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HealthEquity Inc (HQY) Q1 2020 Earnings Call Transcript

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HealthEquity Inc  (NASDAQ: HQY)
Q1 2020 Earnings Call
Jun. 04, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to HealthEquity's First Quarter of Fiscal 2020 Earnings Call. Please note that this event is being recorded.

Go ahead Mr. Putnam.

Richard Putnam -- Investor Relations

Thank you, Jimmy. And good afternoon everyone. Welcome to HealthEquity's first quarter earnings conference call.

With me today, we have Jon Kessler, President and CEO; Steve Neeleman, Founder and Vice Chair; Darcy Mott, our Executive Vice President the CFO. Before I turn the call over to Jon, I would like to remind those that are listening, that there is a copy of today's earnings release, an accompanying financial information posted on our Investor Relations website which is ir.healthequity.com.

We also claim safe harbor concerning this forward-looking statements included in today's earnings release and that will be made during this conference call. They include predictions, expectations, estimate and other information that might be considered forward-looking. Throughout today's discussion we will present some important factors relating to our business which could affect those forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from statements made today. As a result, we caution you against placing undue reliance on these forward-looking statements. We encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock detailed in our Annual Report on Form 10-K filed with the SEC in March 2019, along with any other subsequent periodic concurrent reports filed with the SEC. We are not obligating ourselves to revise or update these forward-looking statements in light of new information or future events.

With all that out of the way, I'll turn the call over to Mr. Jon Kessler.

Jon Kessler -- President and Chief Executive Officer

Thank you Richard, and thanks everyone for joining us on a lovely late spring day out here in Utah for our first quarter 2020 earnings call. I will speak to Q1 operating results of key performance metrics. Our celebrity spokesman Darcy Mott will provide a more detailed review of our financial results and update our guidance. He is our CFO as well. And then Steve Neeleman will join us during the Q&A.

So looking first to the four key metrics that drive our business. HealthEquity continued the trend of out performance on year-over-year measures of profitability and custodial assets, on top of robust revenue and HSA member growth. Revenues of $87.1 million were up 25% year-over-year, adjusted EBITDA $38.9 million was up an even larger 31% year-over-year. HSA members at quarters end reached $4.1 million, up 17% year-over-year and custodial assets at quarter's end grew to $8.3 billion up and even larger 21% from a year ago. Custodial, interchange and service fees all exceeded our expectations. Strong gross margins resulted from a team effort to finish the annual busy season as well as it began in Q4. Adjusted EBITDA margins expanded by more than 230 basis points year-over-year to 45% and all of that occurred notwithstanding the ramping up of the investment program that Steve detailed on our last call.

The sales team also got off to a strong start. HealthEquity opened 89,000 new HSAs in the quarter. Custodial assets increased by $223 million or more than 3 times the growth seen in the comparable period a year ago. And that was the result of increased contributions as well as market gains. Invested assets grew 42% compared to last year. The number of HSA members investing was up 32%. Although, there was no portfolio acquisition activity in Q1, the pipeline of smaller portfolio acquisitions, regained some health with the softening of the macro interest rate environment and we hope to have good results over the rest of the year. So we believe that HealthEquity continues to substantially outpace the market, our largest competitors and all of this adds up to a terrific start to FY '20.

What enabled this outperformance? We often describe HSAs as being at the intersection of four established industries: managed care, banking, retirement and benefits administration. Firms in each of these industries have chosen to partner with HealthEquity as part of a complete solution. Our focus on partnership, the proprietary technology that enables it and the Purple -- and our Purple service culture are what makes HealthEquity unique relative to our largest competitors. One a health insurer, another a bank and a third an asset manager. With our partners, HealthEquity has the tools and the incentive to meet every member and employer where they are today, establish trust and help them take the next steps in connecting health and wealth.

Q1 featured a number of interesting examples of the power of technology enabled partnership and Purple, that's a lot of peace. The team went live with the first integrated 401(k) HSA clients under our new retirement record keeper partnerships. We saw a strong year-over-year renewals and wins among employer clients associated with our health plan partners and we grew custodial margins despite the softer rate environment and that's thanks in part to the strength of our relationships with a dozen depository partners.

The investment and consumer directed benefits or CDB capabilities that Steve has talked about in the past, also saw promising early results during the quarter. HealthEquity grew its FSA HRA business by 4% year-over-year which we believe is ahead of the market and was essentially all taken from competitors and sold its first COBRA clients in partnership with benefits brokers and advisors seeking a single HSA-centric consumer directed solution for their clients and members.

To achieve our investment goals faster and to go further, HealthEquity also during the quarter proposed to acquire WageWorks a leading provider of FSA HRA, COBRA, commuter benefits and other CDB services to employers. Prior to making the proposal, HealthEquity acquired approximately 1.6 million shares of WageWorks common stock or about 4% of the company through open market purchases. We continue to evaluate this and other alternatives to accelerate our progress in connecting health and wealth.

Now let's return to the strong performance during the quarter upon which Darcy is here to shine a brighter light. Darcy?

Darcy Mott -- Executive Vice President and Chief Financial Officer

Thanks Jon. I will discuss our results on both the GAAP and a non-GAAP basis. A reconciliation of non-GAAP results that we discuss here to the nearest GAAP measurement is provided in the press release that was published earlier today.

I will first review our first quarter financial results of fiscal 2020 and then I'll provide an update to our guidance for the full fiscal 2020. Revenue for the first quarter grew 25% year-over-year to $87.1 million. Breaking down the revenue into our three categories, we continue to see growth in each of service, custodial and interchange revenue during the quarter.

Service revenue grew 8% year-over-year to $26.8 million in the first quarter. Consistent with the strategy we have outlined over the last five years, service revenue as a percent of total revenue declined to 31% in the quarter down from 36% of total revenue that it represented in the first quarter last year. As custodial revenue has become more predominant, service revenue growth was attributable to a 17% year-over-year increase in average HSAs during the quarter, partially offset by an 8% decrease in service revenue per average HSA. Remember HSA service fees are paid primarily by employers on behalf of their employees, and so by bringing these down over time, we deliver more value to our employer and network partners. As we indicated last quarter, we expect a decrease in service revenue for HSA to be toward the high end of our historical 5% to 10% guidance for fiscal 2020.

Custodial revenue was $42 million in the first quarter, representing an increase of 48% year-over-year. The increase was the result of the 21% growth in average custodial assets and a higher annualized interest rate yield on average custodial cash assets of 2.53% during the quarter compared to 2.04% in Q1 last year. We expect that the yield on custodial cash assets for fiscal 2020 will be in a range consistent with our first quarter approximately 2.5%.

Interchange revenue grew 10% in the first quarter to $18.3 million compared to $16.6 million in the first quarter last year. Interchange revenue benefited from the 17% year-over-year increase in average HSAs in the quarter, compared to the first quarter last year, offset by a decrease in spend per average HSA.

Gross profit for the first quarter was $57.8 million compared to $44 million in the prior year, increasing the gross margin level to 66% in the quarter from 63% in the first quarter last year. The higher gross margin was the result of the increasing mix to custodial revenue and a higher yield on custodial cash assets.

Operating expenses were $30.1 million or 35% of revenue compared to $23.8 million or 34% of revenue in the first quarter last year. Income from operations was $27.7 million in the first quarter, generating an income from operations margin of 32% during the quarter. We expect that as the investments in sales, technology and development that were discussed in our March fourth quarter conference call continue to ramp up through the year, operating margins will be lower through the rest of fiscal 2020.

We generated net income of $41.8 million for the first quarter of fiscal 2020 compared to $22.6 million in the prior year. Net income included $17.9 million, net of tax of unrealized gain on the equity investment in WageWorks that Jon mentioned earlier.

Our GAAP diluted EPS for the first quarter of fiscal 2020 was $0.65 per share compared to $0.36 for the prior year. Excluding stock compensation net of tax, the tax impact of stock option exercises and the equity investment adjustment, our non-GAAP net income and net income per share for the first quarter of fiscal 2020 were $26.2 million and $0.41 per share.

Our non-GAAP adjusted EBITDA for the quarter increased 31% to $38.9 million compared to $29.6 million in the prior year. Adjusted EBITDA margin in the quarter was 45%.

Turning to the balance sheet as of April 30, 2019, we had $329 million of cash and cash equivalents with no outstanding debt.

Turning to guidance for fiscal 2020, based on where we ended the first quarter of fiscal 2020, we are raising our revenue guidance for fiscal 2020 to a range between $339 million and $345 million. We expect non-GAAP net income to be between $83 million and $87 million. Non-GAAP diluted net income per share between $1.28 and $1.34 per share and adjusted EBITDA between $135 million and $140 million.

Our non-GAAP diluted net income per share estimate is based on an estimated diluted weighted average shares outstanding of approximately 65 million shares for the year. The non GAAP outlook for fiscal 2020 includes a projected statutory income tax rate of approximately 24%.

Before I turn the call back to Jon, I would like to highlight two items reflected in our guidance. First, now that all of this year's custodial cash deposits are placed in interest rate contracts, we expect our interest rate yield for the fiscal 2020 on the custodial cash assets to be in the range of what we reported in this quarter approximately 2.5%. Second, as we have done in recent reporting periods our full year guidance includes a detailed reconciliation of GAAP and non GAAP metrics. This includes management's estimates of depreciation and amortization of prior capital expenditures and anticipated stock compensation expenses. But this does not include a forecast of stock option exercises for the remainder of fiscal year -- of the fiscal year and excludes any additional mark-to-market adjustments for our equity investment.

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

Jon Kessler -- President and Chief Executive Officer

Thanks to team Purple and our partners for a quarter in which you stayed focused and once again exceeded expectations. I want to close by mentioning that on June 19th we will briefly celebrate five years as a public company by ringing the NASDAQ opening bell, and then we turn our focus forward. We'll host an Investor Day from 10:00 am to 1:00 pm again also on the 19th at the NASDAQ market site in Times Square. If you would like to join us and have not done so already, please get in touch with Richard through our Investor Relations site. The entire HealthEquity leadership team Steve, Ted, Darcy and I, we all hope to see all of you there.

With that let's take some questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Jamie Stockton with Wells Fargo. Your line is now open.

Jamie Stockton -- Wells Fargo -- Analyst

Yes. Thanks for taking my question. I guess maybe the first one on the yield, because I know there'll be a lot of focus there. Darcy, the yield curve is obviously well inverted right now or at least part of it. Can you talk about as we kind of think about the cash that you're likely to put toward next year? Would you guys come in from a duration standpoint or a maturity standpoint on how long you're putting the cash to work to maybe enhance the yield that you would be getting versus the historical kind of three year-ish timeframe you've used? And if you did that, do you think you could get the same kind of let's say premium over where a comparable treasury is with a jumbo CD or with the partners not be willing to give you the same level of premium for a shorter duration?

Darcy Mott -- Executive Vice President and Chief Financial Officer

Yes. Good question, Jamie. And we've talked about this before. Our approach to the placement of funds and the duration and the yields has been fairly consistent. We don't actually try to maximize the yield necessarily. What we're trying to do is deliver consistency and predictability and to manage the laddering off of custodial assets. As you know, every year we roll some of the expiring contracts into new contracts and we bring new depository agreements on every year. And so generally we've followed this practice of -- we -- at the beginning of the year we're generally at about a three year duration and then it works its way down to closer to two years throughout the year. And then we kind of bump it back up into a three year duration. And so we are managing that at the same time, we're managing expirations that will happen in any given year.

We don't want to be caught in one year with a whole bunch of expirations and be limited to whatever the rates are at that particular point in time. So we have a great deal of confidence that that strategy has worked well for us in the past. It gives us a great deal of predictability, not only for to tell you what we expect to do on a revenue basis, but also on yields and on duration.

I would also add that as we go through this process, we have a great deal of confidence in the guidance that we've given today, because we have contracts in place that will cover capacity for the remainder of this year and going into January, yes, we'll add some more capacity and we'll roll some contracts. But given the contracts that we'll roll and even given the current rate environment, if it remain even flat with what it's at -- what our rate environment is today, we would still see an uplifting in going into 2021 as a result of new placements this next year. So we're confident in that approach. We like it. We like the laddering effect that it does and it's very easy for us to manage through that.

Jamie Stockton -- Wells Fargo -- Analyst

Okay. That's great. And maybe just as my follow-up. On the investments that you guys are making this year from a growth standpoint, I think you kind of quantified it as $30 million, half of that capital investments, half of that expenses this year. How does the wage situation impact that? Or has it impacted it at all? Because presumably some of those investments were probably going into solutions that might ultimately end up being duplicative. I think maybe you made that offer there kind of after probably you made the plans for those investments if you could just talk about that that would be great.

Jon Kessler -- President and Chief Executive Officer

Yes. Thanks, Jamie. This is Jon. Good to talk to you. As far as what we've done to date, the offer to acquire WageWorks has not affected either the pace or the nature of our investments at all. And that's by design, we want our teams to be working in -- we want them to be working, but also very candidly one way or the other we will learn a lot, and we are learning a lot from the investments we're making and the activities in market. So to date, there's been no real impact and I would not expect and until and unless there were a transaction more definitively that there would be any impact, we're going to continue with our investment program.

Jamie Stockton -- Wells Fargo -- Analyst

Okay. Thank you.

Operator

Thank you. And our next question comes from Sandy Draper with SunTrust. Your line is now open.

Sandy Draper -- SunTrust -- Analyst

Thanks very much and good afternoon.

Jon Kessler -- President and Chief Executive Officer

Hey, Sandy.

Sandy Draper -- SunTrust -- Analyst

I guess the first question, I'm not sure how much you can answer it. It's around the wage situation. Now there is no maybe specific update, but can you just -- are there sort of next steps? Or is it -- are you just waiting to hear back? Is there any conversation going on? Just any type of update as to sort of what the next steps are and at what point do you just -- it's an investment and you figure out what to do with the stock? Just that would be helpful.

Jon Kessler -- President and Chief Executive Officer

Well, it's probably useful to just reiterate the steps that have occurred to date. We made our proposal on April 11th. The proposal, there was -- was evidenced that the proposal had entered the public domain and both companies responded quickly to that by issuing confirmatory press releases on the evening of the 29th or the morning of the 30th, I can't remember. And we've indicated here that prior to April 11, we as part of making the proposal that we had built up this position.

I guess I would say that was one piece, but by no means the only piece of an effort over the course of a number of months to approach our overall strategic objectives the ones that we've talked about on this call and others in a very thoughtful way. And so we'll have to see what happens, I don't have really anything else to update you on in terms of the company's response or potential next steps or what have you. I will say -- the last part of your question that in making the investments that we made, we answered two questions and I think our Board was very thoughtful and deliberate in approaching its role in approving this process.

The first question was did the investment support our strategic objectives. And we concluded that it did. The second question and here I have to admit I felt a much more empathy for the kind of work that you do and Jamie does covering the company for example. We had to make an assessment of whether it was a good investment, and that very carefully and concluded -- as the Board concluded that it was. And that was the basis on which we made the investment.

So at what point we would do something else, I think at this point it's better to not speculate but that's how we got here. And that's exactly where we are.

Sandy Draper -- SunTrust -- Analyst

Okay. That's helpful. And I guess maybe just a follow-up and more operational instant here, I think you said you got your first 401(k) joint, wasn't clear that you maybe also did some -- I'm sure it's commuter benefits or COBRA. I'm just trying to get the update on what parts of the platform are fully operational which are sort of coming down the pipe over maybe the next 12 to 18 months, and just get update in terms of that product strategy. that would be great.

Jon Kessler -- President and Chief Executive Officer

The way we're approaching it. Thank you for the question. The way we're approaching it is to get in market as quickly as we can and learn. And so we were very pleased to have our first -- not only our first sales with our 401(k) partnerships, but actually to be in market with product operating with our 401(k) partners. Do -- does the product today have every feature that it eventually will. I don't think so, because we will learn what customers really like, what's valuable, what helps them grow savings et cetera and we'll make adjustments.

By the same token, we also in this quarter made our first sales of COBRA product and there to we are pleased to be not just in market from selling perspective and learning but in market from a product perspective and learning. And this is as we outlined, this is going to be a multi-year process for us, but we think that the way to do that is sort of -- this is where the technology people roll their eyes, but in a more agile product approach, where end market, we learn things, we make adjustments, et cetera, as opposed to in 18 months we will deploy something and then we'll see how it does.

I'd also add there during the quarter that we also saw -- we don't usually give quarter-on-quarter estimates on our HRA FSA business, but we thought it was useful to do so here since we did indicate that that's also an area where we're investing to improve our capabilities along with some other areas. And we did see some uplift from that during the quarter as well. So that seemed like a good thing. And if -- I guess the major lesson I draw from all of that is at the very least, I think we can take the view that the process of feedback in iteration that needs to occur for an effort like this to be successful over the course of multiple years is under way.

Sandy Draper -- SunTrust -- Analyst

Great. Thanks so much, Jon.

Operator

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

Jon Kessler -- President and Chief Executive Officer

Hi, Greg.

Greg Peters -- Raymond James -- Analyst

Good afternoon. I'm in the spirit of my reputation apparently. I'm going to try and load up several questions into my two question allocation.

Jon Kessler -- President and Chief Executive Officer

We loosen the reins just a little bit and here we go.

Greg Peters -- Raymond James -- Analyst

Why are you referring to Darcy as your celebrity spokesman? I think that's what investors really want to know.

Jon Kessler -- President and Chief Executive Officer

Well, thank you for the first of your two questions, Greg. The reason for that is as you may know is that or as others may know, I don't know how closely you read the sports pages, but Darcy is now a sports celebrity, and I'll encourage folks who are not aware of that to watch more ESPN. And he's done a fantastic job of representing the company in his sporting endeavors.

Greg Peters -- Raymond James -- Analyst

In the spirit of that answer, maybe I know you started to answer this question.

Jon Kessler -- President and Chief Executive Officer

I actually think, in fact that as I recall, I think a member of Raymond James leadership may also have joined the PGA Tour. But I don't want to...

Greg Peters -- Raymond James -- Analyst

Yes. So in the spirit of that, just can you circle back, talk about Vanguard principle nationwide? And give us sort of an update on those initiatives. I know you started to answer some of it in your prior answer.

Jon Kessler -- President and Chief Executive Officer

Yes. And I'll just say Darcy has not joined the PGA Tour, but in case anyone is new to our calls and doesn't realize we're kidding. But he did shoot well and under intense pressure. And so -- but in any event look, we're really pleased with this from two perspectives. I mean first of all looking at the pipeline we were just talking about this morning as we get our weekly sales update. We have good strong cases in the pipeline from each of the three partnerships that have been publicly announced as well as from others that is where we followed our more typical approach of not doing product and partnership announcements, and our partners have been comfortable with that. So, that's a really good thing at this point in the year as you can imagine. And we're particularly pleased with -- if you look at those partnerships and you look at the level of one of our sort of thesis here is that you're going to be able to have in the context of the retirement plan, you're going to be able to have and our partners are going to be more willing to have really thoughtful long-term discussions with the employees that are the beneficiaries of the plans.

And I've been particularly pleased with the level of engagement between our teams that do research on this and we had a great experience a few weeks ago Greg where a number of us happened to all be together at an event that we all contribute to that is support some of the deep research behind some of these saving strategies and the logic behind them and it was just great to see all of these firms really working together to try and obviously some of them compete, but really working together to try and understand how we can get employees of their customers and ours to as quickly as possible to the place where they're really using HSAs as they were intended as long term savings vehicles and either growing their savings faster or meaningfully reducing the cost investing. And so that's that's kind of where we are. It's still early days but we certainly feel good about what we're seeing from a pipeline perspective as well as actually this early seeing customers and revenue operation is pretty good.

Greg Peters -- Raymond James -- Analyst

So thank you for that answer Jon. And I wanted to follow-up just around the HSA members. You have...

Jon Kessler -- President and Chief Executive Officer

Well that was two.And now you got -- now you on three.

Greg Peters -- Raymond James -- Analyst

Come on. You can't count the first one as a real question. I mean...

Jon Kessler -- President and Chief Executive Officer

Go ahead. We'll -- we might pull you on -- on you but probably not.

Greg Peters -- Raymond James -- Analyst

So, the HSA members. So I'm looking at the total number increased 17%. Act (ph) is only increased 13% and what I was particularly struck by is the sequential change in actives versus a sequential change in HSA members and the sequential change in actives is only up 4% compared with something substantial -- different in the HSA members. So maybe you could provide us an update on why these pieces are moving differently?

Jon Kessler -- President and Chief Executive Officer

Yes, I can actually, although now I wish I'd helped you two question, but no kidding, but the first quarter as you know is one where we see a lot of different things occurring with both -- it's the quarter where oftentimes you'll see, if you lost folks or they're moving on it's where you see the accounts close. It's also the quarter where you see HSA assets come on from folks that you've won. And what we saw in this year's first quarter was, we didn't see as many, I mean you can see this in the year-on-year comparisons, we didn't see as many new HSAs come in, but those that we saw come in as well as those that remain saw really substantial growth in assets. So -- and that was reflected in both market growth, but much more so in terms of contributions and rollovers from the takeaway.

So it's just a slightly different flavor of things, but I think if you sort of put it all together, the basic picture from our perspective and we won't know what the market grew this year for quite a while, because there will be a while before that this kind of a comparison can be reported. But we feel pretty good that we continue to outpace the market and certainly, when we sort of think about if you will know our basic model which is, we're going to grow revenues in HSA and we're going to try and grow earnings and assets even faster, you really just saw more of that and that seems like a good thing.

Greg Peters -- Raymond James -- Analyst

Okay. Thank you for your answers.

Jon Kessler -- President and Chief Executive Officer

I think we got your HSA in the first quarter last year though, Greg. So that's how I played a huge role. If you would put another $200 million in, I mean we couldn't be making these positive compares.

Greg Peters -- Raymond James -- Analyst

And by the way, I'm one of the leading reasons why your interchange is down.

Jon Kessler -- President and Chief Executive Officer

It's OK. As we've said many times as Darcy always says, we're happy to help you save for a lifetime when you spend it. It only gives us revenue once. So it's good for you and good for us.

Operator

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

Donald Hooker -- KeyBanc -- Analyst

Great. Good afternoon. Maybe I guess while we have you on -- in a public forum here, if you can maybe just talk about your thinking around sort of potential revenue cost synergies from WageWorks and kind of what you're thinking is in making that proposal and what is the right debt ratio for HealthEquity over time? Obviously you guys have carried a cash rich balance sheet for a long time. You talked about acquisitions, but how comfortable would you be taking that debt ratio up?

Jon Kessler -- President and Chief Executive Officer

Okay. On the first part of that question we have not commented, I think publicly on synergies and I think that's probably for the best. I think we probably think it's better to just hold off on that until we feel like we have all of the facts together and can give you something we feel comfortable with. So I'm going to hold off on that other than to say what we said in the release which is that we obviously in making the proposal we felt that there were significant short-term synergies, but also to remind everyone that the objective of this from our perspective and its the same objective of our overall strategy which is to grow our HSA market share and to continue to help Americans move down that journey of connecting health and wealth and that's why we're doing it, not because of cost savings or whatever. And so that's sort of the first part of your question. I think on the second part or say that's why we proposed doing.

On the second part of your question, I'm going to -- I think the right way to answer that is to speak generally to how we as an organization and I would include our Board since we've had active Board dialogue on this topic for a long time as we should, how we think about debt. And then you can apply it to this situation. First of all, we think that -- we recognize that this is a business that has and hope you recognize that no you do don't --but this is a business that has highly predictable and stable cash flow and that's a good prerequisite for a decision to put the shareholders money at risk by borrowing money from somebody else.

Secondly I think it would generally be the case that where we to incur debt in this or any other context, it's likely to be for assets that have similarly stable and predictable free cash flow. Again reinforcing the view that if we use that we're going to use it responsibly and we're going to use it for things where we can have a high degree of comfort with regard to the free cash flow that's there to service it.

The last point I would make here is that we are confident to some extent -- the last point.

The next point I make is that we're confident to some extent by the fact that the company has a very strong track record of over delivering on its promises and has clearly shown an ability to forecast. And by the company I really mean the people many of whom are in this room with me who have been doing our forecasting for years in some cases more than a decade. And so that gives us a lot of confidence that makes sense. That having been said as I think this is one of these old testament deals pride goes before the fall. And so that's something we are absolutely mindful in all cases of the fact that any leverage reduces our margin for error on behalf of the shareholders and reduces our ability to take other actions that might be beneficial for the shareholders down the road.

And so those are the principles that we've used in thinking about debt in the past. We don't -- we have never identified and frankly don't believe in the idea that there is some kind of ideal debt ratio for the company, that at some level depends on the attractiveness of what you're spending the money on relative to the attributes we just talked about. And so those are the principles that we would apply here and have generally applied as we thought about other things we might do.

Donald Hooker -- KeyBanc -- Analyst

Okay. And then maybe just real quick one on the interchange you've done a good job explaining why services fees per member are declining due to your strategic pricing strategy and tiered pricing by the interchange fees per member, would that continue to be declining? Or can you just talk about sort of your thinking there going forward?

Darcy Mott -- Executive Vice President and Chief Financial Officer

Yes. On a per HSA at a basis that that has been occurring on a regular basis. The rate or the yield that we get off of interchanges is relatively constant. We do see some seasonality as we've talked about in the past about spend patterns whether it's in an HSA or in a RA, that we see usually our first quarter actually has been higher, it starts coming down and then it builds back up toward the end of the year. And so we would like to think that a lot of this is because people are becoming educated about not spending or spending more wisely with their HSA dollars. But frankly I think that it's a somewhat a function of how much money they have to spend, what kind of bills they have and it's not a rate issue, and we've talked about the growth in the number of accounts, et cetera. So it really comes down to the spend for HSA.

Jon Kessler -- President and Chief Executive Officer

I would ask Steve to speak to this. I mean one thing without going crazy, we just completed our -- we have an annual what we call key partner summit and it's not like a super fancy there aren't -- there's no...

Donald Hooker -- KeyBanc -- Analyst

Celebrities.

Jon Kessler -- President and Chief Executive Officer

Celebrity. While -- were you there?

Donald Hooker -- KeyBanc -- Analyst

No, I was elsewhere.

Jon Kessler -- President and Chief Executive Officer

Right our celebrity wasn't there. And but that's true. You were actually outselling them. So that's good. And celebrities. But in any event, it's not fancy, but we really think of it as a learning experience. And one of the things we do is we ask our clients to present on not just their experience with HealthEquity, but more broadly their experience in managing a health plan which is really what they're doing, using all of the tools that are available to them well beyond HealthEquity and one of the things and Steve I was going to thought you could elaborate on this little bit is we heard this year as we heard a number of examples of folks who are really having a significant amount of success at keeping their overall spending very much under control and implicit in that keeping not just -- and I mean total spend, not just what the company spends and implicit in that, keeping members out of pocket spending under control. So do you want to speak to that at all.

Stephen D. Neeleman -- Founder and Vice Chairman

Sure. Yes. So there used to be research studies that they would publish every year that would show that as a percentage in a population goes toward health savings accounts that really spend starts to go down. In fact, the general rule of thumb was if you can get more than 50% of your population and you have a large enough population that it's real numbers into an HSA type plan that your overall trend over what it was when you were in nutritional (ph) plan would be cut by about 50%. They don't tend to publish those studies anymore, because I think it's almost become self-evident. And as we know with our our key partners last month, it was remarkable to hear not only that they were having that exact experience where they would talk about in their presentations, yes, we're now over 50% and our trend is half what it used to be.

But also that they were -- they just have almost a favor to try and educate people to help them understand the importance of saving money in their health savings accounts. And I think where we've seen the change and I think part of its because we've tried to be a leader talking about how HSA can be used as a long-term investment vehicles. Is it rather than meeting with an employer and saying hey, you need to do HSAs and all your people need to do them because you're going to see your trend go down. We've led with a different message decidedly. And its if we can educate people that this is better for them, better for their families long-term, they're going to need the money as they age. And this is the best device to put it in, because of the tax attributes that that will benefit the employee member to us.

But then almost consequently it benefits the employer. And so it's kind of a need to see it just being realized and then saying look help us in our educational efforts. And so -- and it's little stuff and we talk about this all the time but just making a shift from a name brand drug to a generic or making an extra call and and going to couple of walks down the street, if you do need to get a radiology study or MRI or something like that and saving a couple thousand dollars. They're still getting the care they need, it's just they're spending less which leads to this perhaps part of the trend on the spending down. But it great for us because then we can help manage that money and we'll make the money over the next 12 months.

Jon Kessler -- President and Chief Executive Officer

I do think there is -- there are some opportunities here for us that where we can have real win-win that also increase the revenue line and the one that really comes to mind is when people do have incidents, a lot of people as we talked about they still think of these like Flexible Spending Accounts and one way they think about in that way is well I made my election and at open enrollment and that's the end of it. But as we all know with an HSA you're not tied to that number. And so when when people have incidents during the year that caused individuals a spike in those expenses running those extra dollars through the HSA that year can meaningfully reduce that unanticipated expense and that's one of a number of areas that Ted and the team are working on in terms of of really continuing to tighten up what we're doing on the engagement front. So it's something we pay attention to and there's a little bit of sort of crosscurrents in terms of some of its good, some of it's not as good but that's just -- this commentary should give you a feel for the depth of that.

Donald Hooker -- KeyBanc -- Analyst

Thank you very much.

Operator

Thank you. And our next question comes from Mohan Naidu with Oppenheimer. Your line is now open.

Mohan Naidu -- Oppenheimer & Co. Inc. -- Analyst

Thank you very much for taking my questions.

Jon Kessler -- President and Chief Executive Officer

Thanks Mohan.

Mohan Naidu -- Oppenheimer & Co. Inc. -- Analyst

Hi Jon. Two questions for me. One on the technology investments. Can you update us on where you are in the cycle and what we should expect to see through the year? And the second one maybe for Steve, just what your thoughts are on Medicare for all. As unlikely that seems to be, but curious about your views and potentially implications of such an event on your business.

Jon Kessler -- President and Chief Executive Officer

Yes. I'll take the first question briefly. It's obviously early in the cycle. We said in the commentary at the beginning of this call that the investment program we described is beginning to ramp up, but as our guidance implies, there's a little more ramp to come over the course the rest of the year and we'll see how that goes. So that's sort of, I mean it's early, but we've tried to focus as you can tell by some of the other commentary on investing where we can get things into the hands whether there are our own people for efficiency sake or security sake or at the market and learn stuff quickly that's the way we're trying to order things. Steve, on the -- on MFA, do you want to talk about that?

Stephen D. Neeleman -- Founder and Vice Chairman

Yes. So of course, I mean this is something that we spend a lot of time. We talked to that earlier this year and at the end of last year that we were planning to spend more time in Washington DC and we've done so. And we've really taken the time to spend educating on both sides of the aisle. And I think what we're hearing is it sure there's I think a minority of the party that really believes of the third-party in this case really believes that Medicare fraud could happen in the near term.

That being said Medicare is not what it used to be, it's not what's the old phrase it's not like your father's old mobile or whatever. A recent study came out from the American Medical Association that said that if a patient is on Medicare today and they get cancer, and that happens to be when most patients get cancer is when they get older that they would have to spend over $10,000 a year out of pocket above and beyond the cost of what would be reimbursed through Medicare.

And the easy answer is these folks should be spending that money out of health savings account, because if they're paying 401(k), that probably have to take close to $14,000, $15,000 out of the 401(k) to pay their $10,000 or $11,000 cancer bill. And so we don't know exactly where this will go. We do know that from the folks that have been there the longest, not that maybe the newest voices there but the ones who have been there the longest, they say they just don't think it's going to happen in the short-term. We will be spending some time talking a little bit about this in our Investor Day.

But the bottom line is is that we remain hopeful that no matter where kind of the trade winds latest in DC that kind of at the end of the day, there's a health savings account to help whatever plan someone send, whether it's in Medicare, whether it's in traditional care, whether it's in Medicaid Tricare, you name it every American should have a health savings account, because every American independent of what plan you're in is going to have out-of-pocket spending. And so that's kind of been our position.

Mohan Naidu -- Oppenheimer & Co. Inc. -- Analyst

Thanks, Steve. That's great color. I'll keep it to that.

Jon Kessler -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from Stephanie Demko with Citi. Your line is now open.

Stephanie Demko -- Citi -- Analyst

Hi guys. Thank you for taking my question.

Jon Kessler -- President and Chief Executive Officer

Thank you.

Stephanie Demko -- Citi -- Analyst

Just a quick one. When we think about the differing end markets that you've got participate in. You did talk about how WageWorks kind of help your competitive dynamic in the mid-employer market. Could you just walk us through those win rate and compare it maybe to the up market with payers? How we should see the comparative sizing of each opportunity?

Jon Kessler -- President and Chief Executive Officer

I'll try. What, I would generally say is that historically HealthEquity has been -- it's not as much when rates. It's really where we've been on the field. And historically we've been on the field with our enterprise customers and obviously with our network partners. And we've relied pretty much exclusively on our network partners to be on the field outside of the enterprise in the -- with a regional commercial -- regional and even in some areas commercial space. And that's really what's changed over the course of -- as we've sort of dipped our toe in and certainly a scenario where the -- we identified previously that whether it's through the proposed transaction or other means, we intend to increase our sort of shelf space for lack of a better churn and with these employers and with the brokers and advisors who really in many ways are far the key to their decision making and that's what we're going to do one way or the other.

One piece of -- one measure of all of that is if you look at our RFP activity last year, this gets to your question, almost half 49% of the RFPs we received, included at least one of these non HSA services as a request, meaning the other CDBs. And I'm not saying we didn't win any of those because obviously in some cases we offer those products and we're able to meet needs and others the partner clients sort of satisfies and said you can do what you do well and so forth, but there are a lot that we didn't.

And so we just feel like there's the part of this that is having a footprint and a part of it that is having the right product for that footprint that kind of go together and again whether it's ultimately -- whether ultimately our proposal is successful or we get there through other means, we're going to get there, because we concluded that that's something that will really help us down the road that we're really trying to help consumers lot. So that's kind of where we are.

I think, I'm not -- I think that's probably the best I can do in terms of trying to give you some color around it, but it is material and I think we even saw that in the first quarter, if you look at the wins that we got for some of the services that I described and virtually all of them were in connection with a core service that we offer. And in other words, people weren't buying stand-alone COBRA from us as I suppose a few did, but for the most part it was recognition that you know the future of this is in HSA-centric business, where we're really helping people, learn how to spend less today, save today and put that money away in the most efficient way that's available to them for the future and we're meeting them where they are, whether that's as someone who's in a traditional copay type plan with an FSA where they can save money and put it in a 401(k) or whether that's someone who's in an HSA plan where they can save spend less today and save more for more.

Stephanie Demko -- Citi -- Analyst

Now, that's super helpful. Thank you, Jon. Just a quick follow-up on that. You guys, do you have some HRA and FSA capabilities correct? So what are the puts and takes when you try to fit your own platform?

Jon Kessler -- President and Chief Executive Officer

Well, I think probably, it's -- those are probably best talked about in the context of where we're in markets. I think what's fair to say generally is that what we've added this year is the ability to serve customers who were not connected to our health plan partners. Historically, we really built the platform for that purpose. And so that's new capability. But that doesn't mean we can't be doing more, and it doesn't mean we can't be doing it at scale. So while we're pleased with the progress, we're making there and certainly it's not a tiny business at this point. We've talked about elsewhere the number of accounts and all that.

It's as part of our core HSA offering, it's something that we've indicated again whether it's through this transaction or otherwise, we'll continue to invest in. And I think that at some level, the core of that investment if these products are ultimately about helping consumers use these sort of tax benefits to save money right now. And as we've talked about elsewhere, need to complete that circuit. So it has to be about making that part easy. And then about what do you do with that money. Right. Because if it just disappears, it hasn't really done anyone any good. It really helps when you keep the circle and so that's kind of where I think we really feel like ultimately the investment will need to go. It's not just getting parity from our perspective. It's taking this industry in a place that it hasn't been before.

Stephanie Demko -- Citi -- Analyst

Understood. Thank you Jon. That's really helpful.

Jon Kessler -- President and Chief Executive Officer

Thank you. It kind of wandered there, but got to the right place at the end. Maybe.

Operator

Thank you. And our next question comes from Allen Lutz with Bank of America. Your line is now open.

Jon Kessler -- President and Chief Executive Officer

Hi Allen.

Allen Lutz -- Bank of America -- Analyst

Hi everyone. Thanks for taking the question. Can you talk about how the current selling season is progressing versus last year? Where you guys winning more and where are you winning less? And then how is this tracking versus your expectations? And then secondarily is there anything that you can say specifically about the 401(k) contract win?

Jon Kessler -- President and Chief Executive Officer

Go ahead with the first part and I'll...

Stephen D. Neeleman -- Founder and Vice Chairman

Yes. Let me start with the first part Allen. Good to hear your voice. So you know look we remain excited about this season. We talked a little bit about it in the last call that we were already starting our fees and things like that. And we think teams done a great job. We've announced wins already on the COBRA market which we talked about which was excited to stand that up and start selling COBRA. We've announced these partnerships to come in a little bit with the -- on the record keeping side and we've even announced wins there. And as our practice we don't do any names and logos or anything like that. But we're excited to see it working. In fact on the sell side all day they talk specifically about reps that are starting to even have repeat wins and working with record keepers. And that's we think that's a great thing to see happen in a really relatively short period of time since these partnerships have been signed and announced.

I think that what our salespeople are doing is they're realizing that -- that in the past they could rely a lot on these (inaudible) partners and so what we're trying to do is to subdivide the team and have part of team continue to focus on the health plan channels and the different channels we've dedicated to and then, the other half is doing more direct sales and so that's the other part that is exciting for us to actually see kind of inside sales function or direct sales that we've invested in adding over a dozen new sales folks since last year in that effort and we're pleased -- we're pleased seeing that working hard to announce wins and to be very busy. And that's -- everyone knows that there's nothing happier than a busy salesperson so we're happy to be supporting them in those efforts.

Jon Kessler -- President and Chief Executive Officer

I mean it's it's early in the cycle Allan as you know. So it's hard to be too -- it's hard to be concrete, but I guess you know a couple basic thought I think is look, we are off to a good start. It's a similar start to the one we were off to last year. We ended up finishing last year reasonably strong, but the fourth quarter was a little weaker than we wanted it to be as you know. And so if we can -- as they say in NBA finals when pit play four strong quarters here, we should be in pretty good shape. And so that's kind of the way we're thinking about it and everything we see in terms of the pipeline size, RFP volume, the nature of RFPs, the performance of new partnerships all tells us we have that opportunity. And so that's what we are trying (inaudible).

Allen Lutz -- Bank of America -- Analyst

Great. And then Darcy, you said that operating margins will be lower through the rest of the year. Can you give us a sense of the cadence and then the relative size of the step down for the last three quarters?

Darcy Mott -- Executive Vice President and Chief Financial Officer

Yes, I think it'll be a ratable through the three quarters. I mean we're -- we continue to ramp up part of the initiatives that we're spending money on. The biggest challenge is just bringing people onboard and getting up to speed and having them be being productive. And so I think that will continue through all the course throughout the remainder of the year.

If you look at our overall guidance and just take a midpoint of EBITDA, I think we continue to be true to what we said that we'll be in the range of where we were last year. And it's not going to be where we were in the fourth quarter. So I think that you're going to see that (inaudible) down each quarter throughout the year.

Allen Lutz -- Bank of America -- Analyst

Great. Thank you.

Operator

Thank you and I'm showing no further questions in the queue at this time. I'd like to turn the call back Jon Kessler for any closing remarks.

Jon Kessler -- President and Chief Executive Officer

Yes, thanks. I just want to say a little more strongly thank you to the team. This is -- and that includes our partners. I think this is probably the largest amount by which we have ever raised revenue guidance in a quarter that we've done here. I'm looking to Darcy to shake his head up and down. And that's not happening, because we're clever and some chess game associated with investors. It's happening, because we watch what our team members are doing and we have -- we just -- I think about the concerns we expressed in December, the increasing optimism that we expressed in March and now in June, we feel very, very optimistic about where we are as a business and where the team is focused and so forth and so the credit for that to the extent there is credit really goes to the team and the work. So thank you everybody.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your program and you may all disconnect. Everyone have a great day.

Jon Kessler -- President and Chief Executive Officer

Thank you.

Duration: 60 minutes

Call participants:

Richard Putnam -- Investor Relations

Jon Kessler -- President and Chief Executive Officer

Darcy Mott -- Executive Vice President and Chief Financial Officer

Jamie Stockton -- Wells Fargo -- Analyst

Sandy Draper -- SunTrust -- Analyst

Greg Peters -- Raymond James -- Analyst

Donald Hooker -- KeyBanc -- Analyst

Stephen D. Neeleman -- Founder and Vice Chairman

Mohan Naidu -- Oppenheimer & Co. Inc. -- Analyst

Stephanie Demko -- Citi -- Analyst

Allen Lutz -- Bank of America -- Analyst

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