管理層發言
Good afternoon and welcome to the HealthEquity Second Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I’d now like to turn the conference over to Richard Putnam. Please go ahead.
Thank you, Gary. Appreciate it. Hello everyone. Welcome to HealthEquity's Second Quarter of Fiscal Year 2025 Earnings Conference Call. My name is Richard Putnam. I do Investor Relations for HealthEquity. Joining me today is Jon Kessler, President and CEO; Dr. Steve Neeleman, Vice Chair and Founder of the Company; and James Lucania, Executive Vice President and CFO. Before I turn the call over to Jon, I have a couple of reminders. First, a press release announcing the financial results for our second quarter of fiscal 2025 was issued after the market closed this afternoon. These financial results include contributions from our wholly-owned subsidiaries and accounts they administer. The press release includes definitions of certain non-GAAP financial measures that we will reference today. You can find on our Investor Relations website a copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures and a recording of this webcast.
The website is ir.healthequity.com. Second, our comments and responses to your questions today reflect management's view as of today, September 3rd, 2024 and they 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 today. These forward-looking statements are subject to risks and uncertainties that may cause the actual results to differ materially from statements made here today. So 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, as detailed in our latest Annual Report on Form 10-K and subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information or future events. Now, over to Jon.
Thank you, Richard. Well done. Hello everybody. Today is the day after Labor Day and that's the unofficial start of fall, and for some that means leaves turning or the start of football season. For us on Team Purple, it also means open enrollment and busy season are right around the corner. And based on the numbers that we are reporting today, we are looking forward to a very busy and very productive busy season. I’ll discuss Q2's momentum and key metrics and progress towards our strategic goals, Jim will touch on Q2 financial results before detailing our raised guidance and a little bit about our share repurchase authorization, and Steve is here for Q&A on the state of market at mid-sales cycle and also on recent developments in our Nation's capital. Let's get to it. In Q2, the team again delivered double-digit year-over-year growth across most key metrics, including revenue plus 23% year-over-year, adjusted EBITDA plus 46%, and HSA assets plus 27%.
HSA members grew 15% from strong HSA sales and closing the final tranche of BenefitWallet. Strong HSA growth drove total accounts up 9%. HealthEquity ended Q2 with over 16 million total accounts, including 9 million HSAs, holding $29 billion in HSA assets. HSA assets overall increased $2.2 billion in the quarter and, of course, $6.3 billion year-over-year, and we grew the number of our HSA members that invest faster than accounts, in fact, by 24% year-over-year, helping to drive invested assets up 43% year-over-year to over $13 billion. Turning to sales. Team Purple added 187,000 new HSAs from sales in the quarter, 20% more than Q2 of last year, resulting in a record first-half for our sales and relationship management team. And we remain very positive about this year's selling season. Beyond the organic growth in HSAs, we reported in June that the team had transitioned the last of three tranches of BenefitWallet at the start of Q2, adding approximately 216,000 HSAs and $1.0 billion of HSA assets in the second quarter.
The timely completion of transferring HSAs and assets for BenefitWallet for which I thank the team and our clients and our partners at BenefitWallet greatly has opened up opportunity for CDB cross-sales into FY’26 and locked-in strong custodial yields on these assets for years to come. That is good. Thank you. CDB account growth turned positive with 1% year-over-year growth in Q2, even though we haven't quite lapped the final runoff of the Extended Life national emergency accounts, which will occur later this year. CDB sales into the plan year beginning January 1 also look very robust. Results this quarter also represent a down payment on the multi-year 3Ds strategy, that's 3Ds we discussed at Investor Day. Each of the Ds represents kind of a transformation within the company. The first D, delivering remarkable experiences, is about the digital transformation of service delivery. In Q2, the team delivered flat year-over-year service expense on 9% total account growth.
That's really good. A new mobile app launched, continuing our rollout of claims AI and last month, in August, our card processor migration wrapped up. Thank you, team for that which enables stacked cards on major digital wallets and next year instant card issuance, which I'm really excited about. The second D, deepening partnerships, is about the digital transformation of sales and our deepening of our partnerships around the health benefits ecosystem. In addition to record HSA openings and strong CDB results, the team continued work towards scaling partner-facing APIs with a new third-party developer portal, which is coming a little later this year, maybe in the third quarter. The team also expanded our stable of blue-chip Enhanced Rates partners to keep up with adoption of Enhanced Rates, especially by new HSA members. The third D, driving member outcomes, is about extending HealthEquity's differentiation, as a utilization accelerator not only of health accounts and health savings but of our partners' health benefits point solutions more broadly, something we've been doing for a long time and that we're now in a position to do even more of.
One of those outcomes that doesn't get talked about enough actually, though, is dignity. And this morning, we announced the formal launch of HPAs, a no-interest and no-fee option for employees to pursue medical care with flexible payment terms. Your credit score should not influence your access to care. This is a way for employers to make that happen. A version of it already was put into law for Medicare Part-D recipients and the commercial market employers should have it, and we are bringing it to them and we are really excited about as well. All this adds up to a quarter of investment and promise for the future within the envelope of robust growth in the present in terms of HealthEquity's top line, its margins, and its cash flow from operations, as Jim is about to detail.
Thank you, Jon. Hi, everyone. I will briefly highlight our fiscal second quarter GAAP and non-GAAP financial results. As always, we provide a reconciliation of GAAP measures to non-GAAP measures in today's press release. As a reminder, the results presented here reflect the reclassifications of our income statement we described in our fiscal year 2024 10-K, both for fiscal '24 and fiscal '25 for comparison. Second quarter revenue increased 23% year-over-year. Service revenue was $116.7 million, up 4% year-over-year, reflecting growth in total accounts, HSA investor accounts, and invested assets and lower average unit service revenue due to mix shift toward HSAs. Custodial revenue grew 50% to $138.7 million in the second quarter. The annualized interest-rate yield on HSA cash was 3.1% for the quarter, as a result of the BenefitWallet placements and continued mix-shift to enhanced rates. Interchange revenue grew 14% to $44.5 million, notably faster than account growth as members drive more payment activity to card than from cash reimbursement.
Gross profit as a percent of revenue was 68% in the second quarter this year, up from 62% in the second quarter last year. Net income for the second quarter was $35.8 million or $0.40 per share on a GAAP EPS basis. Our non-GAAP net income was $76.3 million or $0.86 per share versus $0.53 per share last year. Adjusted EBITDA for the quarter was $128.3 million, up 46% compared to Q2 last year and adjusted EBITDA as a percentage of revenue was 43%, a 650 basis point improvement over the same quarter last year. Turning to the balance sheet. As of quarter end, 31st, 2024, cash on-hand was $327 million as we generated $174 million of cash flow from operations in the first half of fiscal year '25 and used $200 million of cash for the BenefitWallet acquisition. The company had $1.1 billion of debt outstanding net of issuance costs, including $225 million drawn on our line of credit in connection with the BenefitWallet acquisition.
As was reported in an 8-K filing last month, post-Q2, we refinanced and consolidated our credit facilities, retiring the Term Loan A and amending and extending the revolving credit facility. The new facility extends maturities to 2029 and provides additional flexibility in terms and conditions commensurate with the company's enhanced scale and credit quality. Today's fiscal 2025 guidance reflects the carryforward of our strong sales trajectory, operational efficiencies resulting from our technology investments, and recent changes in interest rate markets. We expect revenue in a range between $1.165 billion and $1.185 billion. GAAP net income in a range of $94 million to $109 million or $1.05 to $1.22 per share. We expect non-GAAP net income to be between $265 million and $280 million or $2.98 and $3.14 per share based upon an estimated 89 million shares outstanding for the year. Finally, we expect adjusted EBITDA to be between $458 million and $478 million.
We expect the average yield on HSA cash will be approximately 3.05% for fiscal 2025. As a reminder, we base custodial yield assumptions embedded in guidance on projected HSA cash deployments and rollovers, the schedule of which is contained in today's release and an analysis of forward-looking market indicators such as the secured overnight financing rate and mid-duration treasury forward curves. These are, of course, subject to change and not perfect predictors of future market conditions. Our guidance also includes the expected impacts of our now completed BenefitWallet HSA portfolio acquisition on the remainder of the fiscal year, including higher revenue and earnings along with higher net interest expense due to an increase in the amount of variable-rate debt outstanding and drawdown of corporate cash to fund the acquisition. Our guidance also includes the commencement of share repurchases as part of the $300 million repurchase authorization announced today.
We expect both to return capital to shareholders and reduce revolver borrowings in the remaining two quarters of the fiscal year. With our new revolver and continuing strong cash flows, we will maintain ample capacity for portfolio acquisitions should they become available. We assume a non-GAAP income tax rate of approximately 25% and a diluted share count of 89 million, including common share equivalents. Based on our current full-year guidance, we now project a GAAP tax rate for fiscal 2025 at about 25% as well. As we have done in previous reporting periods, our full fiscal 2025 guidance includes a 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 included. With that, we know you have a number of questions, so let's go right to our operator for Q&A.
分析師問答
We will now begin the question-and-answer session. Our first question is from Anne Samuel with J.P. Morgan. Please go ahead.
Hi. Thanks for the question, and congrats on a great quarter. I was hoping you could provide a little bit more detail on the launch of your Health Payment Accounts and maybe how to think about how those might contribute to the P&L? And is that going to be part of your selling season this year?
Let me begin by discussing the long-term aspects before addressing the short-term. The purpose of this product is to ensure that individuals, especially those with employer-based health plans, can manage their out-of-pocket expenses without being restricted by their credit limits or credit scores. We believe this approach is essential. The product offers employers and health plans a cost-effective solution to avoid these limitations. I believe it will be widely applicable, benefiting those using HSAs and other health accounts, as well as the broader population, even those without these accounts. While we don’t expect everyone to have an HSA, we see significant potential for this product over time. Our mid-term objective is to incorporate this into benefits packages so that within the next three to four years, a substantial portion of group coverage includes this option, which we find to be quite achievable.
This initiative is reminiscent of the past when HMO plans offered limited choices and covered costs through premiums. Essentially, it’s a return to that model from a cash flow management perspective. In the short term, we anticipate no impact in fiscal '25, but we do expect a modest impact in fiscal '26, as indicated in our release. Some of our clients, including large ones, have tested this product and provided positive feedback on both its usage volume and quality. Therefore, we foresee a modest impact in 2026, growing significantly in 2027 and 2028. We will factor this into our guidance for '26. This product aligns with our long-term goals, and we have been working on solutions for this issue for over a decade.
Yes, longer. I think 2008 is when we first started thinking about it. We had a large client that wanted them and then the world melted at the end of 2008. So it has been, Jon, I think, 16 years since we've been thinking about it. When I practiced it was heartbreaking to have patients come in and say they were delaying care because they couldn't afford their deductible. And we think the HSA is the best way to fund the deductible, but for people that are just getting started. These were great too.
Perfect. Well, congrats on the launch.
The next question is from Glen Santangelo with Jefferies. Please go ahead.
Hi, thanks for taking my question. Hey, Jon, I want to focus on the custodial rates a little bit. And as we look out to sort of next year, right, I think you have almost $1.8 billion that needs to be renegotiated at the end of the year which you are replacing 3.7% cash. And so not that I want you to talk about next year at all. But as I think about the yield curve, like investors are continuously concerned about the decline in rates. So it seems like where you sit right now that your yield on your custodian revenue shouldn't really move that much given that the five years at 364. And even with the benefit of enhanced rates, you’d obviously get another 75 basis points on top of that. Am I thinking about all that kind of correctly?
I think that I’ll put on to Jim. The only part that you lost me a little bit on was the rate at which that cash is currently earning that will reflect.
Yes, that's correct. So, for the remainder of this year, you're right that the mid-range will reprice at mid-range plus a spread. There's some positive momentum for that figure as we move into next year. However, this is overshadowed by the significant potential gains over the next couple of years, which amount to about $6.5 billion over the upcoming two fiscal years, currently priced in the high 1s. If it reaches 3.5 plus that spread, it remains a strong figure while we are transitioning from 1.9%.
And Jim, did I miss the split on enhanced rates this quarter? Because I know that number has been climbing every quarter. And should we think about the volatility of rates having any greater or lesser effect based on the continued shift towards enhanced rates?
Yes, we have not provided a number other than we told you our goal is to get 30% at the end of last fiscal year, which we achieved and we guided to trying to get to 60% over our three-year double non-GAAP net income per share objective, and we are well on track there. Obviously, those are going to be a little lumpy. It is not going to be a straight line. It is going to move based on when cash is deployed, but we feel really, really good about that objective to getting to about 60% by the time of our objective and it should help reduce any extra volatility.
Yeah, okay thanks very much.
Thank you.
The next question is from Sean Dodge with RBC Capital Markets. Please go ahead.
Yeah, thanks. Good afternoon. Maybe just on the guidance. If we look at what you all did in a quarter revenue, EBITDA, EPS wise, all of those came in well ahead of consensus. But the magnitude of the adjustment in the guidance for the full year was less than this Q2 beat or upside that we saw. Are there some one-time items that we should be aware of in Q2 that won't necessarily flow into the back half of the year? Or is there something else that kind of explains this difference between the Q2 upside and the guidance adjustment?
Yes. Thanks for that question. Yes, look, I think the first point is that I think the consensus is probably a little bit conservative on the Q2 side. So that sort of quarterly phasing of our prior guidance didn't quite align with our internal expectations. But if we think about it, about $10 million of upside for the year versus our expectations is kind of how we would think about it and then offset by about a $5 million movement in the other direction based on the downward shift in the forward rate curves for the back half of the year. And where does that $5 million come from? It is not really materially driven by the maturity schedule. It is really driven by the floating rate component of HSA cash, of which there's about $600 million at the end of the quarter. These are placed in short-term deposits. And then a little bit of the placement in the back half of the year, there is $2 billion to be placed, replaced in the second half of the year. Obviously, those will be replaced at slightly lower dollars than the 90-day guide would have hinted. So we think of it sort of in that manner. We are achieving better than our expectations across the three revenue lines to the magnitude of about $10 million and then offset by the $5 million shift in rates.
Okay, very helpful. Thanks again.
The next question is from Stan Berenshteyn with Wells Fargo. Please go ahead.
Hi, thanks for taking my question. Jon, you called out flat services margins on 9% top-line growth within services. Can you just unpack for us the leverage mechanisms there? Is this just a function of automating chat communications? Any stats on progress on that you can give for us? That would be helpful. Thanks.
Yes, it's important to clarify that it's not flat margins but flat costs. I hesitate to suggest we become complacent, but if you examine our service gross margin, which isn't a primary focus for us, it has improved significantly year-over-year. In response to your question, the answer is yes. Generally, we have aimed to stay ahead of the curve with our investments, particularly in digitization where generative AI plays a role, and as we have mentioned in previous quarters, this approach is showing results. You can see this reflected in metrics like electronically handled member needs, often referred to as avoidance rates. We still have investments to make for further enhancements. It is encouraging to see various cloud services and AI competing, such as Einstein from Salesforce and CCAI from Google, each offering unique benefits. Looking ahead, another aspect related to digitization that will help us as we move into the second half of the year and into next year is the completion of our processor transition, which will enable more digital card issuance. We aim to establish instant issuance as a standard practice, which will reduce expenses typically incurred at the year's end. While we won’t reach that goal this year, we have laid the necessary groundwork. There's still a long road ahead, but the important metric I focus on is the increasing avoidance rates.
Thanks. And maybe just a quick one on the third-party developer platform. Any ideal kind of use cases we can expect to emerge from that? Thank you.
Yes. The simplest aspects are things we already support but not in a scalable manner. Features like balances and recent transactions, among others, will benefit from this effort. However, the more intriguing opportunities are future enhancements. Some are ready now, such as API-based enrollment, which exemplifies our goal to expand our sales reach. Partners looking to handle member and client enrollment can leverage our service through an API portal, which is quite beneficial. Much of what we're exploring revolves around enhancing our core differentiators in partnerships and the value we provide to partners as they share value with us. These are the aspects I find exciting in the near term. I expect to see the first enrollment-related API implementations within months rather than years.
Great. Thank you.
Thanks Stan.
The next question is from Allen Lutz with Bank of America. Please go ahead.
Good afternoon, and thanks for taking the questions. I want to follow up on Stan's question around the service gross margin. All the commentary on the digitization is helpful here. And obviously, going back to the Investor Day, the commentary there. How should we think about the service gross margin over the course of the remainder of the year? And then I guess, a higher level question, how should we think about the incremental service cost now that you've started to put in these cost mitigation efforts on new members moving forward? Thanks.
I’ll begin by noting that we will still experience the usual seasonality we see every year. The second half increase in expenses remains unchanged, primarily due to the need to enroll new individuals, particularly concerning the delivery of cards to them. We did not indicate that this would change this year, and it won’t. However, we are currently ramping up our hiring to address this. Over time, this can create a significant impact. To address the rest of this year, you can discuss it further.
Yes, I think that's correct. Maintaining flat costs indefinitely will be challenging, especially since we have real expenses. Jon mentioned the potential future value of digital and instant issuance. The postal service raised costs by 7.5% in July, meaning each card mailing now costs significantly more than it did previously. The future value of our investments relates to mitigating inflation. The aim is not to eliminate service staff, but to ensure that highly skilled personnel manage the more complex issues while simpler tasks, like password resets or reporting lost cards, can be done digitally. I want to emphasize once again that our goal each quarter is to reduce the unit cost of serving an account. We're making progress at the product level, as you can see, and both objectives remain true. We are striving to lower the cost of servicing each account annually, which will involve many strategies. This has been a particularly strong quarter and a great first half, maintaining costs as effectively as we have, and the team has done an outstanding job.
Great. Thanks Jim.
Thanks Allen.
The next question is from Scott Schoenhaus with KeyBanc. Please go ahead.
Hi, guys. Thanks for taking my question. Just curious what drove the investment growth this quarter. Was it from new accounts that you automatically were trying to push towards there? Just kind of want to talk about the dynamics on why you saw such strong investment account growth? And then I have a second question on kind of the job market and all the recent data, but that's my first question.
Sure. Regarding the first question, the transition of the BenefitWallet accounts was beneficial as it allowed us to present a new set of investment options that weren't available on the previous platform. This was likely very helpful. As you know, while we don't provide specific advice on how to allocate between investments and HSA cash, we believe that investing is the right choice for long-term funds. Therefore, we continue to advocate for this approach. We're also refining our digital outreach strategies used during open enrollment to engage throughout the year, which is why we refer to it as Engage360. It’s important to reach people at opportune moments. We’ve mentioned before that those who invest generally see an increase in their cash balances; they tend to be more loyal customers and are making beneficial choices for themselves and our organization's wider goals. This aspect has contributed positively. Additionally, there were market gains during the quarter, although lesser on July 31 and possibly today, which also influenced the growth.
Yes. My follow-up, and that's really helpful, Jon. I appreciate it. My follow-up is what are you seeing right now in the market from the employer front from both HSAs and CDBs, given all the data that suggests we're in the early stage of a softening job market, does your guidance contemplate further softening of the labor market from an asset growth perspective in the back half? Just kind of want to get your thoughts here on all this data that we're getting.
Yes. I'll address the last part of your question and then ask Steve to share his insights on the current marketplace. We generally maintain a macro-neutral stance when constructing our guidance. The reality is that any perspective we hold likely doesn’t significantly affect our guidance. That’s our approach. Generally, clients seem to perceive that the extremely low churn rates are influencing new hiring rates and similar factors. Now, Steve, could you discuss what you're observing in the market this year?
Sure. Thanks, Scott. I had our weekly sales huddle this morning, and I can say there’s a lot of enthusiasm among our sales team. We had a great quarter, and as we enter the second half of the year, they are really motivated, which is exciting. We've experienced several cycles with HealthEquity, including the downturn in 2008. While we don't like a soft job market, it does lead employers to reconsider costs, seeking efficient ways to provide solid benefits while saving on premiums for both employees and themselves. This ultimately drives interest in consumer-directed plans, particularly CDBs with HSAs at the forefront. There’s a lot of enthusiasm as we continue to broaden our distribution partner base, and we're effectively integrating new plans from our acquisitions into the HealthEquity family. If you were to ask anyone on the HealthEquity sales team, they would express that they are just as excited now as they have ever been, despite any challenges we face.
Thank you.
The next question is from David Larsen with BTIG. Please go ahead.
Hi. Congratulations on the great quarter. What are the total dollars invested in the enhanced rates product now? And I'm assuming that that's in the investment bucket, not the cash bucket, is that correct?
It's the opposite; it's in the HSA cash bucket because it acts like cash with a principal guarantee provided by a private insurer instead of relying on the FDIC. Additionally, you can use your card to access it, which isn't possible with investments. We have about $16 billion in HSA cash, which is just over $6 billion. Our goal by the end of this year is to have 40% of our total in HSA at Enhanced Rates.
Our objective is to reach 60% by the end of 2027. As Jon mentioned, you can gauge that progress. I would like to add that, as Jim pointed out, the progress can be somewhat uneven due to the expiration of cash contracts. Our projections indicate that we will see advancements primarily in fiscal '26. Therefore, we anticipate making significant strides this year and next, with a final push in '27. While we do not provide a detailed breakdown every quarter, I can assure you that we are on track to achieve that target. Jim, perhaps you can clarify further.
Okay. So it would be 60% of the total, which is like $30 billion, so that would be around like...
Of the cash sorry. Sorry, no, no, no. Of the cash. HSA cash only is percentage Enhanced Rates, percentage basic rates. And the investments totally separate.
Yes. Okay. And then how much of that $16 billion is short-term in nature?
I encourage you to take a look in the Q; we have a breakdown of that $16.4 billion, detailing how it reprices for the remainder of this fiscal year and the next three fiscal years, along with a significant amount thereafter. Approximately $600 million of that cash is in floating rate investments, which will be excluded from the chart. Thus, you will see $15.8 million as the total HSA cash, as outlined in the maturity schedule with average interest rates for each year. We have about $2 billion repricing for the remainder of this current fiscal year.
$1.9 billion, I think it was.
The next question is from Stephanie Davis with Barclays. Please go ahead.
Hi guys, congrats on the quarter. Thanks for taking my question. Can I be annoying and go back to that guidance question again?
You may. See if you get a better answer.
I was hoping. Look, the implied second half margin implies a five-point step down from 2Q levels. And I get what you said, there's this $5 million delta on yield, but you raised your yield guidance. And when I look at that 5-point step down, it's a $30 million profit delta. Is that investments that are just of that scale that I didn't appreciate? Is there some conservatism baked into the numbers? What is getting the margin so much lower than the first half of the year?
Well, I'd like to begin by saying that we did not change our HSA yield guidance. So we are still consistent on that.
We took off the bottom end.
Yes, still 3.05% versus 3% to 3.05%, which I contact.
I think there are a few aspects to consider. Jon mentioned that the yield will experience a slight decline due to the interest rate curve moving down. This decline is expected to be more pronounced toward the end of the year. We noted that, while this quarter demonstrated excellent service cost performance, as Jon pointed out, we cannot rely on that level of performance indefinitely. Additionally, we have not discussed the costs below gross profit thoroughly. To address a potential question regarding technology and development spending, that expenditure as a percentage of revenue has decreased significantly, more than we would prefer. There is some timing in the projects that we are postponing to the latter half of the year. Moreover, we have several open positions in the tech and development areas that we aim to fill during the second half of the year. Last year, we peaked at around 22 percent of revenue in tech and development spending, which we indicated was likely the maximum percentage we would see. Currently, we are below that mark, and we intend to bring that spending back in line with our expectations.
I was just going to go and harass more about the tech and dev spend.
That's what I was going to talk about.
Well, so you talked about there's a lot of open positions that you want to go fill. So when I think about the cadence of your second half margin because that's hiring, is that going to be a more stable straight line down? Or is there any big pockets to call out where you're trying to do it in a more rapid fashion, just given that the pretty big step still?
Yes, I'm not sure about that. It’s likely fair to say that the fourth quarter will experience some ramp-up activity. To summarize what Jim said, we have projects, some of which are very high-return initiatives, that we want to progress on more quickly than we are currently. This is evident in the fact that T&D spending is slightly below expectations for the first half, as Jim mentioned, and we aim to address that. It doesn't mean we will fully recover all of it, but we will get back on track. The reason for this is the expected return on these investments. I believe that this issue accounts for about one-third of what you're referring to. Additionally, above the gross margin line, we will incur service expenses in Q3 and Q4, which likely adds another third to the situation. Finally, the $5 million reduction we implemented will contribute directly to the bottom line, so that’s probably a good estimate overall.
All right. Thank you guys. You can pay for the call back.
And I don't know what you're talking about.
The next question is from Mark Marcon with Baird. Please go ahead.
Well, that was a tough one to follow up on. I did exactly what we've all done, which is the math.
Then you won’t.
I wonder if the guidance reflects a conservative approach. You mentioned forecasts extending to fiscal '27, such as the 60% on the enhanced yield, given recent changes in yields. Is there anything currently that might alter your expectation of doubling non-GAAP net income by fiscal '27 compared to fiscal '24?
I think there are advantages and disadvantages. The short answer is no, that remains our perspective. The advantages include the performance of the business. In this quarter, there have been many positive indicators, as Jim likes to say, many small improvements that add up. Service performed well, interchange did well, and custodial was not the dominant factor this time, which is a positive change, while enhanced rates are progressing nicely. We experienced a few challenges, but the team managed them effectively, leading to improved sales. Overall, this is the positive side. However, the rate at which we, like everyone else, see rates decrease will affect the business regarding the growth of revenues and margins. This is a good challenge to have, but it is one we consider. Overall, I believe we remain aligned with our multi-year guidance and nothing suggests that our commitment to the business was misplaced. Importantly, we are making investments to ensure long-term growth, whether that involves easily measurable actions like enhancing rates, which will have a lasting positive impact, or new product initiatives that we discussed today, aimed at increasing service revenue while managing costs. These efforts are anticipated to fortify our success long into the future. That's my more detailed response.
Great. I was wondering if Steve could share his thoughts on the discussions around capital held, especially in light of various election scenarios. If there is a blue sweep, how do you think that would affect decision-making regarding potentially switching to Health Savings Accounts or expanding high deductible health care accounts?
Sure, Mark. It's great to hear from you. We've always believed that HSAs can be a bipartisan issue, perhaps more than many people think. Going back many years, during the 1990s when Jon was in Washington, the idea behind medical care security accounts originated from a collaborative bipartisan effort. Fast forward to today, we see a significant bipartisan initiative emerging. Recently, on August 23rd, while many were on vacation, a group of bipartisan congressmen from various states came together to propose the HOPE Act, led by Blake Borne from Utah and Jimmy Panetta from California. We believe this legislation is promising and demonstrates that Democrats and Republicans can unite to create laws that benefit Americans. The HOPE Act is well-positioned, regardless of political affiliation. It's important to note that out of about 100 million working Americans, only a third currently have access to HSAs, leaving roughly 70 million families without. Additionally, there are about 70 million Americans on Medicare who also lack access to HSAs. The HOPE Act aims to address some of these shortcomings. We believe there's a significant opportunity to further develop the concept of personally owned, portable, investable accounts like HSAs and other health care accounts, and the emergence of this bipartisan effort is encouraging.
Great to hear. Thank you so much.
The next question is from George Hill with Deutsche Bank. Please go ahead.
Hi, good afternoon everyone. I have two quick questions. First, can you provide some comments on the launch of the share repurchase program? Does starting the share repurchase change your perspective on capital deployment? Additionally, does it reflect anything about the pricing you're seeing for assets in the market? Secondly, Jon, could you give us an update on what I'll refer to as digital wallet, digital card, and retail partnerships, particularly regarding the ability to integrate them more seamlessly into the platform for transactions? Thank you.
I can take the first question. I want to make it clear that there is no signal regarding pricing in the market. We consider ourselves the logical buyer for HSA portfolios that become available. Jon and I have consistently maintained that we will not increase market assets by raising prices. We take a disciplined approach towards portfolio mergers and acquisitions, as demonstrated by the BenefitWallet transaction, which was beneficial for the business. We will continue to actively seek out similar opportunities. This approach does not reflect a lack of interest or issues with pricing. We will keep striving to add valuable assets to our portfolio, and we have the capacity to do so. I see our share repurchases as part of the overall strategy we are implementing.
Yes. And on your first point on your second point, we're not I'll just say this, we're not really waiting for the digitization of the meeting for the virtualization of the plastic there. We've created a number of partnerships out there that basically are designed to just make it easier for people to do what they need to do, whether that's with firms that are in the space of helping providers collect member out-of-pocket that's owed or things like the folks who buy a lot of HSA or FSA eligible stuff at the end of December and the like. And so we think there's a lot more to do there, but those have been helpful, and they either reduce service cost and they also feed service revenue a little bit. So that's a good thing, and it's something that we'll continue.
Thanks George.
The next question is from Greg Peters with Raymond James. Please go ahead.
Thanks. This is Sid for Greg. I'm curious about the enhanced rate product. Is the 60% allocation primarily coming from new HSA assets, or are existing members also reallocating their assets into that product?
Yes, that's a great question. This year, the increase is mainly from new assets, particularly from the BenefitWallet acquisition, with a significant portion of that cash being invested in enhanced rates. We are adding new members and clients. To achieve our goal of 60%, we will start migrating members who are in maturing basic rate contracts. As these bank contracts mature, we will offer the enhanced rate option as the default. We won't be breaking bank contracts to expedite this process; instead, we will follow the maturity schedule. This might lead to some fluctuations, but we are confident in our target of 60% and believe we are on track to meet it.
Something that you said at the Investor Day that's always worth reminding people is that the biggest break on this thing is navigating the maturity of our basic rates agreement. We don't want to be in the position of even where it might be profitable to do so, of breaking these agreements, particularly at a time when bank deposits are thin. And so we just don't think that's a good look to our regulators or it would be partners in the future. So we've chosen to operate that way by and large. And that's – it is not the presentation or the uptake that's going to keep us from getting there. It is just managing that maturity and liquidity. And then I also wanted to say that I wanted to name one of my kids Sid, and my wife wouldn't let me do it, but I still think it's the coolest, it’s not working. So whatever you do with your like Sid, it's going to be solid.
All right. Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Jon Kessler for any closing remarks.
I wanted to take a moment to thank the team for something we haven't discussed, which is the response to the cyber incident we disclosed during the quarter. I was truly humbled by the constructive way everyone focused on supporting those who needed it. This is how it should be done, and it’s greatly appreciated. On a lighter note, go Dolphins! Sitting in Boston, that might have been a questionable choice, but the Dolphins are the strongest team in September, so it should be good. I'll see you all in a few months. Thank you, everyone.
Thanks, Gary.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.