Q1 2025 Healthequity Inc Earnings Call

Participants

Richard Putnam; Investor Relations; Healthequity Inc

Jon Kessler; President, Chief Executive Officer, Director; Healthequity Inc

James Lucania; Chief Financial Officer, Executive Vice President; Healthequity Inc

Stephen Neeleman; Vice Chairman of the Board, Founder; Healthequity Inc

Glen Santangelo; Analyst; Jefferies LLC

Allen Lutz; Analyst; BofA Global Research (US)

Greg Peters; Analyst; Raymond James Financial, Inc.

George Hill; Analyst; Deutsche Bank

Stan Berenshteyn; Analyst; Wells Fargo Securities, LLC

David Larsen; Analyst; BTIG, LLC

Stephanie Davis; Analyst; Barclays Capital Inc.

Mark Marcon; Analyst; Robert W Baird & Co. Inc.

Jack Wallace; Analyst; Guggenheim Securities LLC

Constantine Davides; Analyst; JMP Securities

Presentation

Operator

Good afternoon, and welcome to the HealthEquity first-quarter 2025 earnings conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Richard Putnam. Please go ahead.

Richard Putnam

Thank you, Gary. Very fine job. Hello, everyone, and welcome to HealthEquity's first 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 as we usually do. First, the press release announcing the financial results for first quarter of fiscal 2025 was issued after the market closed this afternoon. These financial results included the contributions from our wholly owned subsidiary and accounts administer. The press release includes definitions of certain non-GAAP financial measures that we 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. That website is ir.healthequity.com. Second, our comments and responses to your questions today reflect management's view as of today, June 3, 2024 and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates, or other information that might be considered forward-looking.
There are many important factors relating to our business, which could affect the forward-looking statements made today. These forward looking statements are subject to risk and uncertainties that may cause our actual results to differ materially from statements made here today.
We caution 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 the latest annual report on Form 10-K and any 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. With that out of the way. Over to Jon Kessler.

Jon Kessler

Hi everybody, and thank you, for joining us for this healthy start to fiscal 2025. That was Richard Putnam. You may not want to quit your day job. I will discuss Q1 key metrics and progress against our strategy. Jim will touch on Q1 results and detail our raised guidance for fiscal '25. And Steve is here for today. So here we go.
In Q1, the team delivered again double-digit year over year growth across nearly all of HealthEquity's key metrics, including revenue, which was 18%-plus, adjusted EBITDA, which was 36%-plus, that's at 2 times as much and HSA assets, which was 22%-plus -- which were 22%-plus.
HSA members grew 13% from strong HSA sales and BenefitWallet, each of which I will detail in a moment. Strong HSA growth drove total accounts up 7%. HealthEquity ended Q1 with 16 million total accounts, including 9 million HSAs holding $27 billion in HSA assets.
HSA assets overall -- worry about those can translate to I think. HSA assets overall increased $2.1 billion in the quarter, including $0.4 billion of organic growth, [1%] more of our HSA members became investors year over year, helping to drive invested assets up 39%.
And by the way, this quarter, our HSA investors gained access to $0 brokerage trading of individual stocks and yes. Returning to HSA growth, team Purple started the selling year off with 194,000 new HSAs, a record for a first quarter and 60,000 or 45%, more than Q1 last year.
So what happened? First accounts from existing clients and partners grew very nicely, even more so than during the banner macro-driven Q1 two years ago. In particular, we got the boost from the Blues health plan partners that joined HealthEquity from further a little more than two years ago and are now more accustomed to working with us.
Second, accounts from new logos. It was mostly small and midsized employers at this time of year, continuing the positive trend we saw over the course of fiscal '24. beyond the organic HSAs, the team transitioned in two of the three tranches of BenefitWallet in Q1, adding approximately 400,000 HSAs and $1.6 billion of HSA assets.
The final benefit wallet transfer occurred last month that was at the beginning of Q2 and by timely completing what is the largest HSA portfolio transfer ever to our knowledge, HealthEquity's, tiny, but mighty core dev team and thank you guys has raised our visibility to FY25 results has opened up opportunity for CDB cross sales [Engage360 and benefits], which is new name for MaxEnroll deployments into fiscal '26 and laid an anchor to windward on custodial yields for years to come, that's notable.
CDB account decreased 1% compared to Q1 last year, preceding the ending of the national emergency in May and account runoff later last year excluding that factor, we again delivered positive CDB growth year over year. The key metrics support our longer term strategy and the team advance that multiyear strategy, which you've heard about and which we call 3Ds.
The first D is delivering remarkable experience virtualizing our service, digitizing paper and plastic, our cloud-based health accounts platform in order to reduce service expense without sacrificing member delay.
Q1 saw service costs as a percentage of revenue fall 400 basis points year-over-year. We launched more AI driven service tech. We expanded our claims automation for FSA members that you saw at Investor Day. We deploy also to select enterprise clients, HealthEquity's staff, account card for iOS and Android mobile wallets, pretty cool.
Second D is deepening partnerships across the ecosystem to grow sales without sacrificing margins and it continued and in addition to continuing work on the technology backbone of APIs that we also discussed at Investor Day. In the partnership category, we added insurer partners and capacity in the advanced rates program that accommodate a greater than expected adoption as more than 85% of new BenefitWallet members, HSA cash in Enhanced Rates
The third D is driving member outcomes through new data-driven services that give clients and partners insight and engage members to act. During Q1, we gained important client and partner feedback. Thank you to our clients and partners who participated in these sessions live. On our analyzer, transparency, health payment account and other new services in development, all of this added up for adds up to a quarter of investment for the future within the envelope of robust top line margin and cash flow from operations growth in the present which conveniently enough. Jim will now detail. Jim?

James Lucania

Jon. I will briefly highlight our first quarter fiscal year 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 year '24 and '25 for comparison.
First quarter revenue increased 18% year-over-year. Service revenue was $118.2 million, up 6% year-over-year, reflecting a higher number of HSAs and invested HSA assets, partially offset by the runoff of national emergency CDB activity.
Service revenue also benefited from a $2.5 million catch-up accrual of investment record-keeping fees in the quarter that will not be repeated in subsequent. Custodial revenue grew 37% to $121.6 million in the first quarter. The annualized interest rate yield on HSA cash was 2.93% for the quarter. Interchange revenue grew 6% to $47.7 million.
Gross profit as a percent of revenue was 65% in the first quarter this year, up from 61% in the first quarter last year. Net income for the first quarter was $28.8 million, or $0.33 per share on a GAAP EPS basis. Our non-GAAP net income was $70.3 million, or $0.8 per share versus $0.5 per share last year. GAAP results reflect the impact of a difference in the timing of stock compensation expense from performance stock units granted during the quarter compared to those granted in prior years.
Adjusted EBITDA for the quarter was $117.4 million, up 36% compared to Q1 last year. And adjusted EBITDA as a percentage of revenue was 41%, a 540 basis points improvement over the same quarter last year.
Turning to the balance sheet as of the quarter ended April 30, 2024 cash on hand was $251 million as we generated $65 million of cash flow from operations and used $199 million of cash for the first to BenefitWallet closings in the quarter. The company had $926 million of debt outstanding net of issuance costs, including $50 million drawn on our line of credit in connection with the BenefitWallet safe portfolio acquisition.
The third and final BenefitWallet tranche was funded with an additional $175 million draw on the line of credit subsequent to the quarter end. Today's fiscal 2025 guidance reflects the carryforward of our strong sales trajectory, higher expected custodial revenue and operational efficiencies resulting from our technology investments.
We expect revenue in a range between $1.16 billion and $1.18 billion. GAAP net income in a range of $90 million to $105 million or $1.01 to $1.18 per share. We expect non-GAAP net income to be between $261 million and $276 million or $2.93 and $3.10 per share based upon an estimated 89 million shares outstanding for the year.
Finally, we expect adjusted EBITDA to be between $454 million and $474 million. The placement of the benefit wallet, HSA cash complete, we're raising our guidance for an average yield on HSA cash between 3% and 3.05% for fiscal 2025.
As a reminder, we based custodial yield assumptions embedded in guidance on projected HSA cash deployments and rollovers, the schedule of which is contained in today's release and 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 impact 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 draw down of corporate cash to fund the acquisition.
We expect to pay this variable rate debt down with cash from operations over the next several quarters. 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're now we now project a GAAP tax rate for fiscal 2025 at about 25%. As well as we've 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 easy.
With that, we know you have a number of questions, so let's go right to our operator for Q&A.

Question and Answer Session

Operator

(Operator Instructions)
Glen Santangelo, Jefferies.

Glen Santangelo

Thanks for taking my question. Hi Johnny, I had a high level question based on the feedback we getting, all the metrics that you reported were obviously up in that thing on that contributed to the top line and EBITDA beat. But some were pushed back and make the case that may be the better results are more acquisition driven or more rates oriented.
And so I guess the question to you is what's the message to investors that may be concerned about the level of organic growth and maybe concerned that rates are coming down in the near to intermediate term? Just would love to get your high-level take on how you think about the organic growth and the risk that rates come down later this year? Thanks.

Jon Kessler

Well boy, how do they get at it so quickly? who are these people?

Glen Santangelo

I can lower -- but I will.

Jon Kessler

I'll bet. I wonder if they might have a rating interest on. Let's see. Let me first say you can't please everyone. Second say some respectfully, we included about that wallet transaction in our prior guidance, and we can talk about it others -- have others really want to delve into the details of that versus expected and all of that. But we guided at the end of March, we had already done the first round and then I believe.
And the second tranche was on April 9. So probably it would be hard to take the view that we had somehow came to some different result than we were expecting. As to the broader question of rate sensitivity of our performance, the answer is, in my view that the right way to look at this is that the relevant question is, what is the long term custodial bandwidth that we'll receive from a growing sort of corpus of accounts and assets.
And I think what you -- I think the answer is that's more evidence that more evidence comes. And it suggests that that number is at the very least a lot higher than people thought it was a few years ago. And in any case, as Jim has said many times and as the schedules that we provide support irrespective of any within the bounds of current economic forecast of any place within those forecasts, we will over the next.
I don't know what you what would define the near or medium term as well. But the next two years, whatever, three years, maybe something like that in these we have not yet, I think it's fair to say we have not yet reached what is the current, let's call it non-cyclical rate much less the peak rate, which of course, will lag from the market peak.
But I guess I would characterize that broadly as of perhaps investors who were others who have to gain a complete understanding of how this model works now and how we've engineered it to work over the last several years. So that's kind of my response. Jim, would you add anything to that?

James Lucania

No, I wouldn't add anything to that, right. Like we keep updating that repricing table, which is in this Q right. So just as Jon said, right, we're repricing our placements into mid 1% range for the next couple of fiscal years after this one is over. Based on where we've guided to where we think we'll be in basic Enhanced Rate mix. You can impute that the spread we're earning over treasuries. So as Jon said, we're still a ways away from neutral, at least in current. Current reasonable ranges of bounds of what neutral might be.

Glen Santangelo

Well congrats. Thanks for the thoughts, much appreciated.

Jon Kessler

Thank you Glen.

Operator

Allen Lutz, Bank of America.

Allen Lutz

Hey, good afternoon. Thanks for taking the questions. I think if we back out wallet tranches, you grew accounts 8.1% in the quarter that we back out those two tranches. Can you kind of talk about how quickly the markets growing as we kind of turn the calendar to 2024? And then any changes that you're seeing this year versus last? Thanks.

Jon Kessler

I think if you're going to do that calculation. You also have to exclude accounts that were came over with those tranches, but we have deduced or whatever the right term. So the number's a little higher than that. But from if I look at the market as a whole, the seven years last estimate is the market for on the account side is growing around 6% to 8%, something like that, 6%. And so obviously we're doing a little better than that. I'm going to say, and I would invite Steve to comment on this.
One of the things we're seeing in the early part of the sales season here is from a lot of energy around of the accounts that we are the accounts that we get from new small group and the like. And maybe, Steve, you could comfortably from our health plans and maybe Steve you could comment a little bit about what you think is behind that.

Stephen Neeleman

Sure. Hey Allen Lutz. Answer your question. We just constantly look at what the addressable market is and these health plans. It all always impressive to me that if you look at our standard health plan partners, we just have not penetrated their core base very deeply I mean, the bottom line is we have lots of opportunity with them.
I think it's a combination of companies that haven't fully embraced health savings accounts, and we have offered it over the years is kind of an option. Typically that people in the finance department get the tax benefits immediately, but it takes a little longer for people and more broadly speaking to understand that every dollar that goes into an HSA, you get kind of like 35% to 40% more spending power than if you are paying out of pocket out of the regular savings account or something like that. And so we just keep seeing that chug along.
And I think when you couple Medicare inflation with that, I mean, again, when you're taking a bite out of every dollar, you have to spend because inflation and you can get [five] bites back because of our of having great tax benefits, more spending, priority tasks with the messages coming loud and clear. And I think that whether we're at 30% market adoption, you look at different studies or 35% and it just depends on how we use the denominator.
We sell a lot of room to grow and you got to understand most of these health plans that we've only been partnered with probably on average just a few years if you take all of the new wins we received with the further deal and we have a fantastic team that's been working them for the team's amazing income from service on a common for the team, our team that came through that transaction and then just the additional ones we've added over the years I mean, we just have tremendous opportunity.
And I think the key is just doing what we're doing day after day, getting out in front of the brokers and consultants and then the health plan, sales reps and health plan account executives and taking our solution to them. And then they realize that by partner HealthEquity, they can win more business and they can retain more business and we have a great partnership.
We have wonderful just fairly recent plant summer where most of our Blues plan showed up, and we'll have be having meetings with our non-Blues plans of the course of the year. And so tremendous opportunity. But it really is interesting to see how much opportunity we have. Lots of meat left on the bone when it comes to the working with these plans and then working with the employers that need some reasonably priced side coverage with great tax benefits.

Allen Lutz

Great. Thanks, Steve

Jon Kessler

Thanks, Steve

Operator

Greg Peters, Raymond James.

Greg Peters

Good afternoon, Everyone. I'll focus my only question on -- was your adjusted EBITDA margin improvement, which was at least ahead of our estimates I guess what I'm curious about given the updated guidance, is there any sort of seasonality that will flow through margins as we think about the remaining three quarters because first quarter was quite strong.

James Lucania

Yes. And yes, for sure, right. So I think the normal seasonal trends of the interchange line, of course, are obviously strong to start off the year. We obviously had that that true up that I mentioned in the service revenue line, that's not going to occur. But I think what you're seeing is a great, great progress on costs. But a bit of that, especially in that tech and dev line, we'd like to be we'd like to be moving faster on a few things got some open roles. And so you'll see that that line normalize throughout the year. So you are seeing a bit of a high number versus what we call a normalized Q1.

Greg Peters

Got it. Thank you.

Jon Kessler

I think we've commented the only other thing I mentioned is that we did have this accounting item and that's $2.5 billion or so. And I think about revenue at roughly $1 billion, this amount becomes easy from here. So it does play a role. And I mean, what are we guiding to a 40 point -- midpoint is 40 point something of guide and we delivered 41%.
So I think I would expect a version of our broad seasonal pattern that you see where the fourth quarter will be substantially lower. But also keep in mind, we're as we said, one of the benefits of what we're trying to do from a technology perspective is the flat now that bump in expense a little bit and maybe make a little bit of progress on that this year and there's some upside opportunity. Thank you.

James Lucania

Greg got two answers with one question.

Jon Kessler

Yeah, that was two with one question. Well done.

Greg Peters

Got it. Guys. Have a good afternoon.

Jon Kessler

Missed you at Shake Shack last night, Greg.

Greg Peters

Yes.

Jon Kessler

Yes, I visited in your honor.

Operator

George Hill, Deutsche Bank.

George Hill

Yes, good afternoon, guys, and thanks for taking the question. I guess, first is you guys had a goal to get to 80% of dollars from the BenefitWallet acquisition in the Enhanced Rates product. I guess I just wanted to ask about your progress on that and then I have a quick follow-up

Jon Kessler

Sure. Wait, follow-up? Then Greg -- we're have to go back to Greg for follow up.

George Hill

I'm taking Greg's follow-up.

Jon Kessler

And so we did end up around 85% on BenefitWallet relative to 80% and some that is helpful. And it's 5% on -- 60 basis points on -- not a huge number in the grand scheme of things, but it's helpful. And I think it's also look, as we commented, that was enabling that in our view, is two things.
The first is what we're trying to do in terms of articulating the program and so forth. And then the second is the strength of the stable of partners that I really think this is feeling like of what we did in the early days that Steve can well relate to with regard to banks where the trick was don't rely on one, get a nice diverse portfolio that you can then you have a nice open market and so forth.
And I think I got to give credit to the team of people. We don't name so that the recruiters don't get after that. They know that they are fit to do this work both to explain the program and so forth.

George Hill

Thanks, Jon. And my quick follow-up would be is I'm kind of trying to hit on the utilization team that we're all keeping track of here in health care land. And did the BenefitWallet acquisition having meaningful impact on interchange revenue and what I'm trying to get to is organic interchange growth.
And this whole thing is a backwards way of question is, are you guys seeing utilization in your HSA book of business as people increasingly buying stuff we should finish up in the interchange revenue line, which looks like it could have been a little money this quarter through the acquisition?

Jon Kessler

Yes, I think the short answer is I'm not going to get to the end of your question and go back to the beginning. We're not seeing I think there's a sort of hypothesis around GLP-1s or I don't know. Maybe there's some other thing people could be buying. Having a huge impact on particularly HSA spend. And actually, if you look into the thing on a unit basis, HSA spend this quarter was actually a bit lower than we might have expected.
And FSA HRA spend was a bit higher even after factoring in the fact that, that spend is going to be high in this quarter for reasons related to seasonality and runoffs and so forth. So I just don't -- because we get asked this question, Richard, get that some version of it often becoming something of a GLP-1 experts within --

Richard Putnam

I'm not taking.

Jon Kessler

Richard doesn't eat anything. So that's his solution. But, I guess my it all seriousness, I don't see it. And then with regard to just the first part of the question, which was BenefitWallet, I think the answer is a little. I mean, you had a period of time where people didn't have access to their accounts and so forth. And that may explain why HSA underperform just a little bit. But I think if the question is does this quarter either provide any anything that would support or address this sort of thesis? I don't know how to kill this thesis of, but I can't are there any evidence for it.

Operator

Stan Berenshteyn, Wells Fargo Securities.

Stan Berenshteyn

Hi. Thanks for taking my questions. Maybe on digital wallets, if I may. Jon, at the Investor Day, you spend obviously a lot of time in the team talking about the capabilities. I was just wondering if you could give us a sense of whether the digital wallet rollout had an -- type of impact that had on member adoption reception and whether it had any help for you in terms of driving client conversions? Thanks.

Jon Kessler

Client conversions was certainly helpful. It's still very early for digital wallet. And in particular, it is the way this is working stand is we're doing kind of two things at once right? Thing one is that we're consolidating various processor agreements we had into one. So that's for those of our 17 million-odd members who are 16 million members who are cardholders, that's a card conversion. Our card conversions are a little more complicated, actually, three things.
Two, we've added chip, which in normal banking world, no big deal at this point in our world, a little bit more big deal because there is it turns out not standard logic at the merchant level for how to deal with chip, particularly the pharmacy. And so and we talked about that last quarter as something we would have to overcome and we did a good job.
And then lastly, mobile putting all of that, including stacked card on mobile. I think ultimately, the way this will help us is twofold. First is -- I think at the moment, it's primary benefit is innovation that people can talk about in both new client sales and particularly FSA conversions where we have an HSA client and we can stack that FSA on office and we don't report FSA sales figures. But suffice it to say we're doing well so far this year on our pipeline there. And I guess we don't report any pipeline. I think that's one way in which it will help.
The second is ultimately on the expense and member experience side, as we've discussed, a lot of these expenses associated with open enrollment are driven by the need to produce cards, get amount there and so forth. And I want to be clear, we're still going to do all of that this year. We're not forcing anyone into mobile wallet. But eventually we will mobile wallet will be the default. And at that point, busy season will become more like busy week and busy week is a lot easier to handle than busy season.

Stan Berenshteyn

Got it. Very helpful. Maybe just a quick follow-up on. So obviously, you're talking about digital wallets, lots of flexibility usability there that's opening up with on the mobile side. I'm just curious, does this alliance expand maybe into lifestyle spending accounts? And is this something that you've considered?

Jon Kessler

We have a lifestyle product today and it does, okay. I think there's a little bit of -- it's probably safe to say there's more smoke than fire on the lifestyle accounts. But we have that product. It does fine and it's something that is a stackable on the wallet. So for those folks here, this is the way lifestyle works. There are some folks who don't really want to use the card for it for a number of reasons.
But, I guess my short answer is sure that having been said, our focus in the company broadly and certainly in this regard is really around helping people is around empowering consumers of health care. And there's some significant overlap between lifestyle and healthcare, but it's growing that LSA category is not a huge focus for us. It doesn't quite move the needle. And I think our view is there's some stuff there, but it's not enough to fill the Thanksgiving dinner -- Thanksgiving tables.

Richard Putnam

Thanks Stan.

Operator

David Larsen, BTIG.

David Larsen

Hey, congratulations on a great quarter . Can you talk a little bit about your take rate or your yield sort of by investment category? And if you don't want to get too specific. I totally understand that. But like you have cash, you have Enhanced Rates and then you have what I think of as like your legacy sort of investment accounts.
And I sort of thought that your yield was lower on invested assets. So as more money goes into the enhanced reach products, could that potentially pressure your yield or earn on your yield seems fine, but just any color there would be very helpful? Thank you.

James Lucania

Yes, I'll kind of take that in pieces. There's no custodial revenue from the investments anymore like that. That's the thing we shifted. So the custodial line is the blend of the HSA cash yield on Enhanced Rates and basic rates and we've sort of talked about on average, we're doing five year treasury plus, call it [75] on Enhanced Rates and 5-year treasury plus 10 or so on basic rates. And obviously, the key is at the time of placements. So you're going to have a big mix there.
On the investment side, yes, of course, right. We're earning about 30 bps headline rate on invested. I think we blend out to 28 basis points or so. That is in the service revenue line. And I don't -- I tend to not think of it the way that you phrased the question, right? It's not a matter of our members are going to take all of their cash and move it into the investment account, ready to say it's a cash account coupled with a brokerage accounts.
And so as our members continue to save higher balances, they become investors. So it's not one or the other, right? We grow cash balance and then they become investors. And yes, like on the marginal dollar, we only earn considerably less on the next investment. But that's the right thing for the member to do at that point.
Over the long term, I like being leveraged to the US markets right in that investment line and we help the member grow that account and hopefully they become managed account clients as well, and we can actively help them grow that balance. But they're not -- it's not one or the other, right? It's as a member moves along in its maturity, that's how they become investors.

David Larsen

Okay, great. Thank you very much.

Richard Putnam

Thanks, David.

Jon Kessler

Thanks, David.

Operator

Stephanie Davis, Barclays.

Stephanie Davis

Hey guys. Thank you for taking my question. Congrats on the quarter, Jon, I have to ask this whole mobile wallet call out, you know how much I take -- I hate take my HealthEquity card on the subway. Does this mean I'm going to actually just use it?

Jon Kessler

It works now.

Stephanie Davis

It finally works? Apple Wallet? We' re done?

Jon Kessler

Yes.

Stephanie Davis

Okay

Jon Kessler

Yes, I will say on the thank you for that really belongs to New York MTA. It was easy to underestimate the complexity of what they're doing with this product. And we went through this whole thing where there were some nonstandard programming in their system and yada, yada, yada and MTA did a great job of getting their folks, their contractors in gear in a way that I don't think we all normally expect from the New York City subway. But I do appreciate that because I'm taking the subway back to my hotel.

Stephanie Davis

Okay. So let's put this framework in mind. You talked about chip cards in one of your early question answers chip cards aren't cheap tissue. Are you going to find a way to have users opt out of the card overall, you can get rid of that cost from your whole expense algorithm or am I getting ahead of my skis?

Jon Kessler

I mean, the answer is yes. We will ultimately, as I said in the commentary, would be our ultimate aim and I will admit my people who do open enrollment when we talk about this look will be like, Jon, that's harder than you think. You can imagine that we get that look at carefully. But we think that's the right answer, particularly when you actually look at it.
I know people have families are complex, so it might be that where there's a one card is going, remember, there's another that's going to just get over it. But why not our view is that ultimately the idea that the piece of plastic is somehow an advertisement and is sort of passed its due date. And that ultimately that's going to be mobile is going to be your default, which by the way means you're going to get your card earlier.
It's going to be easier to update when it rolls over. We just there's a lot of good that comes from that. That having been said, Stephanie, I think the biggest -- while it is true that those darn ships are not free of we do get to amortize them at least, but of a couple of years anyway.
But I think the bigger point is the costs that we incur and the hassles that members and clients incur in this process that goes on from December from roughly the beginning of December to the beginning of January, where you're translating from an open enrollment decision that a member made to the client closing open enrollment and processing their stuff or their vendor processing their stuff on to data that comes to us to card issuance to card printing to card packaging to the mail at Christmas time, just not --

Stephanie Davis

Get rid of it all.

Jon Kessler

Not a scalable process. So we're trying to get rid of that. And I think that will help that as I said, I think the way you have a sense of that is you look at that bump that we have at the end of the year. And in the fourth quarter and typically in February and first quarter as we wind down. And if we can make that bump kind of go away or be less lumpy, that will be a good thing and that gives you a sense of order of magnitude.

Stephanie Davis

So, that kind of leads into my follow-up. You're talking about these AI opportunities in the prepared remarks. You've got like I feel like a pretty obvious card issuance and statement thing opportunity. Like what is your what is the cost savings roadmap that helps your margin beyond -- Just the leverage that you keep getting from rates?

Jon Kessler

And this is a question I ask Jim a lot. Now he's had like six months. So now I can just throw things at him.

James Lucania

I'll tell you the same thing that I say to Jon, right, is the we're -- like we're not going to parse out the list, right? So, there's a long list --

Stephanie Davis

You tell Jon that?

James Lucania

Yes, of course, some efficiency opportunities. But what is the objective of not just the finance team, the objective of the service delivery teams is to drive down every year, their unit cost to serve account, and that's going to come in a number of places.
And it's math that you guys can do as well, right. You can look at our service costs and divide it by our total accounts and watch that trend line because that's the same trend line that our service leaders are looking at every month in their results and making sure they're continuing to drive progress there.
We're talking about these big things because, yes, like if we can eliminate card printing completely and paper and envelopes and postage and reissue because address has changed the new members forgot to tell us that they move right? Yes, there's the large bucket of costs there. Will it all be removed in one single quarter?
It will not right? So as part of -- this is the long-term objective of our investments on the cost side and the service teams drive to efficiency, right like this, old-school Lean Six Sigma process improvement, continuous improvement work.

Jon Kessler

New tool, same height, same weight.

Stephanie Davis

Exactly, yeah.

Richard Putnam

Thanks, Stephanie.

Stephanie Davis

Hey, thank you, guys.

Operator

Mark Marcon, Baird.

Mark Marcon

Hey, good afternoon. My congratulations for the quarter. With regards to I had similar questions. Just with regards to like trying to disaggregate the benefit that you ended up getting in terms of the gross margin, if we think about it roughly speaking in terms of scale versus reducing unit costs, would it be fair to say that we're still at the really early stages with regards to reducing unit costs? That's one question.
And then the follow up is, can you talk specifically about what happened on the interchange, our gross profit margin because gross margins were terrific, but that one was a little bit faster than the year ago. So just trying to fully understand that?

James Lucania

Yeah, maybe I'll start with that one.

Jon Kessler

That's a really good call out.

James Lucania

Yeah, very good call out. So interchange actually Jon sort of talk about that in a in the commentary. He mentioned that, that we're in the process of moving to both a new and a single card processor on it. So you're seeing a bit of we're operating on multiple card processors now and not just the service cost of multiple processors, but we have some development costs related to the interchange shifts there that hits that line. So that's what you're seeing --

Jon Kessler

That's going to -- will be done. We have said this before, it will be done with this transition in August. So that's that you're going to see a little bit of that. And you're going to see a similar thing in the second quarter and the first bit of the third quarter of the same thought where we're basically paying to processors at work.

James Lucania

Yeah, the other side on the -- I think it's not like a -- there's a start in the end, right? Like the point of continuous improvement on our service cost side is that there's continuous improvement. So like there's not a day where I say well done, guys, you're done, you don't have to tried to be more efficient. So we've the sales and retention side of the house has to deliver their part of that, right?
Of course, growing accounts helps become more efficient and not just driving down the cost, but that does work those work hand-in-hand. So I can't say that we walk through and say this much is related to us continuing to grow versus this much is that as related to our improvements we're trying to do both of those things? Its driving out calls from the call center, more self-service, more automation these work hand-in-hand.

Jon Kessler

I think Mark is driving to this conference tomorrow. So we're going to see that. Are you driving from Wisconsin to New York? Are you on the Ohio Turnpike?

Mark Marcon

No, I'm in New York right now.

Jon Kessler

Okay.

Mark Marcon

I'm looking forward to see you tomorrow.

Jon Kessler

No, that's is a non-denial. Like that is just --

James Lucania

Yeah, you are not saying how you got here (multiple speakers)

Mark Marcon

I flew this morning. Thank you.

Jon Kessler

All right, okay.

Mark Marcon

We do have planes.

Jon Kessler

All right.

Operator

Jack Wallace, Guggenheim.

Jack Wallace

Thanks, team for taking my questions. Hi there. So just to circle back on the BenefitWallet transfer and just relative to your expectations you coming into the quarter? How the account retention fared to the cash AUM are the retained accounts and then the time and cost to transfer? Again, just trying to get a feel for it looked like this was slightly better across most metrics, but you tell me it sound like this was done in a pretty efficient manner?

Jon Kessler

I mean, we had the virtual guiding in March and like we have already done part of it. We're doing part of it a couple of days and we have data from the other side. I'll take that if that. Yes, we that's the kind of forecast. I think of that's probably fair. The one thing that we want you to be mindful of as you get into the rest of the year is that we would expect to see some incremental attrition here, whether that attrition affects assets very much. Don't know, right?
But, it's always the case that we assume in these larger transactions, some post account attrition. It's not -- I don't think it's going to be in the nature of the WagerWorks thing because in the WagerWorks case, it was already like by the time it was already two years after the transaction.
Right here is have more of our conventional portfolio acquisition, which really minimize that stuff. But just something to think about over the remainder of the year, particularly as we get into the December quarter, as I said, as of the date of the Jan 31 quarter.
But look, I guess my short answer is the one item where the transaction really ended up doing better than we expected at least guide really is the one I highlighted in the commentary, which is that we had assumed about 80% of Enhanced Rates penetration. We are 85% and then you can one can calculate the delta on that pretty readily.

Jack Wallace

That's helpful. And then just a double-click into the attrition. Your comment there. So by my math, we had about 49,000 accounts or so that didn't transfer over. Is it fair to just assume that that would have hit the attrition line in the first quarter or is there within that bucket some to come over?

James Lucania

Yeah, good call out there. Yeah, from when we originally announced right that we crossed the benefit here, right? So that benefit while it had some attrition before we acquired it. But yes, we sort of assume --

Jon Kessler

There are also accounts like that --

James Lucania

Zero balance.

Jon Kessler

Zero balance or like that we didn't that were long ago and they don't have any of the health claims data or the like or so there was no point in bringing those over. So there were no, that's real. Those are, but that's not really what we're talking about yet. We're talking about like in the in the quarter right from there, about 40,000 accounts.
That were some were BenefitWallet accounts that came over. So they're in the number in the 400,000 that we close, right? The bulk of those were, but more than 50% mainly were actually cases where there was already a HealthEquity accounts on that side and so we merged them. We don't have to be charged in --

James Lucania

So it looks in our numbers, like you might say, oh, like the closed accounts are higher like no, there were not actually closed accounts. We didn't net acquire the full amount because they already existed on platform. But we brought the assets and had just merged them into the existing HealthEquity account.

Jon Kessler

It's probably also a good place to mention one other thing here. I should probably. It's also in the quarter, we're getting ready for the next wave of the further platform, which is called [Sam], I don't know what Sam is. Maybe it's a Lord of the Rings thing. I don't know, but in any event, Sam is leaving us. So we're moving that business over in cooperation with our health plans.
And so we also did a little cleanup on that platform of accounts that for some of the same reasons, yes, we are this doesn't make sense to bring over at this point. And so that elevated our term of a little a few more which made sense because there was more original accounts.

James Lucania

Yes, around 70,000 further a zero balance accounts we closed.

Jon Kessler

Outside of that. It was a normal quarter.

Jack Wallace

Got it. Thank you. Appreciate it

Jon Kessler

You got more than you bargained for on that one.

Operator

Constantine Davides, JMP.

Constantine Davides

Hi, thanks. Good afternoon, a good start to the year in terms of new HSA accounts. I'm just wondering if you could expand on your comments around a couple of the more recent Blues partners and how they're contributing a bit more of this year to talk just a little more color on that. And then I think you also referenced some small and midsize momentum in terms of new accounts and just wondering if the pipeline composition is a little more skewed to that part of the market this year? Thanks.

Jon Kessler

Yeah, I'll hit the second part and then invite Steve to maybe just talk broadly about our strategy as it relates to our commitment to the Blues and what we've tried to do to make that commitment very clear and that choice. But just on the pipeline question, while we don't -- other than in the text of the pandemic, we don't guide pipelines and we don't tend to like to talk about pipelines other than in the very abstract.
I think it's fair to say that if you look at our pipeline now for sales for the remainder of the year, and you're both and you segment it from both SMB and enterprise are -- these are for new logos to be clear are at or ahead of where we were a year ago. I think they're actually both slightly ahead of where we are in terms of pipeline.
I guess I'd stress that new logos. And in any given year, new logos only make up a give or take a quarter of new accounts. The rest come from growth in existing. But Steve, you want to talk a little bit about our whole way we approach the Blues and how that's relevant here?

Stephen Neeleman

Absolutely. Thanks, Constantine. Yes. So I mean, just in general, you can imagine is most of the Blues plans are non-profits. There is certainly a large for-profit Blue plan that the lot of these folks, they just we've always, I think love the idea of being able to have come back, HealthEquity come in and bring us consumer platform that is what we would refer to as integrated platform.
Meaning that when somebody decides to go down the road either a higher-deductible plan just a qualified or anything that would allow for a CDB suite of products that it needs to be easy to use these and so integrated enrollment and then ultimately integrated claims and then integrated investments and just all of these different solutions we brought to market.
And it needs to be seamless. And by doing that. It allows us to compete against some of the big national plans that historically have been able to invest more money in the solution. And so you can imagine that in order to create not only the pipes and plug along together make this integrated experience, but then also to start training salespeople on why they can take this to market and really compete when it comes to going head to head with some of the more named carriers that are out there. It just takes a little time and it takes some trust.
And one of the things that's happened historically is that when it was an unintegrated experienced an unintegrated, it didn't work so well. So sometimes doesn't count managers were more inclined to say, you know what? I'll just let this thing kind of lie. And if somebody ends up with the HSA qualified plan and they go to their local bank of their local credit union or they end up with one of our competitors, then it's just kind of in their opinion, there's less noise.
But they've also found out is that when seeking to try maybe have a less noise in the sales process because they're not introducing an integrated like HealthEquity, it does put them at a strategic disadvantage. And so that's what we spend our time on. We have people throughout the whole country working these Blues partnerships.
And we've talked about our Blues map. I mean, it basically goes from the East Coast all the way across the West Coast. We have great representation in the different sectors of the country, the Southeast and the Mid-Atlantic, that kind of the Sunbelt states and the Northeast has always been a stronghold for us, and we've made great strides up in the Northwest.
And so it's just I mean, I wish I could say it was like some secret magic code we figured out, but it's not. It's going back to what we've been doing now for over 20 years at HealthEquity, which is providing what we believe is the best seamless integrated experience for people that are going into these types of arrangements and then having the best customer service 24/7, 365.
And so when the nice thing is when we can actually go in and provide that to a Blues plan in this case, talking about Blues Network and their employees, we do it also for non-Blue plans, vertically integrated plans. When they actually start to segue experts myself, then they're willing to go out and sell it to the clients.
And so and I think that it did take a little while because of all we had going on with the WageWorks acquisition that -- we're coming up actually on our fifth year now in another few months, Constantine will be five years into that and then further followed that. So it has taken a little bit of time to dedicate resources to it, but we're getting more and more integrated in a single platform with all of these plants every day.
Jon, is there anything else you would add? I mean, I want to make sure I'm covering with.

Jon Kessler

No, I don't think I could have made that point better.

Constantine Davides

No, that's great color. Thanks for the perspective.

Jon Kessler

Thank you, Constantine.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Jon Kessler for any closing remarks.

Jon Kessler

Yes, I -- there are a lot of people at HealthEquity at our partners, at our clients that are working their butts off right now. And I mean, it is we're entering a time of year where there was a long there used to be a little bit of a lull this time of year. Those days are gone. It's super busy and I think busy in a very productive way. And so I'm very confident that our long-term shareholders and our long-term analysts and our long-term shareholders and analysts to be appreciate that.
But we also very much appreciate your support. It's been a few quarters since I've been able to genuinely say thank you and have the time for that in this call, but I'm glad I'm able to do it here. So I guess that's a great way to close, or at least it's my way to close. Thank you, everyone.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.