Good afternoon, and welcome to HealthEquity's Second Quarter of Fiscal Year 2020 Earnings Conference Call. My name is Richard Putnam, I do Investor Relations for HealthEquity. And joining me today is Jon Kessler, President and CEO; Dr. Steve Neeleman, Vice Chair and Founder of the Company; Darcy Mott, the Company's Executive Vice President and CFO; Tyson Murdoch, Executive Vice President and Deputy CFO and Ted Bloomberg, our Chief Operating Officer.

Before I turn the call over to Jon, I have three important reminders to provide. First, we reported our second quarter earnings after the market closed this afternoon. A copy of that today's press release and the 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, September 8, 2020, and will include forward-looking statements as defined by the SEC, which include 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 our actual results to differ materially from the statements made here today. As a result, 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 our market price of our stock that are detailed in our annual report on Form 10-K and in subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information or future events.

Third, during this call, we will reference non-GAAP financial measures that are defined in our press release. There you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. At the conclusion of our prepared remarks, we will turn the call over to the operator to provide instructions and to host our Q&A.

With that, I'll turn the call over to our CEO, Jon Kessler.

Jon Kessler - President and Chief Executive Officer

Thank you, Richard. Nicely done. Hello everyone, and thanks first off to a really great effort by our teammates. We're able to deliver - thanks to their effort, we're able to deliver to you a bit of sort of purple normalcy today; Q2 financial results exceeding our expectations, faster progress on integration and profit margins and further indications of recovering activity and a strong selling season despite the ongoing pandemic.

I will discuss Q2 performance versus key metrics. Ted will update on WageWorks integration. And Tyson - Tyson, who will be making his premiere on these calls, will detail financial results and Darcy will cover our renewed full-year guidance. Steve is here to join in the Q&A.

So turning to key metrics. Revenue of $176 million is 103% up year-over-year, reflecting organic growth and of course the addition of WageWorks, but tempered by lower custodial yields in our members limited use of commuter benefits and healthcare cards in the midst of the pandemic. We estimate that lower commuter benefits utilization and healthcare card spend reduced revenue by $16 million during the quarter. And absent those impacts, that revenue would have risen 122% year-over-year.

Adjusted EBITDA of $60 million is up 48% year-over-year. 34% adjusted EBITDA margin is a sequential improvement despite the loss of high margin revenue, and that reflects the team's realization of efficiencies, as Ted will discuss, as platform consolidation gets underway in earnest, and our rapid response to changed circumstances. We believe that the margin results really do speak directly to HealthEquity's long-term profit potential.

5.4 million HSAs and 12.5 million total accounts at quarter's end are plus 29% and plus 158% year-over-year. Sequentially, HSAs were up slightly with 108,000 newly opened HSAs, a strong figure as many enrollments occurred during the darkest days of the pandemic. New HSA openings were partially offset by closures in the context of migrating business from legacy WageWorks custodians to HealthEquity's platform, a process which is nearing its completion.

Growth of 0.2 million FSAs, HRAs and COBRA qualifiers is offset by the near-term loss of 0.5 million commuters. Excluding the commuters, CDBs or Consumer-Directed Benefits are up - accounts are up 4% and total accounts are up 2% sequentially over Q1, reflecting both a strong start to the sales year and the benefit of the extension of regulatory grace periods.

Last and certainly not least, HSA assets reached $12.2 billion, up 43% year-over-year. $0.7 billion in sequential organic growth is the largest ever outside of a Q4 enrollment period. And this growth in HSA assets is also net of approximately $125 million lost in the migration process from legacy WageWorks' HSA platforms. While invested asset values provided a tailwind, increased contributions from our employer associated members in response to HealthEquity's engagement and education efforts, combined with lower spend, really drove this remarkable outcome for our members.

The sales pipeline remains robust. Overall win rates thus far are strong. And as we have said, RFPs include total solution and cross-sell opportunities, making them more valuable. As with baseball, it's a unique sales season. Team Purple is getting at-bats. It's improving its batting average and it's slugging percentage, and that's good.

HealthEquity also continues to outpace HSA competitors. According to Devenir's mid-year market report released last week, the HSA market as a whole grew accounts by 12%, I think it was actually 11.6% and assets by 19% for the year ended June 30. As I just mentioned, we are reporting 29% account and 43% asset growth year-over-year as of the end of fiscal Q2. Now that of course includes the WageWorks acquisition, but organically, we were up 13% in accounts and 25% in assets, and that's better than the market. And HealthEquity's total solution, market leadership and purple service culture are the reasons for its continued outperformance.

On that positive note and with my quota of one summer sports metaphors filled, here is Ted with detail on the status of WageWorks integration, its heightened pace and resulting long-term profit potential. Ted?

Ted Bloomberg - Executive Vice President and Chief Operating Officer

Thank you, Jon. We are excited today to report accelerated progress and to raise our goals for merger integration synergies. This is due entirely to our team's remarkable performance despite the pandemic, and we could not be prouder of their efforts and focus during Q2.

Let me begin with an update on key integration metrics. Recurring net synergies achieved as of the end of fiscal Q2 surpassed $50 million. As a reminder, a year ago, we promised we would hit that number within 24 months to 36 months. We have migrated seven duplicate platforms as of the end of Q2 against the goal of 10 migrations by fiscal year end. The completed migrations include 5,000 clients, 700,000 members and $1.2 billion of HSA assets moved with 96% of service fees retained. We have invested a total of $55 million as of the end of Q2 to achieve these synergies and complete integration.

Migrating all of our business to one go-forward operating platform will yield additional synergies - excuse me, additional efficiencies beyond those already achieved. We have said before that we would not report separately on integration efficiencies once that $50 million net synergy target has been reached. However, platform consolidation continues to produce efficiencies. So we are today raising our goal from $50 million to $80 million of recurring net synergies from the WageWorks acquisition. We expect to achieve the additional $30 million within 18 months from today. And to get there, we will invest at the high end of our previously stated $80 million to $100 million one-time integration expense range. We will continue to report regularly on recurring net synergies achieved and one-time expenses incurred, as I have done today, until our raised target is met.

We believe that integration investment will also drive top-line growth for years to come. Jon talked about the emergence of total solution sales in our pipeline and wins through Q2. Beyond sales themselves, integration increases the value HealthEquity can deliver and receive. For example, the migration of more than $1 billion in HSA assets year-to-date from legacy custodians to HealthEquity enables us to deploy our proven member engagement capabilities to help people build HSA balances and give employers visibility to overall engagement process - progress. As integration continues, we will train these engagement resources on FSAs, for example, to drive members to use unspent balances, and as Jon mentioned, to COBRA, where we will help our members understand their available choices for staying covered.

Integration means delivering on our commitment to remarkable Purple service in everything we do. Loyalty scores of WageWorks clients have risen throughout Q1 and Q2 in response to the consolidation of all service calls onshore, completed as promised in June, and the expansion of HealthEquity's Voice of the Client program to these clients. Beyond integration itself, we continue to invest meaningful capital in the future of the HealthEquity platform, including a better client experience and interface, capacity for deeper data-driven engagement, faster innovation through a micro services infrastructure and enhanced security to keep up with emerging threats.

Despite the pandemic's near-term economic impact on our business, we have kept integration on course and are continuing to invest for the future. These decisions have helped keep our team members energized as well. Measures of team member engagement dramatically increased through the first half of the fiscal year. Building Purple culture while 97% of us continue to work from home is an everyday challenge, and we are fortunate to have leaders and teammates who are making it happen.

Speaking of leaders, I have the honor of the first-hand off on one of these calls to Tyson Murdoch, HealthEquity's newly minted Deputy CFO, fellow [Phonetic] father of three who will review the quarter's financial results in detail. Tyson?

Tyson Murdock - Executive Vice President and Deputy Chief Financial Officer

Thank you, Ted. I will review our second quarter GAAP and non-GAAP financial results. A reconciliation of GAAP measures to non-GAAP measures is found in today's press release.

Our fiscal second quarter financial results, as you know, include the operations of WageWorks, which was acquired in Q3 of last year. Second quarter revenue grew overall and organically in each of our three categories. Service revenue grew to $103.8 million, representing 59% of total revenue in the quarter and 295% year-over-year growth. The increase is primarily attributable to 159% growth in average total accounts from acquisitions, including WageWorks and new sales.

As was discussed, last quarter's service revenue, specifically commuter service revenue, was impacted by a large majority of our members working from home as offices shut down in major U.S. cities. As temporary benefit extensions expire and lay-off shift to benefit eligible workers, we are starting to see more COBRA qualifying events, which could partially offset commuter headwinds in the second half of this year.

Custodial revenue grew to $46.9 million in the second quarter, representing 27% of revenue in the quarter and 8% year-over-year growth. The increase is primarily attributable to 31% growth in average HSA cash with yield and 41% growth in average HSA investments with yield year-over-year, partially offset by a lower annualized interest rate yield of 210 basis points on HSA cash with yield. This yield is a blended rate for all HSA cash with yield during the quarter. The HSA assets table of today's press release provides additional details.

As previously mentioned, we have nearly completed migrating HSA assets and expect to complete additional migrations by the end of the fiscal year. Interchange revenue grew to $25.3 million, representing 14% of total revenue in the quarter and 51% year-over-year growth. The increase is primarily attributable to growth in average total accounts and a negotiated more favorable interchange share, partially offset by reduced spend across our platforms in the quarter. While we believe it will take some time before we see members reactivate commuter accounts, we are seeing healthcare markets provide more access for consumers as the economy reopens. We believe many of the reimbursement accounts, FSAs and HRAs will accelerate their spend by the end of the year.

Gross [Phonetic] profit reached $101.8 million compared to $58.4 million in the second quarter of last year. Gross margin was 58% in the quarter versus 57% [Phonetic] for the first quarter this year and 67% for the second quarter of last year. Last year's pre-merger Q2 was a peak gross margin quarter in our history. Beyond the change in revenue mix resulting from the WageWorks acquisition, gross margin was impacted in Q2 by the decline in custodial cash yield, loss of high margin interchange revenue and COVID-19-related expenses.

Operating expenses were $92.8 million or 53% of revenue including amortization of acquired intangible assets and merger integration expenses, which together represented 17% of revenue. Income from operations was $9 million. We had a net loss for the second quarter of $0.1 million, which equates to $0.00 per share on a GAAP EPS basis. Our non-GAAP net income was $30.1 million for the quarter compared to $28.8 million a year ago, a 5% increase. Non-GAAP net income per share was $0.42 per share compared to $0.44 per share last year.

Adjusted EBITDA for the quarter increased 48% to $60 million. And as Jon mentioned, adjusted EBITDA margin was 34%, up from 33% reported for the partially COVID-impacted first quarter. So we increased margin on lower revenue quarter-over-quarter, while operating through the full impact of COVID in the second quarter. For the first six months of fiscal '21, revenue was $366.1 million, up 111% compared to the first six months of last year. GAAP net income was $1.7 million or $0.02 per diluted share. Non-GAAP net income was $60.9 million or $0.83 per diluted share. And adjusted EBITDA was $123 million, up 55% from the prior year, resulting in 34% margin for the first half of this fiscal year.

On the balance sheet, as of July 31, 2020, we had $269 million of cash and cash equivalents, with $1 billion of Term A debt outstanding and no outstanding amounts drawn on our line of credit. The $287 million equity offering that we completed in July allowed us to reduce our Term A debt with a $200 million debt repayment, lowering our debt-to-EBITDA ratio resulting in a lower interest rate share.

I will now pass the mic to Darcy to review our updated guidance. Darcy?

Darcy Mott - Executive Vice President and Chief Financial Officer

Thank you, Tyson. As you know, due to the uncertain impact of the pandemic and its economic fallout at the time, in June, we withdrew guidance for full year fiscal 2021 and provided guidance for the second quarter only of fiscal 2021. Second half results will depend on the pace of reopening and economic recovery. However, based upon our second quarter operating results and the economic progress to-date, we are resuming guidance for the full year fiscal year 2021.

Specific variables that will impact our performance through the remainder of fiscal year 2021 include, but are not limited to, members access to and spending on healthcare as associated distancing restrictions ease and their use of transit, parking and other commuter benefits as workplaces partially or fully reopen. The modest pace of recovery in employment may negatively impact the number of our average total accounts, and conversely perhaps, spur uptake in COBRA and other benefit continuation products among current or new COBRA eligible members.

Across these and other variables, there exist a wide range of possible outcomes for the remainder of fiscal 2021, resulting in a wider guidance range and then we would otherwise provide. Importantly, however, our guidance for fiscal 2021 assumes that current trends across these and other variables continue through the remainder of the year.

Under these assumptions, we expect HealthEquity will generate revenue for fiscal 2021 in a range between $720 million and $730 million. We expect our non-GAAP net income to be between $111 million and $119 million, resulting in non-GAAP diluted net income per share between $1.48 and $1.58 per share. We expect HealthEquity's adjusted EBITDA to be between $226 million and $236 million for fiscal 2021.

Today's guidance includes the effect of having achieved the goal of $50 million in annualized run rate net synergies as of the end of the second quarter. And as Ted discussed, we are increasing our estimate for net synergies to $80 million, expected to be achieved within the next 18 months. Realization of synergies are expected to be additive to both the top-line and bottom line in fiscal year 2021 and beyond. We expect a yield of approximately 2.05% on HSA cash with yield during the full year fiscal 2021.

Our non-GAAP diluted net income per share estimate is based on an estimated diluted weighted average shares outstanding of approximately 75 million shares for the year. The outlook for fiscal 2021 assumes a projected statutory income tax rate of approximately 25%. Our 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 included.

With that, I'll turn the call back over to Jon for some closing remarks.

Jon Kessler - President and Chief Executive Officer

Thank you, Darcy and Ted, Tyson. Nicely done. You can rate Tyson on Yelp for his debut there. Not the HealthEquity Yelp, just Tyson Yelp. I'm sure there is one. And again, I do want to thank not only our teammates, but also our partner and - our partners and clients and hundreds of HR professionals - thousands of HR professionals working in living rooms and kitchens across the country for their resiliency and focus during what was obviously an extremely unusual quarter.

With that, let's open the call up to questions. Operator?

Question & Answers

Questions and Answers:

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Operator

[Operator Instructions] Our first question comes from the line of Anne Samuel from J.P. Morgan. Your line is now open.

Anne E. Samuel - J.P. Morgan - Analyst

Hi, guys. Congrats on a nice quarter.

Jon Kessler - President and Chief Executive Officer

Thank you, Anne.

Anne E. Samuel - J.P. Morgan - Analyst

I had a question around, you spoke to more COBRA qualifying events offsetting commuter in the quarter, I was wondering maybe what that means about the employment backdrop and how you're thinking about that and if that's impacting asset growth at all?

Jon Kessler - President and Chief Executive Officer

Yeah. Well, it's a good question. Thank you. I appreciate it. Just as a way of backdrop, COBRA generates pre-COVID - generated pre-COVID about $85 million a year in annual run rate, 70% of the fees come from employer contracts, 20% from premiums and about 10% from various activity, and I said by premiums, I mean uptake of COBRA and then 10% from other activities, notices and the like.

So when the pandemic started in March and April, the job losses really did not have a material impact on COBRA. We saw short-lived spike in QEs around May 1, but many of those who lost jobs during that period weren't benefit eligible or were in small businesses that are not required to offer COBRA. And then of course there were also furloughs, which is another way to say temporary benefits extensions. And of course our client base SKUs somewhat large with - and also SKUs towards less affected industries, only 7% of our total accounts, I should say in exposed industries.

So what we've seen at the end of July and August is a little different and a little bit of a greater impact as the slowdown really starts to resemble, as others have commented, more typical demand-driven recession. So our QEs in late July and into August are roughly 100% up year-over-year. It sounds like a lot. It's not a lot, relative to the state of unemployment, but it's material. And we've also seen a modest rise year-over-year in the percentage of those QEs that are uptaking qualified benefits.

And then lastly, you have the regulatory flexibility that the administration has offered in terms of COBRA deadlines that kind of muddies the waters a little bit because employees have an undetermined amount of time to select COBRA. So there may be people out there who have not uptake - who have not uptaken, who will ultimately uptake.

So - and then lastly, I think we have - as employers have looked at this and said they wanted a comprehensive solution that provides the administrative excellence and compliance excellence, but also things like our state covered and simply covered, which are public and then behind the wall efforts to help make sure that our COBRA members get and stay covered. We have a very, very full COBRA sales pipeline.

So that's kind of where COBRA is. And we've - since we haven't really been through this before, we've been somewhat conservative in our thinking about this from a sort of forecast perspective, but it is reasonable to believe that we will see some incremental benefit on the COBRA side over the course of the second half year of the year.

As far as what that says about the general employment picture and/or the impact more broadly for our account business, I mean, I think it says that, as I said at the beginning of comment that this recession is starting to look like a regular really not a pretty substantial recession where you have reductions in demand and those reductions in demand, produce efforts at cost cutting on the part of employers, and we're seeing that.

I do think that in terms of our business and other businesses that are based on employment that will provide a little bit more of a headwind perhaps going forward than it did in the second quarter, and that's - some of that conservatism is built into our guidance, but obviously COBRA provide some offset to that. But in the big picture, I think again, what I said this, if you recall in June on this topic, and I'm giving the longer answer than I wanted to, is that if we were getting out of the year with unemployment at a rate that was below 10% that we could start thinking about this as a normal recession, and we're at 8.4 now. So I'm thinking about it as a normal recession and that will have some negatives that will ultimately turn into positives as the economy continues to recover.

Anne E. Samuel - J.P. Morgan - Analyst

That's really helpful. Thank you. And maybe just another one, maybe on a more positive note. Can you maybe provide some early comments around how the selling season has been going with the combination with Wage? And how those conversations are going?

Jon Kessler - President and Chief Executive Officer

Yeah. I guess, generally, we feel like - well, first, let me say, as Ted points out, this is our first pandemic. So it's very hard for us to make realistic comparisons. But when we ignore that and nonetheless make year-over-year comparisons to either the combined pro forma company or our own just experience as individuals in the marketplace, we feel very good about where we are. We have, as we've mentioned elsewhere, we have significant number of our existing clients that are in cross-sell discussions to add products or to add - to get total solution. And the total solution message has played very, very well from our perspective in terms of both as a reason to bring more RFPs to us as well as for those RFPs to be higher value.

So we'll see how it goes. And again, it's a little bit hard to benchmark in light of COVID. I mean, as - there are about - the feeling good is notwithstanding the fact that of all of the opportunities we see, about a third are ultimately, have ultimately been deferred as a result of COVID. But because we're seeing a lot and because we are winning a lot and because we're seeing a higher slugging percentage that is when we win these are valuable, we're feeling pretty optimistic about where we are as we head into sort of the home stretch of the sales season.

Anne E. Samuel - J.P. Morgan - Analyst

That's great. Thanks guys.

Ted Bloomberg - Executive Vice President and Chief Operating Officer

Thanks, Anne.

Jon Kessler - President and Chief Executive Officer

Thank you.

Operator

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

Greg Peters - Raymond James - Analyst

Hey, there.

Jon Kessler - President and Chief Executive Officer

Hey, Greg.

Greg Peters - Raymond James - Analyst

Hey, good afternoon, everyone. Tyson, you did a flawless job reading the script. The only question I have is who wrote it? Yeah, Richard. Can we - can you help reconcile the account number data. The HSAs, if I go sequentially from year end, we're 5.344 to 5.380 at the end of first quarter to 5.384. And then the CDBs were going downwards, 7.437 to 7.338 to 7.090. So on the HSA numbers, I mean, you talked about organic growth, but - and you talked about the success of new accounts, but the actual numbers not increasing that much. And then on CDBs it's a downward trend. So I'm just trying to get some sense directionally of what's going on there underneath the coverage?

Jon Kessler - President and Chief Executive Officer

Yeah. Why don't I start and then I'm going to have Ted help me elaborate a little bit. Let me start with the CDB side. So as you say, and I'm just going to look at it quarter-over-quarter, the main - basically we had was, we had about 200,000 new non-HSA CDBs offset by a loss of commuter accounts. And the way our system works is that commuter accounts are counted if they're not adding value, right, in a given - for a given month, I should say then we have not been including them in the account numbers.

And so obviously you had a lot of people back in who added value at the beginning of March for April, but ceased doing so once it was clear that they were staying home. And so that's what that reflects. And so if I take that number out, as I said in the commentary, CDBs were actually up 4% quarter-over-quarter. We don't control commuter or shutdowns or whatnot, rather people just be safe than report a better number. So that's kind of what's going on there.

With regard to HSAs, we did have more closures this quarter. And the reason primarily for that is that the bulk of our migrations occurred during the quarter and process that's nearing completion.

And maybe I'll have Ted elaborate a little bit on the numbers as well as his thinking on the causes.

Ted Bloomberg - Executive Vice President and Chief Operating Officer

Sure. Thanks, Jon, and thanks, Greg. With respect to the closures that happened in HSAs kind of year-to-date, there is two things happening. One is our standard close rate against the entire book, which is pretty low at around 1.5% and that's very consistent with prior years. And then on top of that, year-to-date, there have probably - there have been approximately 90,000 migration-related closures, and that is really a combination of three factors. One is accounts we didn't migrate, which means that they had zero balances, they hadn't been active for a while, didn't make sense to migrate them on to the platform.

The second is, there is a fair number of duplicates, meaning someone had an HSA on a legacy Wage platform and a legacy HealthEquity platform to increase their convenience and make their life easier, we consolidated them into one account. And then the third is with any migration or integration, you don't expect 100% retention. We had some attrition that was spurred by the migration. And those three factors in Q2 were about 60,000 accounts total and about 90,000 year-to-date. So that kind of gives you a sense of sort of what's contributing to sort of more than our usual attrition rate. But I would say that relative to migrations we've experienced in the past, this is kind of right in line with our expectations.

Greg Peters - Raymond James - Analyst

Got it. Thanks for that answer. The second question would be just around the revenue, the cash yield you're getting off of the HSA cash balances. I think, Tyson, you said, 210 basis points in the second quarter. Can you just give us an updated perspective on the cash yield? Are you still - given we're in easily a recession at this point, does that lessen the demand by banks for your cash deposits? Is there still an expectation that you can get the 75 basis point to 125 basis point spot over the three year jumbo CD rate, etc.?

Tyson Murdock - Executive Vice President and Deputy Chief Financial Officer

Darcy, do you want to start that one and I'll offer any thoughts?

Darcy Mott - Executive Vice President and Chief Financial Officer

Sure. So Greg, when we gave guidance for Q2 based on what we were seeing and what we were getting on yields at that point in time, we gave guidance to 210 and lonely hill [Phonetic] we came in at 210 for the quarter. As we go through, now as we look at for the remainder of the year, there is a little bit more uncertainty with respect to the rates out there, and it's really reliant upon what rates that we are able to place new money coming in in December. And so we've been fairly conservative on our forecast what that would be.

As rates have come down, there is three different things that kind of impact that overall yield. One, as we migrate the remainder of the Wage assets, which have no yield today on to - adding assets on to our cash yield - our HSA cash with yield, those will be at a lower rate. And so - but they're still better than the zero rate they're getting today.

Secondly, the growth in cash balances, which has been fairly robust at least in the quarter and if that continues and that means more placements, which again, would be at lower lower rates. And then we've always said that there is a certain element of our HSA cash with yield that has a variable rate associated with that and those variable rates have even come down slightly in the quarter. So we're being conservative.

With respect to the 75 to 125 premium that we've talked about in the past, we'll have to wait and see how that will play itself out. There is a lot of things going on between now and December replacement cycle for those. So we're trying to be conservative in our forecasting, but also acknowledging that there is some uncertainty in what those rates will ultimately be when the new money is placed.

Greg Peters - Raymond James - Analyst

Got it. Well…

Darcy Mott - Executive Vice President and Chief Financial Officer

Do you want to add anything to that?

Tyson Murdock - Executive Vice President and Deputy Chief Financial Officer

No. I think you covered the whole universe there.

Greg Peters - Raymond James - Analyst

Thank you for your answers, gentlemen.

Darcy Mott - Executive Vice President and Chief Financial Officer

Thanks, Craig.

Jon Kessler - President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Bob Jones from Goldman Sachs. Your line is now open.

Robert P. Jones - Goldman Sachs - Analyst

Hey, thanks for the questions. I guess, maybe - and Jon, you started touching on some of this in one of your previous responses. But maybe just looking at EBITDA, both in the quarter and then in guidance, clearly in the quarter better than expectations. So maybe just there if you could share what kind of contribution maybe the net synergies had to the quarter? Again, you guys have highlighted you're ahead of schedule, well ahead of schedule there.

And then if I just look at the kind of year-to-date EBITDA versus the guidance, it does seem like it's calling for the back half at the midpoint to be down around $15 million versus the front half. Just curious if that's kind of some of the things you've already talked about or if there's other specific drivers you'd call out as you think about the back half versus the front half?

Jon Kessler - President and Chief Executive Officer

Yeah. Why don't I'll hit the second quarter and then Tyson why don't you talk about the back half of the year, if you wouldn't mind as it relates to our guidance. But during the second quarter, I mean, if you sort of look at the results relative to the guidance we offered at the end of Q1, we had about $6 million more revenue and that was good and that was generally fairly high margin revenue. So obviously that played a role in the EBITDA beat, but then we beat EBITDA by more than that, and that really reflects, and therefore, margin and that really reflects the benefits, which are more or less permanent of the - it's not - it's really accelerated realization of synergies and increased realization of synergies. So those are good things.

Now as Tyson will say in a minute, we are certainly cognizant of the fact that we've asked our teammates to do extraordinary things in an extraordinary time. And we've tried to reflect those in our things like bonus accruals and the like, and hopefully we have. But nonetheless, certainly feel like especially given that there are COVID-related expenses and the like, really a good effort. And I mean, I think if you go back, Bob, to the time of the transaction itself, one of the questions was, well, WageWorks doesn't look like that profitable business. And our view was, it can be if you start to run this thing on one platform instead of like 13, and that's what we're doing. And the great part is, a lot of that synergy is still to come.

The difference between 50 and 80 is really the difference between starting and finishing the job of platform consolidation. And so we feel pretty good about the general view that we took at the outset that was when all is said and done, the ancillary side of the HSA business, which is what the CDBs are a profitable business. And the fact that we were able to grow those accounts net of commuter by 4% over a quarter, I mean is I think indicative of the opportunity that ultimately lies when all the dust clears to take market share from others on the CDB side because we just have a more complete offering. And so that's what we're going to try and do.

Tyson, do you want to talk about the second half seasonality?

Tyson Murdock - Executive Vice President and Deputy Chief Financial Officer

Perfect. Hey, Bob. Thanks for the question. So what we're really looking forward to is a strong open enrollment season. And given the business models, the one that we had and the one that we've now acquired and put together with ours and the migrations from the different platforms and centralizing those to one platform, you'll see in these businesses that we leaned in on expenses related to our servicing and being able to make sure we have a really good servicing season, especially with all the new customers and especially with them being on new platforms. Ted and I have spent a lot of time, and his team, thinking about that and investing towards that. And so that's one of the reasons why that's occurring and that you will see that up in the cost of sales side.

The other thing is that we're really continuing to invest. And you'll see if you watch what we're doing, we're actually hiring quite a few people even in light of COVID and working from home, we're able to transition people into the business. And also another item that we're investing and you'll see on that as well is that we're going to have a 100% virtual open enrollment season this year. And so that's a pretty big investment in marketing. But the thing about that is it actually leads to a lot of efficiencies going forward. We wanted to do this for years and make this more virtual and not have to put people out into the field and offices and employers and things like that selling the concept of HSAs. And so we're going to be able to do that virtually. And we got a head start, we started to make this investment little early. And then as we saw the pandemic kind of leading across the course of the second half of the year, we leaned in even more here to make that successful. So we're looking forward to our marketing team having a successful open enrollment season.

And then I'd have to say to you, just trying to put together guidance and putting out numbers so that people could follow what we're doing. There's a lot of uncertainty out there, I know you've heard that probably in all these different calls. But when you think about our business and what people are doing with the spend and other things, we want to make sure that we are really thoughtful about how we think that plays out. And really what we've done is we've taken, as you know, when we gave guidance for Q2, we took how things were kind of panning out in April and kind of rolled that forward to that guidance. And of course, now we've got more information coming up in Q2, we've kind of rolled that run rate into the second half of the year, top-line as well as in some of the expense areas and that's where we were able to land on some guidance that we could provide.

Robert P. Jones - Goldman Sachs - Analyst

No, I appreciate the thoughts from both of you. Thank you.

Tyson Murdock - Executive Vice President and Deputy Chief Financial Officer

Thanks, Bob.

Operator

Thank you. Our next question comes from the line of Donald Hooker from KeyBanc. Your line is now open.

Donald Hooker - KeyBanc Capital Markets - Analyst

Great. I just - maybe you guys referenced this in your previous comment a little bit, but I wanted to see if I could expand on this. We are in this virtual environment, and is there a concern maybe for that people should bear in mind with regards to engaging and enrolling members in HSAs, you referenced that and maybe said it in your last answer. But just, as we look forward, can you give us a little comfort as to what that enrollment, you're adding members getting them to aggressively invest and appropriately use your HSA?

Jon Kessler - President and Chief Executive Officer

I am. I think the answer is, Don, it's really more of an opportunity for us. I mean, one way we could have approached this is to say, okay, good, there is not going to be any travel, let's put that savings in our pocket and claim credit for some magic that we have done. And now that I say it, it's actually not the worst plan. But actually, what we did instead was looked at the work that Adam Hostetter and our marketing team have been doing over the last year or so in terms of - two years really, in terms of training some of the engagement that we do in the service experience on to the open enrollment experience and said, let's - our clients are going to be willing to let us do more virtually here and do things that we wouldn't be able to do and they're not only going to let us do, they're going to see it as a service. And so that's what we've done.

And so we've delivered both standard virtual open enrollment packages that are truly multimedia in nature that include both live as well as pre-recorded elements and mix them together so that you could be looking at something that's pre-recorded and then talk to somebody live that kind of thing as well as doing some more custom stuff for some of our clients around reaching team members, their team members. And we see it not only as a great opportunity just in terms of the results this year, but also as a learning opportunity in an environment that is in this respect much freer than it otherwise would be to really figure out a little bit more about what's effective and what's not in driving people both to enroll as well as sort of setting the table for how they use the accounts themselves.

And so I think primarily we're looking at it in terms of opportunity more so than risk. We've never felt like the face-to-face let us call them open enrollment meetings where everyone's there and it's sort of like a benefits parade are terribly effective, they can be effective to show who you are and your personality and that kind of thing. But for one thing, the stouse who is often making these decisions isn't necessarily present. And for another, there's a lot of information being thrown at people at one moment.

So our hope anyway is that we will have a more effective year. And our expectation is that we will learn a lot about how to use technology to make the open enrollment experience as effective as possible both for us and for our clients and partners and ultimately for the members themselves.

Donald Hooker - KeyBanc Capital Markets - Analyst

Great. Thank you for elaborating on that.

Jon Kessler - President and Chief Executive Officer

Yes sir.

Darcy Mott - Executive Vice President and Chief Financial Officer

Thanks, Don.

Operator

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

George Hill - Deutsche Bank - Analyst

Good afternoon, guys, and thanks for taking the question, and Ted and Tyson, fellow father of three here. Jon, it sounded like some of the synergies that you discussed, revenue synergies as well as cost synergies, so there's going to be more than the I guess the tech component that goes into this. I guess, could you talk a little bit more about the top-line synergy? And then I guess I'd ask how we should think about these $30 million step up in gross versus net. Is there anything that you think needs to be reinvested back in the business where most of it hit the pre-tax line?

Jon Kessler - President and Chief Executive Officer

Yeah. I'll start on this one and then I may ask for some help from the team. First of all, on the top-line, if you look at our original estimate of $50 million in synergies, it included about $27 million on the top-line, and that number had really kind of let's say two components. One was about interchange, in particular, interchange rate, which we have achieved entirely, notwithstanding the fact that we're spending less. The number was - we overachieved on the rate and therefore have achieved the actual number. And obviously as spending picks up, we'll continue to get the benefit of that.

And then the second revenue - and I'm using the term revenue synergy here to mean kind of not like selling more, but the kinds of things that are normally associated with near-term predictable synergies. The second area of synergies that we anticipated was in the migration of assets from legacy WageWorks custodial partner platforms where they were not earning interest or where the interest was sub-optimal relative to what we could generate on the HealthEquity platform. And in that area, it's a little bit similar in the sense that we've been able to do a little better, but the underlying interest rate environment obviously has deteriorated substantially since then. And so I'm not as happy with that one as I would be, and you'd sort of expect that.

So - and of course, some improvements on the cost side more than made up for any shortfall there on the interest side. So we're not quite done yet with the migrations, we still have some room to go, and a lot of the assets that are yet to be migrated were earning nothing for us in the legacy custodial arrangement. So anything is better than nothing. And so that's kind of the way I think about that one.

The second half of your question which was about the remaining incremental synergy and reinvestment in the business. Let me say - let me use the question - let me make it a more general question and comment on it. I think it - where general question might be, look, the business is clearly generating a decent level of profitability, notwithstanding a very difficult revenue environment. So do you feel like there are opportunities to invest in the business in order to spur top-line growth? And a couple of thoughts there. First, and I'm sure you and others have the same challenge since there are so many pieces moving at once with both COVID and an integration happening that does muddy the picture, a little bit and our reaction to that is to be cautious in anything we do just recognizing that the signals are imperfect and the fact that time is kind of on our side. These items will work themselves out and our business is not one where if something was an opportunity this quarter, it will be an opportunity next quarter and the quarter after that.

The second point is that - the short answer is yes. That is to say that while we feel like the business we've built will be a strong organic grower as this all clears away. Nonetheless, it's also in our view, an incredible platform with both option value in terms of things like rates can go up and the like, but also I think opportunity to expand both from a reach perspective as well as from a portfolio - product portfolio perspective. So those are things that we are, as we're getting a little bit of distance from the pandemic and a little bit of distance from the initial component of integration that we're beginning to explore very seriously, and those are areas where we would reinvest in the business.

And then I would just say, lastly, we are again mindful of the fact that there are certain things this year that won't repeat themselves that have produced efficiency and then certain things that are costs that hopefully won't repeat themselves either. Obviously, there is no travel happening. I'm talking to you from my living room floor that would not be typical. But - and you're probably listening from your living room. And - but - so travel costs will return in some form, though perhaps not at the same level as they used to be, as we've identified efficiencies. But it's also true that costs we're incurring right now will not be there either.

So I guess that's sort of the way I think about it. I guess, the big picture answer is that while we will be cautious as long as these signals are a little bit - as long as there are lot of signals we're trying to read, it's also true that we are very definitely looking at this and saying, hey, we're ahead of pace in terms of proving that we've built a profitable business, so let's be ahead of pace and thinking about how those profits will be reinvested beyond repayment of our outstanding debts and that kind of thing.

George Hill - Deutsche Bank - Analyst

Jon, that's great color…

Darcy Mott - Executive Vice President and Chief Financial Officer

Hey Jon, this is Darcy.

Jon Kessler - President and Chief Executive Officer

Hi Darcy.

Darcy Mott - Executive Vice President and Chief Financial Officer

I was just going to add one thing to that for George. George, when you mentioned revenue synergies versus cost synergies, I wanted to just clarify that when we spoke and continue to speak about revenue synergies, those are primarily related to uplift that we get from custodial revenue and some interchange revenue that are more contractual and moving things on the platforms. What it does not include is revenue, real revenue synergy that you get from cross-selling and uplift by selling a bundled product versus a single product before. Those were not previously nor are they now included in that synergy number. So that would be additive on top of what we've already described here.

Jon Kessler - President and Chief Executive Officer

I mean from my perspective, as long as the healthcare consumer continues to need help, there is going to continue to be opportunity for us. And I don't think any of us would look at it and say that the healthcare consumers needs are being fully met.

George Hill - Deutsche Bank - Analyst

Thank you.

Darcy Mott - Executive Vice President and Chief Financial Officer

Thanks, George.

Operator

Thank you. Our next question comes from the line of Sandy Draper from Truist Securities. Your line is now open.

Jon Kessler - President and Chief Executive Officer

Truist Securities.

Sandy Draper - Truist - Analyst

Here we go. Hey guys. I'll join in as another fellow father of three, so the club is getting bigger. And so I guess my first question just on the commuter accounts, so I think it was you said 500,000 that have been deactivated. Those don't have to be - I'm just trying to be clear, they don't have to be resold at some point when the economy reopens. They just get turned back on or do you actually have to resell to the employer?

Jon Kessler - President and Chief Executive Officer

No, they're not result of the employer. They are open for enrollment and they remain open enrollment. We will do member communications around both ways they can use the accounts even when they're stuck at home. And then of course as employers do return to work, we have some messaging and the like that they can use. But no, they're not. A way to think about it is, we're still getting monthly enrollment feeds and the like from these employers as just obviously people are not adding value, and that's understandable.

Sandy Draper - Truist - Analyst

Okay, great. That's helpful. And my second question, you obviously did a very nice job on the margins, as mentioned before, better than expected. You also mentioned there is - you estimated about $60 million revenue impact from COVID. How should we think about what the incremental degradation of margins was from that? Just to think as that business comes back on, how much of that can flow through to EBITDA versus you have to start bringing costs back on as that revenue comes back on?

Jon Kessler - President and Chief Executive Officer

Darcy or Tyson, you want to - Tyson, why don't you hit that one?

Tyson Murdock - Executive Vice President and Deputy Chief Financial Officer

Sure. With regards to the commuter specifically, Sandy, that business, it's a nice high margin business. And so the drop in that revenue, there is some variable cost in there that of course we've gone and found and taken out relative to those that particular servicing of those customers. But in the long run, yeah, when that comes back, that revenue will drop down at a pretty high margin.

The other thing I would mention too is that even though that part of that business is shut down, people aren't using it. When it does come back, we've still been selling it as part of the bundle as well. So we've been putting new clients on there too that will also also help margin. And the same is true for when you think about then coming back as well. That's just the spend relative to the cost of the processing that's done by the issuing bank and the processor. And so that margin again is a very high margin that falls to the bottom line. So those are kind of - those will be some benefits, hopefully that will happen when we get turned around as an economy.

Sandy Draper - Truist - Analyst

Okay, great. That's really helpful. Thanks, Tyson. And then maybe…

Darcy Mott - Executive Vice President and Chief Financial Officer

Sandy, this is Darcy. Just let me add one thing to what Tyson just said.

Sandy Draper - Truist - Analyst

Sure.

Darcy Mott - Executive Vice President and Chief Financial Officer

So relative to the expectations, yeah, we lost that revenue, and we came through with some pretty good margin. The margin related to that lost revenue was offset to a fairly significant degree by the efficiencies that we gain through this whole process. So when Ted and Tyson were talking about the acceleration of just synergies and how much we were able to get done, that was a great offset to help mitigate that $16 million loss of revenue

Sandy Draper - Truist - Analyst

Okay. Yeah, that makes a lot of sense. Thanks for that, Darcy. And I guess maybe my last question probably for Jon. When I think about the consumer, employee, it's pretty - it'd be pretty atypical to make a lot of benefit changes around HSA contributions within the course of the year. So we've seen the numbers hold up pretty well. But do you have any going back, any data from in recessionary periods where people tend to change in the following year, benefit year where it's like enrollments like I'm going to - I've got a pretty good balance, I didn't spend a lot this year, so next year I'm just going to - I'm going to reduce my number or once people said it even in recessionary environments, do they tend to leave the level of contribution to same?

Jon Kessler - President and Chief Executive Officer

Yeah. I mean, there is actually - let me say, the last recession was long enough ago that there wasn't a ton of HSA data out there, but there has been some analytic work on this. And the nature of the question that was asked is do people behave with regard to their HSAs in a similar manner that they behave with regard to other savings vehicles during recessions. And I mean the short answer is, yes. And what that means is that in general what you actually see, and this is a little bit counterintuitive, is that - but it's a very well established pattern, is that people actually increase their percentage of their income that is generating savings.

So on the one hand, obviously, you have some people who don't have income, right? But among those who are associated with employers, obviously, in our world they all have income. So they will increase. And In fact, if you look at the underlying macro data, you can see that since - so if you go back to February before the the pandemic started, the national savings rate was about 8.5%, meaning about 8.5% of disposable income was put in savings. And in July, which I don't think we have the August numbers out yet, at least I haven't seen them, that figure was close to 12%. And again, that just reflects that behavior. We obviously saw that in both - in the fact that contributions came up over the course of second quarter and also that people didn't react to the fact they weren't spending by not that - they didn't stop their contributions because they weren't spending.

So I guess my short answer is that won't continue forever. As the economy improves, I expect that you will not see people keep doing that. But we're going to try and take advantage of it and use it as a teachable moment during this period of time, and hopefully that will benefit us for the long-term. So that's the member side. And I wasn't sure if you're asking about the employer side as well, but…

Sandy Draper - Truist - Analyst

Yeah, no primarily focused on the member side. That was really helpful. Thanks, Jon.

Jon Kessler - President and Chief Executive Officer

That's what we see so far. And I think pretty - I don't think it's the case based on the member activity that we see that it's like, people said it, they're not thinking about it. I mean, everyone's thinking about their dollars and cents. But I think fortunately they are thinking about how do I put a few more away and we're a good place to put them away.

Sandy Draper - Truist - Analyst

Got it. Thanks.

Tyson Murdock - Executive Vice President and Deputy Chief Financial Officer

Thanks, Sandy.

Operator

Thank you. Our next question comes from the line of David Larsen from Verity. Your line is now open.

Jon Kessler - President and Chief Executive Officer

Hey, David.

David Larsen - Verity Research - Analyst

Hi, how are you? Hope you guys are well. Can you talk a little bit about the trend in interchange revenue sequentially? It's my understanding that that's tied to medical volume and medical visits. And when you look at all of these various charts and you listen to like the publicly-traded hospitals, they're saying volumes are back up like 85%, 95% of pre-COVID levels. The pulling in interchange revenue was a little bit more severe than we had been modeling. Just what's the - how do I reconcile that? Are we going to see a pop back up in interchange revenue? Is there like a 90-day lag or something like that? Any thoughts there would be very helpful.

Jon Kessler - President and Chief Executive Officer

Yeah. I have seen some of those data, and I think that really say two things. One is, I think that you're seeing more spend pull through among procedures that were truly delayed and truly had to happen. So hospitalizations for necessary surgeries and that kind of thing and definitely among the Medicare population. I mean, that's not our world or the spend that you get is a little different here.

So let me kind of go through a few of the details, and hopefully this is helpful. If you look at it kind of sequentially, you had a $6.5 million decline in interchange fees. And let's break that out. FSA/HRA was down the largest, about $3 million quarter-over-quarter and that is definite reflection of the fact that this - the sort of core spend on doctors' visits and the like, which is really where most of those dollars come from has been - as well as more, I'm not calling elective, but elective-ish type items has been much slower than the stuff that's really necessary basically due to limited access. It's also true that seasonally the first quarter is a very strong quarter because there are folks who elect money into their FSA solely for a particular procedure, and if they got that procedure done in January, February or March, it's like the whole year, they're done.

HSA was down about two point - and I should say it before I leave FSA, we're still trailing - even into August, we're still trailing on a month - on a year-over-year basis where we were a year ago, although the trends have improved pretty steadily since the lows in April. HSA for the quarter was down about 2.5 million and interchange HSA is, it was a little less affected from the start and has been quicker to return to pretty much near, I'm gonna call it normal as of the end of the quarter. So we're not quite back to where we would have thought we would be, but pretty close and certainly we're back positive on a year-over-year basis. And then commuter has not been good. So commuter is about $1 million of interchange per month - sorry, generally and obviously was negatively impacted during the quarter, more so, obviously, as the quarter ended with some folks sort of spending down their balances and the like, but we don't really see a change in sight there at this point until people really begin to come back to work in cities, the commuter interchange is going to be modest. So that's sort of the detail of it.

But the big picture I think relative to what you're seeing from, let's say, the hospitals or the like is that their high-ticket items are things that are truly necessary for lack of a better - I'm trying not to use the word voluntary that's not fair, but or involuntary, but they are truly necessary and they have some urgency to it. That's not where this spend comes from for the most part and so that's why we're not seeing it quite to the same degree.

David Larsen - Verity Research - Analyst

Okay, that's very helpful. And then just one more quick one. Within service revenue, it was my understanding that the commuter sort of revenue impact was about $7 million a month within the service line item. And if we assume, hey, there was like a $7 million headwind in fiscal 1Q, which might be, you say all of April then you would say okay all of May, June and July, there was a commuter ding of $21 million, assuming at $7 million a month. The decline in service revenue was not as severe as I would have expected, it was maybe about $8 million sequentially. Just any thoughts there would be very helpful.

Jon Kessler - President and Chief Executive Officer

Yeah. I'll talk and then ask Tyson to elaborate whether I've screwed up or not, but commuter generates on the service fee side about $5 million a month in service fees and then another $1 million a month in interchange, as I just discussed. So a little bit less than the premise of your question. And of that more than 50% has gone but there is some that does remain and that remains either because there is attractivity [Phonetic], people are ordering passes, etc, etc, but also in some cases just the nature of the billing arrangement, depending on which of the legacy platforms it was on is such that there is some continuation now. So that's why it isn't quite as bad as you're suggesting. Tyson, you want to elaborate on that at all?

Tyson Murdock - Executive Vice President and Deputy Chief Financial Officer

I will just say a few things. I think you pretty much nailed it. When we think about that and try to forecast what that looks like and going back in time to say February and seeing what commuter look like at that point, I think not give you the numbers on a month-by-month basis, but that's largely falling-off to the tune of plus 50% plus and with that kind of that underlying platform that helps us as we go forward. So we've looked at that, we have looked at the trend in July and we've essentially taken that trend out through the end of the year.

Jon Kessler - President and Chief Executive Officer

But I mean you're right to say that of the $16 million we think we didn't get in the quarter, the lion's share of that is commuter.

David Larsen - Verity Research - Analyst

Okay, thanks so much.

Jon Kessler - President and Chief Executive Officer

Thanks, Dave.

Operator

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

Jon Kessler - President and Chief Executive Officer

Hi Steph.

Stephanie Davis Demko - SVB Leerink - Analyst

Hey guys, congrats on the quarter and a double congrats to Tyson for taking the feet officially.

Tyson Murdock - Executive Vice President and Deputy Chief Financial Officer

Thank you.

Stephanie Davis Demko - SVB Leerink - Analyst

For Steve, he has been pretty quiet this call. So I'm going to have the first part of my question just be towards him. So the election coming up, how should we think about the impact, if any, of a change in administration and how would you say that you're lobbying, Steve.

Stephen D. Neeleman - Founder and Vice Chair

Thanks, Stephanie. Thanks for bringing them into the foray here.

Stephanie Davis Demko - SVB Leerink - Analyst

Never had you to so quiet.

Stephen D. Neeleman - Founder and Vice Chair

Well, Jon is the Maestro here, so I am just waiting for him to [Indecipherable], but you did it in this place, so thank you. Look, I mean I think the good news is that this even predates the acquisition, but certainly the acquisition let us down this road that we really do have a bipartisan effort. I mean if you think about the span of products we offer, and in many of these predate HSAs for example. And so we've had a very aggressive lobbying effort to protect place sponsored - employer-sponsored benefits and pre-tax benefits from employees for a very long time and honestly I think that is independent of how the election goes, we're going to continue that and we might have some nuanced approaches, depending on what would happen in the election, but the reality is, people just need help. They need to avoid taxes, they need to save for retirement, you can say for their current healthcare spending and our suite of products allows us to do that. So we've got a great team, both in-house and then outsource team that we used to kind of look after each of these needs.

And so I guess the short answer Stephanie, it's more of the same. I mean we need even right now, thankfully Congress is back to work this week. So they should we thinking right now about a COBRA subsidy because if unemployment is over 8%, there's a lot of folks out there that need help of COBRA subsidies, so we are going to [Indecipherable] that. We have been pleased with some of the things that have come out of the CARES Act, but we think there's more meat on the bone and so we're going to go after this and I really don't think - I almost think it's administration independent, I mean, you may have different nuances like I said that we're going to keep going after it.

Stephanie Davis Demko - SVB Leerink - Analyst

Okay, understood. That makes sense. Now shifting gears a little bit maybe to Tyson. When I look at the new revenue growth guidance, it looks like it could reflect up to a marginal decline in organic revenue growth despite what's been a relatively healthy year-to-date performance, all things considered. So how much of this is conservatism of the outlook as you guys do independent the continuing as opposed to maybe some other puts and takes.

Tyson Murdock - Executive Vice President and Deputy Chief Financial Officer

As I was outlining before, Stephanie, the way we looked at this for Q2 guidance when we pulled annual guidance into Q2, we looked at how April shook out kind of put that forward. The same thing is true with regards to this quarter on each one of the trends in the line items. We looked at what those look like and really the story there is about spending energy and talking a lot about on this call, which is the right place for people I think to be focused in that we want to, we want to be able to see that come back, but we're definitely not going to build in a massive come back in the second half of the year until we see it. It's just - there is with the regulatory changes on extending FSAs out to a longer period of time and some of those other things, which have a lot of people to potentially hold onto that money a little longer than they were before. We've got to see some things break free in order to build that in.

And so I would say that's kind of the one area that you might notice that in as you look out and then with regards to custodial, that's pretty consistent other than the migrations that we're completing, the money we're putting to work and I think we've been pretty transparent about that in the releases and then of course the service fee rate in revenue comments that we just answered as well.

And Jon, you want to add to that?

Jon Kessler - President and Chief Executive Officer

No.

Tyson Murdock - Executive Vice President and Deputy Chief Financial Officer

All right.

Stephanie Davis Demko - SVB Leerink - Analyst

Is there same assumption as well for the synergy target timelines given us a lot slower than what you guys have accomplished so far, just some conservatism, a lot of moving things.

Jon Kessler - President and Chief Executive Officer

Yeah. I can maybe speak to that one and then Ted, you can elaborate on it. The work we have to do is a little harder, right. Obviously, by definition when you find stuff later on, it tends to be a little more work. So the way to think about it is that the timing really boils down to the timing in which we will be completing the process of getting to one platform that the entire business is operating on, no more legacy, this, that, whatever and that process will extend out through not this January, but next January by virtue of the fact that in some cases it does make sense to convert people at year-end. We're not going to give out the details of the timing, because as we found out some of our competitors choose to use that information to to market against us, but that's okay. But if that's really what that timing reflects is, the amount of time it will take to get that all done, will we try and front-load, of course we'll try to front-load.

Stephanie Davis Demko - SVB Leerink - Analyst

All right, Sounds good. Thank you guys.

Jon Kessler - President and Chief Executive Officer

So Ted, I kind of went longer than I thought it was going to say, maybe there is - Ted, anything to add to that. He is on mute.

Ted Bloomberg - Executive Vice President and Chief Operating Officer

Sorry guys, thanks. I will just say, you have a chance. The order of the work and that mix to the little dose of trying to find timing that accommodate as many of our clients as possible with a dash of typical public conservatism gets you to that timeline.

Stephanie Davis Demko - SVB Leerink - Analyst

Thank you, guys.

Jon Kessler - President and Chief Executive Officer

I like Stephanie didn't trust me to like throw the question - she likes to screw that - I'm going to take control the questions throughout. Well done.

Operator

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

Mark Marcon - Robert W. Baird - Analyst

Hey, good afternoon everybody. Tyson, great job. Hey, just with regards to platform migrations, how many have been accomplished thus far out of the wage set.

Ted Bloomberg - Executive Vice President and Chief Operating Officer

Yeah, sure. It's 7 through the end of Q2, which I know if you read the press release, it says 5, but the correct answer is 7 and we're on track to deliver at least 10 by year-end.

Mark Marcon - Robert W. Baird - Analyst

Okay, great. And in terms of thinking about, so 10 by year-end, is the incremental $30 million in savings all going to be from those platform migrations or is there anything else that's factored in.

Jon Kessler - President and Chief Executive Officer

That's the store side. Ted, you want to comment beyond that.

Ted Bloomberg - Executive Vice President and Chief Operating Officer

Yeah, sure. I can. Thanks, Jon. It is absolutely the biggest source, not just of those 10, but of the ones that follow. The significant proportion of that remaining $30 million is from those platform consolidation there are few other payments things that are similar in nature, but not in scope to the Visa deal that we're working through as well, which we think will be a contributor, but the big ones are the efficiencies we realized from the platform.

Mark Marcon - Robert W. Baird - Analyst

Great. And then can you talk a little bit about this fall selling season, just in terms of what you think the attitude of employers is going to be particularly as it relates to being more aggressive in terms of adopting consumer directed healthcare benefits as potentially a budget savings tool and how they're going to approach it this year relative to years past where the unemployment rate was so low that they were afraid of tipping the [Indecipherable].

Jon Kessler - President and Chief Executive Officer

Steve, why don't you start us off on this one.

Stephen D. Neeleman - Founder and Vice Chair

Sure, Mark. Yeah. So I mean this is a little bit like 2018. I mean we saw 10 where you had, I mean, life is a lot easier for some of that leads human resources [Indecipherable] the people team if they can offer choice right and say, look, we'll give you all these choices and I think that they would love to do that, but the problem of choices is oftentimes you have this weird shift in risk pools where maybe the healthy people go for the HSAs and then healthy people stick in the traditional plan and your plans hemorrhaging cash. And so there was a little bit of talk when unemployment was around 2%, they are acquirer maybe we'll keep going down this road of choice. We haven't heard that much at all in the last six months. We're hearing more how do we continue to get the best benefit for the best price for our teammates and held equity employees.

And so the bottom line is, is that our sense is, is that when employers take a step back and say, how can we save money on taxes, that's what the HSA does both on the employer and the employee side, of course, and then how can we help our folks for the short term and avoid taxes for the short-term spend on health care and say for the long term, there's just no better solution and sure when the economy is racing higher and you're really in a competitive job market and maybe and as educated target that you want to hire the same. I really want my fully loaded low deductible plan, maybe you're more inclined offer choice but that's gone for a little while. And so our sense is it more than ever employers are asking us to, I was just, no, it really remarkable call I was on with very large hospital system have never offered HSAs ever before and now not only are they doing it, they're doing like 50 webinars don't have their employees in particular their doctors and their higher comp people realize that this is the richest benefit they can really offer if they do an appropriate plan design with an appropriate contribution the account, there is no richer benefit you can offer an HSA plant.

And so they're getting it and the reason why it's still weaker savings is because of the tax, which is pretty remarkable. So I don't know, I remain bullish on it. I think every every decade we need little kick in the gut to make us realize this really is a truly remarkable benefit.

Mark Marcon - Robert W. Baird - Analyst

That's great to hear.

Jon Kessler - President and Chief Executive Officer

Yeah, I mean I just add to it, obviously the focus question and answers on the HSAs. On the CV side, I think we have a lot to offer in this kind of economy. For employers, first of all, let's start with the one piece which is COBRA. As I said, like in the - I think Greg Peters referred to a script, I didn't even though you could script these things. That's a great idea. Sorry, those will drive growth. But I don't know if you're talking about really scripting but employers compliance is extremely important. It's also important to serve people well out the door, those people are going to talk about you and how you serve them and they are potentially your customers or partners in their new roles. So really trying to take care of people, well on the way out the door for the same prices not, it feels like a really good thing and that's what we're offering there and that's why we have a robust pipeline there.

I think if you look at the other CDBs, also though, I mean these are about saving money on stuff that you are going to buy and especially with OTC available now for the Flexible Spending Accounts and the like - there's a lot to offer there and I think as a penny saving device in a time when people are really counting their pennies that's something we can take more advantage of both in the current cycle and then over-time. So look, it's a weird cycle markets. It's very - again, we have no benchmarks for this. As Ted says, this is our first pandemic. And so I'd say like that line so much I used it twice, but if I look at where we were at the start of this thing and where I see my fellow folks who sell into B2B type environments and then ultimately consumers, we have to feel really good about the demand we have and about how that will play out both this year, but I think also into next year and the following years when we're not talking about our pandemic.

Mark Marcon - Robert W. Baird - Analyst

Terrific. Can I squeeze one last one. And just from a competitive perspective.

Jon Kessler - President and Chief Executive Officer

Since Peters only did A and B, I mean there is a ton of time.

Mark Marcon - Robert W. Baird - Analyst

Right. Can you just talk a little bit about the competition just in terms of how you expect them to respond to two dynamics; one, you having a greater level of capabilities and therefore having more to offer to potential clients and b, the interest rates being lower, and therefore, they may not have as much flexibility in terms of account fees.

Jon Kessler - President and Chief Executive Officer

Yeah, I mean - look, let's take a step even beyond those questions. We are in a consolidating market and whatever the specific facts of an industry are it's often the case that the downward economic pressure accelerates consolidation. And if you look at the [Indecipherable] figures that came out in the last few weeks, I don't think they publicly published their lead tables, but I can say here that we are number one in accounts and we are based on the numbers we reported today we are damn close to being number one in assets and so we think that there is an opportunity there. That doesn't mean the competitors won't play their own games, but and we'll talk of that effect, but absolutely it's the case that if the folks who have been kind of hurt the most and are folks who are the most-reliant on net interest margin for their source of income and or profit.

So the typical HSA provider more than 50% of revenue, not profit, revenue comes from net interest margin, which by its definition net interest margin is 100% profit, so the absence of net interest margin can kind of be a problem. And we are, I guess some in the vein of sort of like the Madagascar penguins and other plan perfectly executed where we are in a position where we altered our pricing strategy to put less emphasis on balances and more emphasis on employers working with us and partnering with us for the total solution. That's the way to get competitive fees and that turns out to have been a well-timed shift and something that's kind of working for us in the current situation. Others don't have that flexibility, either because they don't have those other products or if they do have them, they're essentially just outsource platforms and there's now whatever we're all, all the economics are really going to third party. And so it's hard to - you're not really getting any margin benefit by selling them. So that's kind of the underlying dynamic. As I said, I think we have some competitors that are very solid that will have their own game plants. Fidelity, it's pretty clear. Their game plan is to focus on high balance accounts and that's what I would do if I were them too. And they're going to be effective at that. That's great. That gives us a lot of new partners to work with as you know. Optum and United, they'll do their thing and we'll have some effectiveness of that and then you know where some of the other competitors are. But I really believe fundamentally that this is a market that we will look at over the course of the next five, six, seven years and that health equity will have continued to grow market share steadily in a market that will continue to grow with HSAs themselves maturing in terms of balanced growth and with us continuing on the CDB side on the ancillary side to take market share from weaker competitors who just cannot offer from a capital intensity perspective, the same level of service benefit that we can provide to both members and the client. So that's kind of my rough version of that one.

Mark Marcon - Robert W. Baird - Analyst

Appreciate it.

Jon Kessler - President and Chief Executive Officer

Thank you.

Operator

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

Allen Lutz - Bank of America Merrill Lynch - Analyst

Thanks for taking the questions.

Jon Kessler - President and Chief Executive Officer

Hi, Lutz.

Allen Lutz - Bank of America Merrill Lynch - Analyst

How are you?

Jon Kessler - President and Chief Executive Officer

Excellent. Well, excellent is probably too strong. I am stuck in my living room and the air is orange outside, so.

Allen Lutz - Bank of America Merrill Lynch - Analyst

So before wage, you guys talked for several years that service fees will decline by about 5% to 10% per year. So now we're about a year into the wage acquisition. How should we think about that line item moving forward?

Jon Kessler - President and Chief Executive Officer

Darcy, you want hit this one?

Darcy Mott - Executive Vice President and Chief Financial Officer

Sure. So when we talked about the 5% to 10% decrease, that was primarily on an 8 per HSA basis. And so, it kind of took into account the issue that we had with respect HSAs that we were giving volume discounts for more HSAs and that played itself out for quite some time and it actually still continues to be true that on a just a pure HSA pricing for service revenue, but that's probably still the range that we would expect. As we've made the Wage acquisition, we've kind of transitioned to looking at this service revenue on a total accounts or total average accounts basis and so we're monitoring that as we go. We think over-time that they actually will flatten out or even actually go up. It's hard to tell exactly, because our pricing model now will offer bundled services and so the bundle is kind of like, well, if you buy HSAs on a standalone basis, you get this price, but if you bundle it all together with some FSAs and some co-brand, commuter, and we're going to give them a blended price. So we're looking at really how does this service revenue relate to the total offering that we are offering and we don't have any specific guidance as to a percentage increase or decrease, but we do believe that over-time because we offer all of these services that competitively, we have a lot more flexibility with respect to our offering into win competitively as Jon said, so you get more at-bats and and to hit more extra-base hits. So that's kind of how we look at it for a total accounts basis and how we'll measure it going forward.

Allen Lutz - Bank of America Merrill Lynch - Analyst

Thanks Darcy. And then for my follow up there was in Article out that [Indecipherable] put out last week talking about custodial rates for vendors what they were paying out to holders of HSA is basically that they declined from mid 25 or mid 20 basis points to below 10 basis points. Is that something that you've seen in your book of business and can you kind of elaborate on that.

Jon Kessler - President and Chief Executive Officer

We reported in the quarter that we paid out I think we report this not reporting it now that we paid out about I must say 19 basis points in the quarter, which was down a little bit in our case and down a little bit from a low 20s, something like that. And in our case - we approached this I think in a somewhat unusual or unique way in that the rates we pay our members are really a function of, they're actually outlined in our depository agreements, I'm sorry, our custodial agreements and they are really a function of what our largest competitors are doing and we've committed to follow them and whatever direction they take. We think that's useful in that it from our perspective, it means that we're committing to our clients that we will always be in-market in this regard and that's the way we've approached it and that has resulted in a bit of a decline and that certainly is helpful from a margin perspective, but it's not a huge decline and importantly we offer our members other options.

So for example, we are, it's not the only ones, really among relatively few HSA providers that offers a non-FDIC option, which we call Yield Plus, which is a way for members to get more yield. It does not come with FDIC coverage because of the way that it works. But nonetheless, it's a very, a very conservatively invested and and safe product and then of course notwithstanding the fact that cash is historically a higher margin on a per dollar basis, we encourage our members to invest because investing is ultimately once they reach a certain balance is better for them and over the long-term, we will generate high returns. So that's kind of the way we approach it. So there is some - we've seen some of that - certainly other competitors have been more aggressive about it as you might expect is they are hunting to recover lost margin but, but nonetheless, we think that over-time we will continue to follow the market in this regard.

Tyson Murdock - Executive Vice President and Deputy Chief Financial Officer

Yeah. And I would just add to that Allen that in those surveys. I mean, we look at this every single month because our conservative agreement requires us to look at what the market is doing, but most everybody there might be a few exceptions to this, but most everybody pays interest on a tiered pricing and schedule. So for the lowest balance accounts kind of like free checking if you have less than a couple of thousand dollars in the account or $1000, you get a very low bips on that balance, but as you grow your, your cash balances they may scale up and which we do and others do. And so when we talk about what we're paying that's a blended rate for all of our portfolio, not the lowest rate that we pay, but their entry level for an HSA which sometimes that survey information dictates.

Allen Lutz - Bank of America Merrill Lynch - Analyst

Thank you, both.

Jon Kessler - President and Chief Executive Officer

Thanks Allen.

Operator

Thank you. Our next question comes from the line of Vikram Kesavabhotla from Guggenheim Securities. Your line is now open.

Vikram Kesavabhotla - Guggenheim Securities, LLC - Analyst

Yeah, thank you for taking the question. I think in the past you've talked about the mix of HSA sales opportunities that also request consumer directed benefit. So I'm just curious if you can give us an update on how that mix has trended throughout this year and in particular, how your win rates have trended among those sales opportunities in particular.

Jon Kessler - President and Chief Executive Officer

Yeah. Those are our juiciest opportunities and we feel that I can just tell you from a win rate perspective or from a just feel of the sales force perspective, we feel great about those opportunities. I don't think the numbers have changed substantially from what we reported earlier in the year in terms of percentages and all that kind of stuff, so I'm not going to add to that, but the strategic - putting aside all the synergy synergy is sort of how you pay for it and that's great, but strategic thesis is why you did it and why we did it was the view that we could, that the market was moving and that we could take advantage of the markets move to thinking about HSA and the ancillary benefits as one product and that we can deliver more valuable to more value to customers by thinking about it that way and by being a leader across all of these sort of both HSA as well as the various sub categories of ancillaries.

And as I think Tyson commented even with commuter not being terribly active right now, that's still true even in commuter where people see that convenience. So we feel real good about the total solution sale and where we are positioned when there is a total solution opportunity both in terms of new cases and also in terms of the cross-sell to our existing customers and it's obviously a great time to be building on existing relationships, given COVID. So the numbers themselves are substantially the same as they were earlier in the year just on a larger base and the feel across all of these kinds of sales where we have the opportunity to talk about a broader solution is really, really good.

Vikram Kesavabhotla - Guggenheim Securities, LLC - Analyst

Okay, great. And then maybe just a follow-up. I appreciate the commentary you gave before on consolidation activity in the market. I'm curious if you can just give us some color on the time-frame over which you think that activity will take place and in particular, if you have a sense or how meaningful those opportunities might be in the near-term versus maybe just being an ongoing theme that will play out over-time. Any color there would be helpful. Thank you.

Jon Kessler - President and Chief Executive Officer

Yeah, sure. I mean, I think in answering the question I was sort of talking about over a multi-year period. I think I said that in the answer. So I think the second part of your question is really more kind of what is the near-term consolidated M&A market look like. And my view is that for the most part - first of all, that market active, it's active I think primarily with those who are the most challenged in the context of the current rate environment, and so we're looking at a number of specific opportunities and I was not going to comment on them individually but they're not of modest size. We don't really see a lot of movement at the top of the lead tables as it were. But when you get to the middle of the league tables, I think that's where you're going to see more movement and we think we're a great acquirer for a lot of different reasons not the least of which is that we take care customers and for many of these folks, these are their customers in other areas and we're not going to sell them competing products and all that. This is really what we do. So we feel like when those transactions are out there, they have very good return. And the nice thing about turning in a high level of profitability in the quarter we've just completed is it gives us a little more ammo for that kind of stuff as well as for investing in the business organically, when the time is right

Vikram Kesavabhotla - Guggenheim Securities, LLC - Analyst

Great. Thank you.

Jon Kessler - President and Chief Executive Officer

Yes, sir.

Operator

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to management for closing remarks.

Jon Kessler - President and Chief Executive Officer

Nice job. Thank you. Well, we've already thank everyone enough, and thank you guys for staying with us. I'm imagining patio is there and Mark is probably is out somewhere and now it sounds pretty good. So but we appreciate you guys sticking with us and staying focused despite all that's going on in the world and also really appreciate the same from our investors of whom we look forward to speaking with many over the course of the next few days at various conferences. So with that, again thank you and we'll talk again in a couple of months.

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HEALTHEQUITY INC

Q2 2020

Earnings Transcript

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