyst

Good afternoon, Jon and team. Thanks for taking the question. It’s like, Jon, I have a list of, like, 15 questions in front of me. I feel like I have to pick two or three. I’m going to go to — on the last call, Steve talked about the opening a bit of the middle market. I guess, one thing I wanted to ask you about the middle market and what you’re seeing about the return of labor in general. Is the HSA mix and the people who are coming back to market and given the strength that you saw in the sales going into what I’ll call calendar 2022, fiscal ’23, do you feel like the mix continues to improve? Like, is there — are the number of people who are coming in and adopting HSA is greater than what the prior — I guess, what I’ll call the prior cohort looks like? And then I have kind of two housekeeping questions for Tyson.

Jon Kessler — President and Chief Executive Officer

Ted, why don’t you take this one, because it’s — I think it’s — this is really about what we’re doing technologically and what the market is asking us to do as new clients come in around driving HSA adoption.

Ted Bloomberg — Executive Vice President and Chief Operating Officer

Yeah, I would make a couple of points. And I think it’s a little early in this year’s sales cycle to be able to tell you exactly how it’s shaking out, the split between HSA and FSA, HRA type plans. And our sacred obligation to the marketplace is to meet people where they are, right, bring them into the family, and then convince them of the value of HSAs over time, which is what we continue to do, and I think our sales season is off to an early but very solid start for this year.

And it’s — there is nothing appreciably obvious to us about the mix of HSA, non-HSA that feels different than previous years. But I think where the real opportunity is what Jon alluded to in his comments, which is we’re getting better and better at talking to our existing clients about how to design their plans and how to talk to their employees, about how to adopt them and how to maximize the benefit, right. So what the market is asking us for is, hey, help us leverage our benefits as a competitive differentiator, help us have people actually use the benefits, and we’re seeing that — and our marketing department has done a wonderful job driving things like high 90%s retention in HSA plans, right. That’s just great to see and it’s a couple of percentage points higher than it is.

Jon Kessler — President and Chief Executive Officer

That’s the way you grow, as you start by keeping the people you have.

Ted Bloomberg — Executive Vice President and Chief Operating Officer

Right, exactly. And so, I would say no insightful comment on what this mix of sales is this early in the year. But a lot of both opportunity and progress in driving HSA growth through existing clients just in partnership with our clients, and that’s been working really well.

George Hill — Deutsche Bank — Analyst

I’ll say, Ted, I feel like — as I listen you answer the question, I realize I kind of asked my question terribly. The thing I wanted to ask simplistically was we’re all seeing this demand and this focus on employee retention, given how tight the labor market is. You guys had a very strong sales season heading into calendar 2022. As everybody is focused on benefit as a source of retention, it seems the answer from your selling season was HSAs are the answer as opposed to a richer benefit design and other ways are the answer. That’s more of a statement than a question. But I guess, maybe just the feedback on why are employers saying, yes, HSAs are the answer to employee retention, or at least part of the answer. It’s the employee retention, it’s the benefit design, it’s kind of what I was trying to get at. I’m sorry.

Jon Kessler — President and Chief Executive Officer

Yeah. I mean, what it kind of comes back to is something we’ve talked about before, which is the sort of richness of an HSA qualified health plan versus the richness of what’s now a typical PPO plan. They’re just not that different. And in many cases, they’re deliberately, in terms of actuarial value, identical. You may recall, we talked about some market research on this topic with you the last call or it must have been back in December. And so, then what you have is a little bit of from the employers’ perspective, you can effectively, by focusing on doing what you need to do to have those plans be HSA qualified, I think this is particularly true in mid market where you have — you are like, why wouldn’t you do that, you’re giving a better benefit with the same actuarial value more or less.

And then I would add one other factor, which is part of the wave that Ted’s comments are trying to serve. And that is more and more people have had these at other employers. So one of the impacts of the current labor situation is that while labor markets are very tight, there is also a lot of movement. And as people move, if they figured out what an HSA is and how it works, they don’t want to not have one. And so, that too has put pressure on benefits departments to kind of like go this route and to conceive of it less as something — many years of something I have to do and something my people are making me to.

And that’s part of the overall process of driving us to this outcome that we see, which is — it’s not that everyone in the world will have an HSA, right. That’s [Indecipherable]. Everyone doesn’t have a 401(k), right, but we are — part of the world of getting to that level of prevalence is the shift from like, the HSA as good, I just didn’t wish — I wish I didn’t have that health plan to, you know what, the health plans are all pretty similar, I want that HSA, that helps me.

George Hill — Deutsche Bank — Analyst

Okay, that’s helpful. And Jon, I just say that in the context of — I think we’ve heard some concerns where if employers were going to work harder to retain employees, was the HSA going to be a beneficiary or you’re a victim of that trend? It sounds like it’s a beneficiary. Tyson, two quick housekeeping questions.

Jon Kessler — President and Chief Executive Officer

Yeah, it certainly adds [Phonetic] to beneficiary.

George Hill — Deutsche Bank — Analyst

Right. Two quick housekeeping questions, on the no COVID subsidy benefit in 2022, you talked about a $10 million benefit last year. Can you talk about what the margin profile on that is? And then the other housekeeping question is, I thought you said the most recent rate hike was explicitly included in the fiscal ’23 guidance. I guess, can you flush any more color around what is explicitly included in the guidance from the most recent hike? And then I will be quiet.

Tyson Murdock — Executive Vice President and Chief Financial Officer

Yeah, so the COBRA — with the COBRA subsidy, I don’t think we’ve ever talked about them what the margin is [Speech Overlap] we didn’t talk about the margin. Yeah, we said $10 million to $12 million of revenue, but we haven’t necessarily [Speech Overlap] the average, I would say [Speech Overlap].

Jon Kessler — President and Chief Executive Officer

It wasn’t super profitable, it wasn’t like…

Tyson Murdock — Executive Vice President and Chief Financial Officer

Hard work, yeah.

Jon Kessler — President and Chief Executive Officer

It was a lot of work. Yeah.

Tyson Murdock — Executive Vice President and Chief Financial Officer

And then the second question was…

Jon Kessler — President and Chief Executive Officer

I don’t think it was profitable for Ted’s hair.

Tyson Murdock — Executive Vice President and Chief Financial Officer

Yeah. The 25 basis points, I mean, if you think about that, that’s really something that only affects the variable contracts that we have. So we won’t place real money again, big money, until next January. So that’s really an impact on next year that kind of gets banks and we think about what we can negotiate rates at then. And so, the variable component is a little less than $1 billion. So 25 basis points on that, $2 million, $2.5 million annualized, something like that. So we raised the bottom of the guidance and that was where will be landing.

Jon Kessler — President and Chief Executive Officer

Yeah, basically a [Speech Overlap]

George Hill — Deutsche Bank — Analyst

Very helpful.

Ted Bloomberg — Executive Vice President and Chief Operating Officer

Thanks, George.

Jon Kessler — President and Chief Executive Officer

George, you’re the new — George will be picked on now. Peter’s off the hook.

Operator

Thank you. Our next question comes from Scott Schoenhaus of Stephens. Your line is open.

Scott Schoenhaus — Stephens — Analyst

Close enough. Hey, guys. So I wanted to touch back on your last quarter commentary. You mentioned that Fifth Third and Further were running at adjusted EBITDA margins that were dilutive. I believe you even quantified it around 20%, and that’s a steep discount to your historical adjusted EBITDA margins. Can you talk to us about how you’re improving that throughout the year, what your guidance implies, when that book — when these books of business can be repriced at higher yields, all the moving parts on those two recent acquisitions? Thanks.

Jon Kessler — President and Chief Executive Officer

Yeah, it’s really Further, I think, that we made that comment about, not Fifth Third. And so, maybe Ted, I’ll let you sort of speak to the state of integration of Further.

Ted Bloomberg — Executive Vice President and Chief Operating Officer

Sure. And I was just — portfolio acquisitions like Fifth Third typically tend to have a really nice margin profile relatively immediately, which is the distinction Jon’s making. Further is similar to Wage. We bought a business that has a lower margin profile than we have — that we have now than we had at the time with where we expect Wage and the act of synergizing that business, the act of combining the business, the act of sort of investing less sunsetting platforms, and then migrating the business, we expect those businesses to ultimately perform at our margin profile. And in some cases, it could take two and a half years, like in the case of Wage. And with Further, we expect it to take around that amount of time, but for slightly different reasons, which is we’re going to go a little slower, but our expectation is we continue to expand the margin of Further assets that we bought until it gets to roughly the HealthEquity margin.

Scott Schoenhaus — Stephens — Analyst

Great. And that’s baked into your guidance for fiscal ’23?

Ted Bloomberg — Executive Vice President and Chief Operating Officer

Right.

Scott Schoenhaus — Stephens — Analyst

Okay. And then my second question is, did I hear you right? You’re not going to be breaking out the HSA investments versus cash going forward?

Jon Kessler — President and Chief Executive Officer

No, we were just saying in — during the period of the Wage, we’re — thank you for asking this question, because I can imagine, we’d be dealing with that one for like the next 10 days. No, we — all we were saying was in prior periods, we have broken — or for a period after the WageWorks acquisition, we broke out cash without yield. And I think also investments without yield and what that actually was, as some of you will recall, is that WageWorks had some HSAs that we’re on effectively third-party platforms where they were not earning those things. And that’s all done now. So there is no point in breaking out any cash without yield or investments without yield, because effectively, there aren’t any. And so, that’s really all. We will continue to break out cash and investments as we always have.

Scott Schoenhaus — Stephens — Analyst

Got it. And I guess, just — sorry, a follow up there is, as the stock market comes in and interest rates are set to expand, does your sales strategy shift from pushing more people towards HSA investments versus cash change during this period?

Jon Kessler — President and Chief Executive Officer

No, our — well, let me back up and say, when it comes to our members, the strategy that we have, and I think, Ted, you used this phrase earlier, is, we want to meet our members where they are, and we feel like, from an industry perspective, if you look at our major competitors, we are uniquely positioned to meet every member where they are, whether they’re a spender, a saver, an investor, a fat cat like Putnam over here or completely superfluous, like myself, and — how do you get another superfluous. And so, my point in all of that is to say that we don’t take a view per se that is based on wherever yields are, we’re going to try and push our members from A to B, because they have a way of changing over long periods of time. And our responsibility to our members, from our perspective, is to help them think about long term.

So we have always been of the view and will remain of the view that the more people that learn how to use an HSA, what that’s likely to do, it’s going to increase the percentage of our members who invest, and it should increase invested assets. Of course, that’s subject to some market volatility. And we’ll continue to drive those numbers, continue to report on them, continue to celebrate that as a success for our members, and ultimately, we think that if you take the long view, no matter what the relative yields are, that it’s the right answer, because when people understand about how to use one of these products, they are not only better — like investors, they end up having more cash in their account on average and you see that in our own mature accounts, right. They end up also being stickier customers, right. They are more likely to stick with us as they spin off of a given employer or that kind of thing. And so, like this has been a winning strategy for us this whole time and nothing about current conditions in terms of the relative yields between cash and investments is going to change that strategy.

Scott Schoenhaus — Stephens — Analyst

Very helpful. Thank you very much.

Richard Putnam — Vice President of Investor Relations

Thanks, Scott.

Operator

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

David Larsen — BTIG — Analyst

Hi, congratulations.

Jon Kessler — President and Chief Executive Officer

David.

David Larsen — BTIG — Analyst

Hi, congrats on a good quarter. Can you just remind me how much revenue contribution is there from Further and Fifth Third in the fiscal ’23 guide? And what is Benefit Concepts, again? Thanks.

Jon Kessler — President and Chief Executive Officer

I don’t know what Benefit Concepts is. That’s not…

Tyson Murdock — Executive Vice President and Chief Financial Officer

Maybe he’s talking about HSA Administrators.

Jon Kessler — President and Chief Executive Officer

Oh, HSA Administrators?

Tyson Murdock — Executive Vice President and Chief Financial Officer

Yeah.

Jon Kessler — President and Chief Executive Officer

I’ve heard of a company called that, but it’s not affiliated with us. So just to get a feel for it, I’m going to focus on Further and refer you back to the numbers at the time of the acquisition. I think at the time of the acquisition, we said that Further would produce about $60 million in run rate revenue. If you — we, as you may recall, ultimately carved out that — carved out the VEBA component and that — let’s say, that’s roughly $5 million, so call it $55 million, and that’s what it’s contributing in — exactly as we said it would in fiscal ’23.

The other transactions are much smaller. They are single-digit contributors. I would note that, in the case of Further, right, Further contributed about, what was it, 14 or — some number in the mid teens in the fourth quarter. And of course, Fifth Third was closed earlier last year, so it contributed over the course of the last half of the year and so forth. So it’s not like they weren’t in fiscal ’22 either, but the net difference between — for Further between Q4 and — or between fiscal ’22 and fiscal ’23 is the difference between roughly 12, 13, 14 and 55.

David Larsen — BTIG — Analyst

Okay. Great, thanks. And then in terms of the accounts that generate earnings or yield based on LIBOR, are you going to increase that portion in 2023 or over the next couple of years? I mean, it just seems like you’re locked into with these seemingly low rates. Like, why not take more risk?

Jon Kessler — President and Chief Executive Officer

Well, you actually just answered your own question. I’m being a little flip with you, David, sorry. I thought I was going to say, because of risk. And then you — look, I mean, the way to think about it that has been — was pointed out in our prep here is, we have maintained a very consistent — extremely consistent quote-unquote, investment policy, here. It’s probably the — a little bit of a misnomer. But that’s probably — if we were managing a pension fund, that would be a way to think about it. And that policy is that we will maintain, on average, our funds in durations of between three and five years, and we have typically hugged closer to that three-year. And within that, we will have, at any given time, somewhere between 5% and 10% of those funds, either liquid or where our contracts give us the ability to be liquid with no penalty.

And we’ve maintained that since the beginning and at various times, people have asked us — I know Darcy Mott is listening to this call somewhere and probably getting a massage or something like that. And — as we know he likes, but — and, so we — and so, at various times, we will get asked depending on what the then current macro environment, why don’t you either come in duration, which is effectively what you’re asking, or go out in duration, right, be a different version of that.

And we’ve maintained this view and maintained it consistently, because what we’re really trying to do is manage to not so much to, like, optimization on a quarter-by-quarter basis, but rather to have a smooth kind of sine wave over time. And I think that really paid dividends, no pun intended, over the last cycle. The pandemic turned what was effectively a 2.5% yield environment into something that looks like it could potentially be a zero percent yield environment almost overnight, and yet, this company managed to — at the beginning of the pandemic, I remember us, like, I was sitting on my living room floor like where is a phone. We don’t have a phone in this house, which we didn’t, and still don’t.

But saying — look, what we think, what we really don’t know is that this is going to bottom out around 150 basis points for us. And it’s going to take a while to do that. It’s going to take a couple of years. Well, here we are, kind of giving guidance for our third year and we’re bottoming out at a little better than that, right. That tells me that the approach that we’ve taken here, which is not to turn every HealthEquity investor into purely a rate speculator, right, is the right approach. Now — so anyway, that’s the reason we do it that way.

David Larsen — BTIG — Analyst

Okay, great. Thanks very much. Appreciate it.

Richard Putnam — Vice President of Investor Relations

Thanks, David.

Jon Kessler — President and Chief Executive Officer

Yes, sir.

Operator

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

Jon Kessler — President and Chief Executive Officer

Hey, Mark.

Mark Marcon — Robert W. Baird — Analyst

Good afternoon. Hey, everybody. Good afternoon. Thanks for taking my questions. One, things are just starting to open up a little bit. Are you seeing any sort of improvement in terms of the take-up rate with commuter and any sort of change in terms of the expectations in terms of how commuter could end up performing in fiscal ’23, relative to what you commented during the last conference call?

Jon Kessler — President and Chief Executive Officer

I mean, I think the short answer is no, meaning that — I don’t think today’s situation is fundamentally different than the situation that we observed and expected to see a month ago. We’ve talked about before, you can look at things like NYC Transit ridership and stuff like that, that are good indicators, but we are also — like, we’ve been burned on this, well, at least twice. And so, we’re — as we said, I think when we introduced fiscal ’23 guidance or actually maybe even when we revised in Q4, actually now that I think about it, we — we’re going to — we’re not going to assume nothing, right. That would just be silly, but we’re assuming, as, I think you said in the comments, Tyson, a very gradual modest improvement over time and we’ll see what happens and revise accordingly. I mean, would you add — you look at these numbers all the time.

Tyson Murdock — Executive Vice President and Chief Financial Officer

Yeah. I just think that now that we’ve got kind of the year-over-year comps behind us for the prior pre-pandemic time frame, we’re in a nice place that it’s not going to have that big of an impact and hopefully, it gradually increases and sort of gives us a little bit of a tailwind, but I’m not going to bank on it. I mean, I open the paper every morning and there is another article on, commute in midtown, people want to go there, but people don’t want to necessarily commute and then work there, right. So, you see that still. And how to run businesses now? It’s very interesting to think about how people are going to do it.

Jon Kessler — President and Chief Executive Officer

One thing that Ted’s team has done and is — I don’t want to go crazy on this, because it’s only — it’s 4% of our revenue. But that is to say commute or that Ted’s team’s have done is they’ve altered the way the business runs so that — well, I can’t say that we’re not, in that regard, either vulnerable, negative or have positive upside in terms of ridership and whatnot, but far less so in terms of vulnerability than we were at the start of the pandemic.

At the start of the pandemic, if people didn’t show up for a month, that was it. Like, we didn’t get paid. It didn’t matter if they were still calling us and trying to return their passes and whatever, we didn’t get paid, they didn’t order pass, we didn’t get paid, and we only have monthly passes. That’s not true anymore. And as a result of that, for example, one reason that we know — that the quarter we just reported was a little bit better than our expectations, one small reason was that when Omicron hit in January, we didn’t really see a big dip in revenue. Even though, if you looked at the data, there absolutely was a dip in ridership. Was — we’ve put some stabilizers in there that recognized the work that we actually do on behalf of our members and clients and so forth during those kinds of periods. And so, that’s made that business a little more stable and we’ll be glad to be beneficiaries of it growing, even if it grows a pace.

Mark Marcon — Robert W. Baird — Analyst

Great. And then one inflation related question and it relates to two different areas. Specifically, you mentioned you’ve got the increased service costs, which are due to the strong sales season and making sure that everybody’s implemented correctly and the challenges in terms of still some people working from home. But are you seeing any sort of pressure with regards to your Team Purple just in terms of recruiting and retention from a wage inflation perspective? That’s one element. And then on the flip side, when we take a look at the monthly per account service fees, does the wage inflation reduce some of the pricing pressure that some of your competitors have put in place on that monthly fee? Is there even a potential to raise prices?

Jon Kessler — President and Chief Executive Officer

I’ll let Ted comment on the pricing point. I’m going to comment on the first point. So we — and this is reflected in our guidance. We were very — well, you can decide if we’re thoughtful or not, but we were — we certainly spend a lot of time in the current cycle, thinking about how to help our team members deal with what amounts to, at least at the moment, 7% annualized inflation. I’m not sure that we’ll maintain that, whatever, but like that’s the current reality. And recognizing that that’s coupled with inflation, wages don’t tend to keep up with it. And so, we — and again, all of this is reflected in our guidance.

We — essentially, if you are a team member and you were in good standing, you absolutely got a salary increase this year. If you were an hourly team member, you have opportunities to earn more. But in addition, we also try to do things — and again, all of this reflected in our guidance, to protect our team members, actual real take-home pay. So we — those in our own health plan, we did — we froze annual increases in the plan, stuff like that. But I guess, I would say, in general, one of the nice things — and I don’t think we ever take this for granted, or we try not to. One of the nice things about working in this environment is, people aren’t just here for the money, and that — meaning that by and large, they are not going to move an extra $5, but they also want to be treated fairly and with respect.

And so, when Ted and Tyson earlier talked about some of the things that we tried to do during open season, which was none-art open season. That’s a different thing, that’s hunting. [Indecipherable] here doing open season, but doesn’t help. But during our peak season, we — it was still a very difficult peak season for people, but we — you’re not hearing stories from HealthEquity and maybe there is one, and so, maybe I’m whistling past or whatever here, but bosses yelling at people to come in who are sick because they got COVID, work anyway, you can work from your closet. And so I think that the answer here goes hand-in-hand with some of the discussion about how we’ve tried to manage our busy season. But in any event, that’s kind of my answer on the first question. Maybe, Ted, you can hit the flip side of it, which essentially is there opportunity to raise price?

Ted Bloomberg — Executive Vice President and Chief Operating Officer

Yeah. On the pricing side, I would just start by saying, we’ve invested a lot in our pricing capability and analytics and awareness of what the market is offering us in terms of opportunity over the course of the last year. And there are definitely — there’s not an across the board, like, everyone’s raising prices 20% hop in type of environment, but there are certainly opportunities. There are certainly deal sizes and market segments where there is an opportunity to raise prices or to be less forthcoming on the work we’re willing to do for a certain price, and we are pursuing those aggressively for all the reasons that you might expect.

And I mean, a silly example, but our paper cost has doubled, right. You wouldn’t think of us as a paper cost type people, but we still send a few hundred thousand paper statements, and we have to get paid for that, right, because they cost up. And so, there’s just things like that that we are just getting smarter about and studying, but I wouldn’t say it’s like some tidal wave of price increases. I would say it’s selective and pinpointed and we’re doing it in partnership with our distribution partners and our sales teams to make sure we stay competitive. We’ll keep growing and keep winning.

Mark Marcon — Robert W. Baird — Analyst

Terrific. Thank you.

Jon Kessler — President and Chief Executive Officer

Thanks, Mark.

Richard Putnam — Vice President of Investor Relations

Thanks, Mark.

Jon Kessler — President and Chief Executive Officer

Sorry about Wisconsin — and Milwaukee too, rude of us [Phonetic].

Richard Putnam — Vice President of Investor Relations

Yeah, that was tough.

Operator

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

Jon Kessler — President and Chief Executive Officer

Hey, Allen.

Allen Lutz — Bank of America — Analyst

Hey, guys, thanks for taking the question. I guess, going to the — I guess to the service fee line, if you exclude the $10 million impact from COBRA last year, I guess, how are you thinking about the service fee per account this year? There’s obviously a lot of moving pieces. But I think it’s fair to assume at least a nominal increase in commuter coming back, a nominal uplift in FSAs, and then kind of a nominal uplift in HSAs. So that would kind of suggest that the service fee per account could go up a little bit. But then historically, you guys have been — you’ve talked about the 5% to 10% decline. I guess, where are we with all that? Is there a chance for that service fee per account to inch up this year?

Jon Kessler — President and Chief Executive Officer

Yeah, I mean I’ll comment a little bit on it and then Tyson, you can as well. I mean, what you’ve got right is that you really have to think about the mix shift, the mixes themselves because, for example, commuter is our highest service fee type, right? And so — because that’s mostly what it is. And so Commuter is — if we inch up in Commuter, that is, I think, that’s helpful in that regard. But unfortunately, it’s already a small piece of the business, and we’re not anticipating — we’re not anticipating that business obviously, within our guidance, growing substantially. It’s more kind of inching up. And then FSAs are kind of next and then HRAs, HSAs, COBRA or the lowest on a per unit basis. So maybe you can — I would just want to give the mix shift out — the mix outlay, the outlay, outline, out something. Tyson, why don’t you talk about what we’re thinking about for this year?

Tyson Murdock — Executive Vice President and Chief Financial Officer

Well, I mean, Allen, I know we talked about this before, too. But when I’m signing deals and I’m thinking about how we’re going to serve somebody and the various components of that deal and they’re buying multiple accounts, and then we are considering that if they’re bringing in an HSA, the amount of assets, a lot of that feels like how I think about the service fees. So I would say, I think you’re thinking about it, right?

You actually outlined it kind of like I would when you started the question, but we will have still probably a little bit of a decline in HSA as we compete, maybe less because of some inflation and just the opportunity to have a little bit more strength there given our — given where we’re at in the market. I think we grew really well compared to some of our competitors. That gives us some confidence. But it’s really about collecting assets at the end of the day and putting yield rate against it and making that line item the biggest line item in the long run. So to me, if I have to give up a little bit, compete to do that, I will. And so that’s…

Jon Kessler — President and Chief Executive Officer

And for fiscal ’23, essentially all of our account growth is HSA, right? And so I sort of interpreted your question a little bit about what about going forward? And the answer will be, as you — as it shows, I think, heard from my initial comments, we expect the CDB side to grow, and that will help us on an average fee basis. But — so that would be very helpful. But I think for fiscal ’23, it is worth noting that essentially all of that total account growth is HSA. And there, the fees are the most pressured, it’s for good reason because you’re working on underwriting the combination of service fee, a custodial balance and then an interchange.

Allen Lutz — Bank of America — Analyst

And that kind of leads me into my second question around kind of the interchange per account. So last year was another sort of weird year where interchange kind of peaked in 2Q and then got weaker. I guess as you think about the contribution of that business on a per account basis, just trying to understand kind of what’s embedded in guidance and kind of what you’re seeing, I guess across HSAs and FSAs today?

Tyson Murdock — Executive Vice President and Chief Financial Officer

You want me take this one? Sure. Yeah, I mean I think what I would say is, given the volatility that we have experienced here over the COVID, here I’ve tried to be really make sure about what we put in so that we can make sure that we exceed it. And so that’s how I would think about it. I would like to think that this year will be smoother given just the way people are kind of working their way through this. I do think that — when you think back through when Omicron was kind of heightened in the first part of the year, I mean we see that has an impact on things. It actually really has an impact.

So it’s just, I can’t — we’re not going to forecast any pandemic-related things, and I specifically mentioned that. So we’re trying to get back to a more normalized place, but just really trying to make sure that we think we’ve got the seasonality nailed on that where it’s heavier, of course, in the January, February, March time frame because people get their FSAs topped up and their HSAs. And then as they have user lose it in the last half of the year, it gets a little heavier too, but it gets lighter in the middle parts of the summer. And we kind of look at it and see if we can build a forecast to match that.

Jon Kessler — President and Chief Executive Officer

I would say there, the thing that I wish that I — if I sort of think about something I wish I had been saying for the last eight-plus years, so that if you like, remember this, is like the third quarter is — to pick this point up, the third quarter is going to be the weakest quarter for interchange. It always is, right? And obviously, in this last year relative to a much stronger second quarter than one would normally have, it surprised us and you know that, right? So I just think that as you quarterize this — as you quarterize and answer that’s kind of roughly flat on a per account basis, it’s — just keep in mind that seasonality, that is that last year, exactly as you said, the second quarter is overstated, and the third quarter is probably understated, but it’s still not — it is seasonally the weakest quarter.

Allen Lutz — Bank of America — Analyst

Great, thank you.

Tyson Murdock — Executive Vice President and Chief Financial Officer

Thanks, Allen.

Operator

Thank you. Our next question comes from Stephanie Davis with SVB Leerink. Your line is open.

Jon Kessler — President and Chief Executive Officer

Hi, Stephanie.

Joy Zang — SVB Leerink — Analyst

Hey guys, this is Joy Zang on for Stephanie. Thank you for taking question.

Jon Kessler — President and Chief Executive Officer

What’s happened to her? What have you done to her?

Joy Zang — SVB Leerink — Analyst

Every time, she’s never on the call.

Jon Kessler — President and Chief Executive Officer

It’s the whole thing a little suspicious.

Joy Zang — SVB Leerink — Analyst

I guess my first question is an e-comm question for you, Jon. You guys mentioned that you’re not baking in any further Fed rate hikes in your guidance. But in terms of us trying to model custodial revenues going forward, do you see anything fundamentally different in this current rising rate environment versus what we saw in 2016 and to 2019? Or can we expect a similar type of cadence we’ve seen in the past?

Jon Kessler — President and Chief Executive Officer

I guess here’s how I think to measure it. The reason we do not include this in our guidance is not just because it makes our lives easier, but also because it’s turned out that people are remarkably bad at predicting the actions of the Fed, including and in particular, Fed futures market are terrible predictors. There have been various studies that have shown that it’s basically a roll the die. And I think that, that’s a reflection of the fact that I’m hoping they’re not listening and assuming they’re not listening, that there are policy factors that tend to be at play. And also, these are ultimately human beings who are trying to make decisions.

And so I guess my thought is that what if you go back to the last rate cycle, what I think we would all hope is that this cycle will be longer, meaning that what we’re doing is returning to a level of normality versus an up cycle and then a down cycle. And I think that’s probably the biggest potential difference here is that just as we got to kind of a place where people were feeling normal and a little bit of wobbliness towards the end of 2019, but whatever, still in the range of normal, boom, we got the pandemic. And so, I think that’s probably the biggest thing as you think about it is that over the next year or two, right, there’s no reason to believe, but also other than, that whatever we believe is probably wrong, that the cycles won’t be different. What I think we’re all hopeful will be the case is that we are beginning the process of returning to truly normal monetary policy, where the normal rate of interest, which is another way to say the normal Fed funds rate will be in the twos rather than zero, and also not in the fours or fives which would be maybe not a good thing for anyone. So that’s the main thing that I would — we’d think about.

Joy Zang — SVB Leerink — Analyst

That’s super helpful. And as a follow-up maybe on the enhanced rate product side, can you give us some color on how you’re incentivizing folks to move over to the new project — is this purely a function of new accounts? And then can you give us a sense of how much of the benefit from this shift is baked into your guidance?

Jon Kessler — President and Chief Executive Officer

I’ll answer the first part and then encourage Tyson to answer the second part. But on the first part, we don’t — as I think Ted commented on an earlier call, we don’t like — we can’t like run special campaigns and whatnot. The rates that we provide to our members are enhanced as the name suggests, but they are determined by a formula that’s in our custodial agreements, right, that’s based on what others are doing. And so we don’t have the leeway to, like say, we’re running a special to come in, here’s — like you’ll see sometimes banks do. Here’s 100 basis points for a year, but in the fine print, [Indecipherable] battery sold separately.

And so our main “incentive” is around education. And that’s where we have focused pretty much all of our energy is making sure that our members are aware of this option. In practice, the greatest awareness is going to be among newer accounts because those are the people who are most — not only are they most likely to be coming into our systems, but they’re also in practice having to make a choice. And so whereas for anyone else, you’re battling inertia. And so that’s the piece of it. And that does reflect our thinking and our guide about how much kind of seeps into this product over time, and that’s where Tyson’s part of the question concern.

Tyson Murdock — Executive Vice President and Chief Financial Officer

Yeah, as I mentioned before, too, I mean, the way to get chunks of this is the portfolio acquisitions like the one we just closed HSA administrators. That’s a great way for us to get assets into these types of accounts. You got to remember that the majority of the accounts are $500 right at an average of $2,700. So someone isn’t necessarily going to go in, would make a move that takes a little bit of time to move it over there without — it’s just — that’s not going to be a very fast move to do it one by one, even though we will message that. We’ll take the opportunities. I would say — there’s very little, if any, built into moving people over, and that’s more upside in my mind. It’s more about getting the chunk.

And then I would say of course, in January, we’ll get a lot of funds in and we’ll place them in enhanced rates. So whatever the rates are there, that will be what they are, but we haven’t built in a bunch of upside in January relative to Fed rate increases even on those enhanced rate products. We’ve kind of done it as it stands today. And so I would call it upside on getting people over there, upside for half of the January month or a little more, and that’s kind of where it’s at with regards to guidance.

Joy Zang — SVB Leerink — Analyst

Very helpful, thank you.

Jon Kessler — President and Chief Executive Officer

Thanks, Joy.

Operator

Thank you. Our next question comes from Glen Santangelo of Jefferies. Your line is open.

Glen Santangelo — Jefferies — Analyst

Hi, yeah, thanks for taking my question. Hey, guys. I just wanted to follow up on this rate question one more time because I think it’s so important that we get a lot of questions on it. I understand we don’t want to forecast interest rates going forward, but I just want to make sure I’m thinking about this correctly, particularly as it relates to the forward rate curve. I think, Jon, you said that the average duration of the portfolio now is just a little bit over three years. And so am I thinking about it correctly that next January, you’ll ultimately reinvest almost a third of the portfolio. And if we look at the short end of the curve here, it’s up 80 to 100 basis points in the last two months alone, and so if nothing changes, theoretically, right, you’re going to be investing almost a third of the portfolio 80 to 100 basis points higher, right, which would have a pretty dramatic impact on your yield curve, right, as we go into fiscal ’24, if nothing else were to change from where we are today, right? And so all of a sudden, that $20 million headwind this year could be a significant tailwind next year, again, if nothing changed. I just want to make sure I’m thinking about that correctly.

Jon Kessler — President and Chief Executive Officer

Yeah, the only point I would make is that you’re reinvesting so in — at the beginning of fiscal ’24, right, on average, you will be investing dollars that we put in at the beginning of fiscal ’21, which is another way — or end of fiscal ’20, which is a way to say like just before the pandemic. Do we think?

Glen Santangelo — Jefferies — Analyst

Okay.

Jon Kessler — President and Chief Executive Officer

So it’s not — when we were at the peak of the last rate cycle, right? But in other words, you’re — from that perspective, the implication would be, yes, there will be some upwind there, right? But you’re still — you’re like — it’s also what you’re replacing, does that make sense?

Glen Santangelo — Jefferies — Analyst

Right. I get it. I get it. So you’re saying we’re just going to do the three-year look back, right? So the big year becomes fiscal ’25 when we look back to fiscal ’22, right, that the step-up is much greater? Again, assuming that where we are now.

Jon Kessler — President and Chief Executive Officer

I will say, even notwithstanding my point, you would still see a step up, right? And in part, that is because of the enhanced rates issue and in part, it’s just because there would still be a step up, right? But based on your assumptions, right? So…

Glen Santangelo — Jefferies — Analyst

And then maybe I just had a quick follow-up for Tyson, on the margin side of the business. If we were to normalize the $5 million to $7 million in costs that are coming in 1Q and we would have backed that out for a second, it almost assumes like you’re assuming flat margin sort of year-over-year. So is the right way to think about the cadence in fiscal ’23 that margins will be down in Q1 sort of year-over-year, but then sort of flattish for the following nine months or three quarters? Is that generally the right way to think about the cadence or no?

Tyson Murdock — Executive Vice President and Chief Financial Officer

Yeah, I think that’s right. I mean I think I’d also just think about — we’ll be merging us out of Q1 into Q2. So Q2 may have a little bit of that in there, too. But for the most part, you’ve got it exactly right. One other thing I was going to mention really quick, just back to the last question, is just the rates we get versus the Fed rates are not — they’re not actually connected, right? It’s a negotiated rate, just to make that clear. So there’s not a — the Fed raises the rate. We still go out and negotiate a rate. We do that with our enhanced rate partners, who are out there, the ICM partners, but there’s not a direct connection well, right? I just wanted to make that point.

Glen Santangelo — Jefferies — Analyst

Right. I think we should be looking at treasury rates, right, not the Fed funds because the Fed funds only impacts the variable rate?

Tyson Murdock — Executive Vice President and Chief Financial Officer

Yeah, that’s right.

Jon Kessler — President and Chief Executive Officer

You really need to be looking at CD rates.

Tyson Murdock — Executive Vice President and Chief Financial Officer

Yeah. But I mean I understand what he’s trying to do.

Glen Santangelo — Jefferies — Analyst

Yeah, yeah, okay.

Jon Kessler — President and Chief Executive Officer

On your assumptions, I’m with you. I mean if look, we — what you can tell from our answers is, again, if forward rate curves were always right, rates would always be rising, okay? They’re not — I just don’t — I don’t think anyone really believes that forward rate curves are a good reflection of what rates will be at the end of that curve. They just aren’t. And so we just have to be thoughtful about that and kind of reel that in a little bit. But that all having been said, this — a way to think about, it’s just big picture, so outside of timing for a moment is we manage today $13 billion of cash and give or take. And that pile is growing larger every year and by a substantial amount. And every 100 basis points on that is, I don’t have to — I mean, I got a master’s degree, but I don’t need it for that — to do that math.

Glen Santangelo — Jefferies — Analyst

Yeah, that’s interesting.

Jon Kessler — President and Chief Executive Officer

And so, there is real embedded profitability in the business. Some of that obviously does, as we’ve talked about before, right, maybe that — of every dollar that shows up on the top, ultimately, $0.25 ends up showing up as expense either or as like more pressure on service fees, as Tyson was suggesting, or ultimately over time. But there’s a lot of embedded profitability in the business on the basis of now in fiscal ’23 being at what is clearly going to be the trough of the — of our custodial yield curve.

Ted Bloomberg — Executive Vice President and Chief Operating Officer

Yeah. Perfect. I got it. Thanks for the answers. Appreciate it.

Jon Kessler — President and Chief Executive Officer

Thank you.

Operator

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

Jon Kessler — President and Chief Executive Officer

Thanks, everybody. As I said at the beginning, we’re excited to be together here in person. It also kind of reminds us a little bit. We’re seeing — I’m seeing faces that I haven’t seen, we may haven’t seen forever or ever, but a lot that I haven’t seen in two plus years and kind of reminds you of all the work people have been doing. And I know that our investors have been doing that work too and our sell-side folks have been doing that work too. And so thank you guys for all of that. Hopefully, I’m sure there will be a few more scary days because that’s how these things seem to work with the pandemic. But it seems like brighter days ahead for all of us in that regard, and that’s a good thing. So thanks, everybody.

Operator

[Operator Closing Remarks]