HealthEquity - Earnings Call - Q4 2025

Executive Summary

• Q4 FY25 revenue was $311.8M, up 19% YoY; GAAP EPS was $0.30 (flat YoY) and non-GAAP EPS was $0.69, while Adjusted EBITDA was $107.8M with margin at 35%. Custodial revenue strength (up 37% YoY) offset service cost headwinds from fraud and card processor consolidation.
• Versus S&P Global consensus, revenue beat ($311.8M vs $305.8M*) and non-GAAP EPS missed ($0.69 vs $0.716*); Adjusted EBITDA was below consensus (company-adjusted basis) as ~$17M excess service costs compressed margins**.
• FY26 guidance introduced: revenue $1.280–$1.305B, GAAP EPS $1.85–$2.01, non-GAAP EPS $3.57–$3.74, Adjusted EBITDA $525–$545M; average HSA cash yield assumption ~3.45% and non-GAAP tax rate 25%.
• Strategic catalysts: record one million new HSAs from sales in FY25, HSA assets up 27% to $32.1B, and launch of the HealthEquity Assist suite (Analyzer, Navigator with TALON, Momentum) to drive enrollment, engagement, and cost-to-serve efficiency.

**Values retrieved from S&P Global.

What Went Well and What Went Wrong

What Went Well

• Record-scale custodial revenue growth and higher yields: Q4 custodial revenue rose 37% to $144.1M; enhanced rate placements reached 49% of HSA cash with goal of 60% by FY27.
• Strong HSA and asset growth: HSAs reached 9.9M (+14% YoY) and Total HSA Assets climbed to $32.1B (+27% YoY); invested HSAs grew 23% YoY to 753k.
• New products and AI-enabled service modernization: Assist suite launched; Expedited Claims uses AI across 7,000 clients and ~1M members; new chip-enabled stacked card rolled out, foundation for digital wallet.

What Went Wrong

• Elevated service costs and margin compression: ~$17M excess service costs in Q4 tied to fraud reimbursement and card processor consolidation reduced gross profit and Adjusted EBITDA margin (to 35%).
• EPS missed consensus: non-GAAP EPS of $0.69 fell short of S&P Global consensus $0.716*, despite revenue strength**.
• Continued near-term cost headwinds: management expects heavier-than-normal service and security costs in H1 FY26 before margins improve in H2.

**Values retrieved from S&P Global.

Transcript

Operator (participant)

Good afternoon, and welcome to the HealthEquity Q4 2025 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Richard Putnam. Please go ahead.

Richard Putnam (Head of Investor Relations)

Thank you, Gary. Love the classical hold music. It was great.

Hello, everyone, and welcome to HealthEquity's Q4 fiscal year-end 2025 earnings conference call. My name is Richard Putnam. I do investor relations for HealthEquity. Joining me today is Scott Cutler, President and CEO, Dr. Steve Neeleman, Vice Chair and Founder of the company, James Lucania, Executive Vice President and CFO. Before I turn the call over to Scott, I have a couple of reminders. First, a press release announcing the financial results for our Q4 and fiscal year-end 2025 was issued after the market closed this afternoon. These financial results include the contributions from our wholly owned subsidiaries and accounts they administer. The press release includes definitions of certain non-GAAP financial measures that we will reference today. You can find a copy of today's press release on our investor relations website, including the 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 our responses to your questions today reflect management's view as of today, March 18, 2025, and will contain forward-looking statements as defined by the SEC, which include 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 the 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 our and our 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. Now, over to Scott.

Scott Cutler (CEO)

Thank you, Richard. Hello, everyone. Welcome to my first official earnings call with HealthEquity. I will discuss Q4's momentum across key metrics, and for those of you who caught our Assist portfolio press release, that pun is intended. Jim will detail Q4 and full-year financial results, as well as our full outlook for fiscal year 2026, and Steve's gonna join us for Q&A. It's been a busy and exhilarating first few months since I was introduced to you in December during the Q3 earnings call. A month later, I dove right in with our team to help close out our record-breaking peak season, which included 1 million new HSAs from sales. It's proven to be an eventful start to this next chapter with Team Purple, and I'm thrilled to be here.

In Q4, without missing a beat, the team achieved and delivered strong year-over-year growth across our key metrics, including revenue up 19%, adjusted EBITDA up 9%, HSAs grew 14%, CDB accounts grew 2%, driving total accounts up 9%, and HSA assets up 27%. HealthEquity ended Q4 with 17 million total accounts, including 9.9 million HSAs, holding $32 billion in HSA assets. HSA assets increased $6.9 billion year-over-year. We grew the number of our HSA members who invest by 23% year-over-year, helping to drive invested assets up 44% to $14.7 billion. HSA cash reached $17.4 billion. Our HSA members grew their average balances by 12% this year. Team Purple opened 471,000 new HSAs from sales in the quarter, bringing a total of 1 million new HSAs from sales for the year, a milestone achieved for the first time in our history.

Net CDB accounts grew 200,000 quarter over quarter and up 2% year-over-year, continuing a positive trend. Our operations team were also exceptionally busy in Q4 across various initiatives as we served a record number of new HSA members and CDB accounts. While Q4 is always our peak season, we were also active in rolling out the final stages of our new chip-enabled stacked benefits card to our millions of members and continuing to migrate existing clients to our latest platforms. Like other financial services companies, we also have seen increased cyber threats and fraud attacks from bad actors using sophisticated technology, techniques, and methods. The collection of these activities led to excess service expense, which Jim will detail further. We continue to believe we will drive down our service costs while delivering the remarkable experiences our customers expect from us. Our team is committed as ever to exceed these expectations.

As I have begun this journey, I'm focusing the team on a member-first, secure mobile experience. Our members expect seamless and frictionless mobile and digital-first experiences to help them save, invest, and spend against their healthcare needs. We have made significant progress consolidating platforms inherited through acquisitions and moving our platforms to the cloud. We are now well-positioned to leverage these investments and continue our technological push in mobility and AI. I'm encouraged by many things we have delivered this year, including a new app experience, which has been downloaded by over 1 million members, Expedited Claims, which uses AI technology to automate claims, now serves more than 7,000 clients and 1 million members, and a stacked chip card, which we rolled out this year and serves as the foundation for our upcoming digital wallet.

Building on these foundations, I'm confident we can more efficiently and effectively deliver against our mission of saving and improving lives by empowering healthcare consumers. As you've heard from us many times before, we are addressing the market's appetite for greater healthcare transparency and affordability. We are excited to see that vision come to fruition through our new Assist portfolio announced earlier today. Assist is a growing portfolio of owned and partnered solutions designed to help employers and their employees get the most from their benefits offerings, with two immediate offerings in market. First, Analyzer provides real-time data on inefficiencies, trends, and benefit program design to help employers make smarter benefits decisions. Next, Navigator supports more informed employee healthcare decisions, along with potential rewards for making high-quality, affordable care decisions.

The third Assist offering, Momentum, will nudge employees to get the most of their company's benefits plan through personalized, AI-driven recommendations. Momentum is aimed at increasing healthy behaviors, driving down healthcare costs for both employers and employees, and improving employers' benefits plan ROI. Momentum is being developed alongside an exclusive set of innovative clients who share our vision for empowering their workers with greater transparency, relevant information, and incentives to take positive action. Together with our core offerings, the Assist portfolio joins a growing menu of technology innovations, delivering remarkable experiences for our clients, partners, and members while reducing our cost to serve. Let's toss it to Jim to go a bit deeper on their impact to our financials. Jim.

James Lucania (EVP and CFO)

Thanks, Scott. I'll briefly highlight our fiscal Q4 and 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. Q4 service revenue increased 19% year-over-year. Service revenue was a record $124.2 million, up 5% year-over-year, reflecting growth in total accounts, HSA investor accounts, and invested assets, partially offset by lower average unit service revenue as product mix continues to shift toward HSAs. Custodial revenue grew 37% to a record $144.1 million in the Q4. The annualized yield on HSA cash was 3.23% for the quarter as a result of higher replacement rates and continued mix shifts to enhanced rates. Enhanced rate placements now make up 49% of our HSA cash placements, putting us well on our way toward our goal of 60% by the end of fiscal 2027.

Interchange revenue grew 13% to $43.5 million, notably faster than account growth as members increased contributions and distributions and conducted more payments on platform versus requesting cash reimbursements for payments made off platform. Gross profit of $189 million was 61% of revenue for the Q4, down slightly from 62% in the Q4 last year. As Scott mentioned, in addition to seasonal factors, gross profit during the quarter was reduced by approximately $17 million of additional service costs incurred to protect members from and reimburse those impacted by sophisticated fraud activity and to assist members during our card processor consolidation. We continue to invest in our fraud prevention and detection capabilities, and we believe these event-driven costs will continue in the first half of FY26 but normalize towards the end of the year.

Net income for the Q4 was $26.4 million or $0.30 per share on a GAAP EPS basis. Non-GAAP net income was $61.3 million or $0.69 per share. Adjusted EBITDA for the quarter was $107.8 million, up 9% compared to Q4 last year, and adjusted EBITDA as a percentage of revenue was 35% compared to 38% in the Q4 last year, and it was, of course, impacted by the event-driven service costs referenced earlier. For our full fiscal year 2025, revenue was $1.2 billion, up 20% year-over-year. Adjusted EBITDA rose 28% to $471.8 million. Adjusted EBITDA margin increased 240 basis points to 39%. Turning to the balance sheet as of year-end, January 31, 2025, cash on hand was $296 million, as we generated $340 million of cash flow from operations in FY25.

The company repaid $50 million of revolver borrowings during the year, leaving approximately $1.1 billion of debt outstanding net of issuance costs. The company also repurchased $122 million of its outstanding shares during fiscal 2025, leaving $178 million remaining on our previously announced $300 million share repurchase authorization. Our fiscal 2026 guidance reflects the expected carry forward of our strong sales trajectory into next year: technology and security investments to reduce fraud and drive operational efficiencies and continued tailwinds from current forward interest rate curves. We expect revenue in a range between $1.28 billion and $1.305 billion. GAAP net income in a range of $164 million to $179 million, or $1.85 to $2.01 per share. We expect non-GAAP net income to be between $318 million and $333 million, or $3.57 and $3.74 per share, based upon an estimated 89 million shares outstanding for the year.

Finally, we expect adjusted EBITDA to be between $525 million and $545 million. We expect the average yield on HSA cash will average approximately 3.45% during fiscal 2026. As a reminder, we base custodial yield assumptions embedded in guidance on projected HSA cash deployments and rollovers, a schedule of which is contained in today's release, as well as 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. Seasonally, our Q4 is usually our highest service cost quarter of the year. As our busy onboarding season peaks, we usually see member service costs normalize starting in Q1. We continue to invest in protecting our members' assets and data while providing them a remarkable experience.

We expect heavier-than-normal costs in our first two quarters towards that effort, followed by better margins in the later quarters from those investments. Our guidance includes additional expected share repurchases under the $300 million repurchase authorization and further reductions in revolver borrowings in the fiscal year. With continued strong cash flows and available borrowings on our revolver, we will maintain ample capacity for portfolio acquisitions should they become available. We assume a non-GAAP income tax rate of approximately 25% and a diluted share count of 89 million, including common share equivalents. We also assume a GAAP tax rate for fiscal 2026 at about 25%. As we've done in previous reporting periods, our fiscal 2026 guidance includes a reconciliation of GAAP to the non-GAAP metrics provided in the earnings release, and a definition of all such items is included at the end of the earnings release.

In addition, while the amortization of acquired intangible assets is being excluded from non-GAAP net income, the revenue generated from those acquired intangible assets is included. With that, Operator, let's open up the line for questions.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question today is from Glen Santangelo with Jefferies. Please go ahead.

Glen Santangelo (Managing Director)

Oh, yeah. Thanks, Scott and Jim. Thanks for taking the question. Hey, Jim, I just wanna follow up on these incremental service costs you're talking about. I think in your prepared remarks, you said you incurred about an incremental $17 million in Q4. I'm kinda curious, did anything specific happen, or is that just the decision you all decided to make on the investment front? You know, just as a follow-on to that, the cadence throughout fiscal 2026, you said it's obviously gonna be more weighted to the first half. Are these one-time costs, or are these costs that are gonna be sort of included in the base going forward? If you could just help us think about the cadence through fiscal 2026, that'd be helpful. Thanks.

Scott Cutler (CEO)

Yeah. Thanks, Glen, for the question. Really, it's the same topics that we talked about last quarter, right? We have these sophisticated fraud actors. You're seeing a combination of the cost to reimburse members for fraudulent activity in their accounts, as well as the service costs related to our contact centers, taking those calls, dealing with those calls, confirming bad activity in the account. It's a combination of actual reimbursement events as well as the excess cost to deal with those events. Recall we talked that was about an $8 million impact for us in Q3. We obviously plan for a bit of that to continue in Q4, but obviously, we're overly optimistic on our ability to be in front of that.

It was more than we expected in Q4. We're expecting that to continue into the first half of the year. Obviously, we don't sort of guide quarterly, but trying to give you a view that we expect a little bit of continuation and trail down into the beginning of the year here, and sort of the back half being more normalized like you would expect on the service cost side.

Glen Santangelo (Managing Director)

Okay. Thank you.

Operator (participant)

The next question is from Gregory Peters with Raymond James. Please go ahead.

Gregory Peters (Managing Director of Insurance)

Good afternoon, everyone. I think my question around the earnings guidance part of the answer might deal with this cybersecurity issue you were talking about. When I look at your range for the fiscal year 2026, I'm just curious, what kind of levers or what kind of issues can pop up that can drive the result towards the bottom end of the range? I think the consensus numbers are steering towards the top end of the range. I'm just curious, inside your modeling, what are the factors you're seeing that could lead to a result towards the bottom end of the range?

Scott Cutler (CEO)

Jim, you want me to take that? I'll take it.

James Lucania (EVP and CFO)

Yeah. Yeah.

Scott Cutler (CEO)

Yeah. Go ahead.

James Lucania (EVP and CFO)

Yeah. Greg. Yeah. Greg, you know, just reiterating sort of the trends that are driving the business overall that we just view as tailwinds that we're very optimistic around. You know, first of all, as it relates to the custodial, the custodial line, we are very confident on the continued penetration of enhanced rates. Jim talked about our long-term focus of getting towards 60% in a couple of years. The new money that's coming in, 85% of new members are going into the enhanced rate product. We see upside associated with the maturities, you know, as you know, that are coming off. Again, reminder, in fiscal year 2026, that's $2.3 billion at 2.5%, and fiscal year 2027 at $4.1 billion at 1.9%.

You know, so I think when we see the growth from HSA sales that we've had here this year, plus those drivers, we're confident in terms of some of these things in terms of just business as usual, as we go, and then some just being powered by the growth that we've had associated with the business. I think when you look at then the carry-through of what we're doing, more on the margin side and the services side that Jim highlighted, I think we've also highlighted a couple of different opportunities there. Number one, as we look at just the expense base overall, you know, we plan on looking at our functional areas to effectively grow those expenses slower than revenue.

We see opportunities associated with our service modernization efforts that we're gonna continue to execute on and, you know, still find that opportunity to drive margin expansion in the business overall. You know, I think, again, building on the momentum that we have coming out of this year gives us that opportunity to, you know, look at our guide that we're optimistic on for this next year.

Gregory Peters (Managing Director of Insurance)

Got it. Just a clarification on your answer. I, and you may have said this, but what was the percentage in enhanced yield at year-end?

James Lucania (EVP and CFO)

49%.

Gregory Peters (Managing Director of Insurance)

Got it. Thank you very much for your answers.

Scott Cutler (CEO)

Thanks, Greg.

Operator (participant)

The next question comes from Stan Berenshteyn with Wells Fargo Securities. Please go ahead.

Stan Berenshteyn (Senior Equity, Digital Health)

Hi. Thanks for taking my questions. On the Assist initiative, is there any direct monetization associated with any of these products? Can you disclose which partners are involved in the partner solutions? Thanks.

Scott Cutler (CEO)

Yeah. I'll take that on. You know, first of all, as we look at the overall strategy here, and I've communicated, the focus here is on a member-first secure mobile experience, which is maybe slightly a different language than you've heard us talk. It is consistent with what we've outlined in our 3D strategy. I think that's really informed by me coming in where, you know, today's consumers expect a digital-first mobile experience. They expect kind of security as a seamless part of that process. When we look at the market opportunity that Assist is really going after, Stan, it's really focused on enrollment, adoption, and engagement.

Analyzer, as an example, is a product that's internally developed, and we're leveraging the data, the insights, the integration that we have with plans, the insights that we have on reimbursement, to actually help our clients or employers manage an increasing healthcare cost that's growing faster than wages. Just to give you a couple of stats on that, 3% of our HSA members max their HSA contribution, and about 8% of HSA members have invested. We think there's a significant opportunity to help clients, you know, effectively drive savings in healthcare costs while also helping their members maximize the benefits associated with that product. The other product that we announced, Navigator, this is in partnership with Talon, and this is really designed to help on that engagement side.

And this is really also driven by changes in the regulatory environment that's requiring transparency for plan providers, helping clients also driving compliance as well as engagement on that. We talked a little bit this last year on HPA, which is in partnership with Paytient. and this is really meant to drive access to have more HSA clients, d you know, use this product to help drive adoption of a high-deductible health plan. Probably the last one that we highlighted, which is Momentum, which, again, this is gonna be a product that is leveraging our unique open system that's connected again with our partners as well as plans and providers that we're gonna leverage technology, insights, data, and AI to drive better behavior, give our members better nudges so that they can make more informed healthcare decisions.

Hopefully, that gives you a sense of partially the things that we're doing on our own and then the areas where, you know, we'll use partners.

Stan Berenshteyn (Senior Equity, Digital Health)

Yeah. Thanks. Maybe just a quick follow-up on this. You had record member growth this year. Has any of this been a result of better engagement to drive enrollment within your client population? Does that translate in better conversion rates on the member side? Thanks.

Scott Cutler (CEO)

Yeah. The growth that we saw this year, in terms of the, on the client side came from the small and medium-sized businesses. And I think that's a lot about, you know, kind of our effort. You know, I think what we view as the opportunity, within the existing client base, as I, you know, shared on the, the opportunity side, we are implementing with our sales and relationship management team, a lot of efforts. You know, for example, Analyzer has been out there with a number of clients that have, that have been using it already to drive engagement and enrollment. And we see that opportunity to kind of like digitize the sales experience by leveraging data that our clients can use to effectively put together better plan design to drive greater enrollment.

It's kind of the mix of all of the things that we're doing, you know, that's driving both an assisted growth through data and insights as well as the efforts that we have on the sales team of engaging our network partners, as we're going to market.

Gregory Peters (Managing Director of Insurance)

Great. Thanks so much.

Scott Cutler (CEO)

Thanks, Dan.

Operator (participant)

The next question is from Anne Samuel with JP Morgan. Please go ahead.

Anne Samuel (Executive Director, U.S. Healthcare Technology and Distribution)

Hi. Thanks so much for the question. You know, you've been highlighting a lot more of your technology enhancements recently. I was maybe just hoping you can speak to how we should be thinking about, you know, investment in R&D going forward. Is this something you plan to ramp as you lean a little bit more into tech enablement, or is that, you know, kind of being reallocated from other areas?

Scott Cutler (CEO)

Yeah. Thanks. I would not expect any material change in terms of the percentage of our revenue that we will be spending on product and tech. I would expect, you know, given I'm coming in new to the situation and driving this focus on this member-first experience, for the impact to be more in what we're prioritizing. As we look at our roadmap going into the future, the things that we've prioritized, again, with that orientation, is building on some of the great success we've had on the tech side this last year. For example, app downloads where we have over a million. We launched the app this last summer. I would expect us to continue to drive adoption of the app for our members. It's a more engaging experience.

It's the digital-first experience that they expect. It's also a more trusted and secure way for us to authorize and authenticate users on the platform. I really like the continued investment that we've had on the AI side. Claims AI, as we talked about in the past, is leveraging, again, data and insights on reimbursements to automate the reimbursement process for claims. We've had that rolled out with thousands of clients covering, I think, over a million members. That's a whole way for us to automate, you know, the claims process and reimbursement process. Ann, as I look at the financial framework for our product and tech, I would expect us to become more efficient in that absolute dollars cost.

Our priorities really is just gonna be shifting the resources around to make sure we're delivering against that, that member-first, secure mobile experience that I'm really excited about enhancing, the, you know, both the effectiveness and the speed with which we're delivering that type of product out to our clients and members.

Anne Samuel (Executive Director, U.S. Healthcare Technology and Distribution)

Really helpful. Thank you.

James Lucania (EVP and CFO)

Thanks, Anne.

Operator (participant)

The next question is from David Roman with Goldman Sachs. Please go ahead.

David Roman (Managing Director)

Thank you and good afternoon, everybody. I wanted just to pick up on a comment you made earlier regarding HSA member growth and just make sure we understand the trend and potential implications. I think you made a reference to an increasing percentage of the HSA member growth coming from smaller employers, and maybe just talk to us where we are in that trend. Are we at a position on a go-forward basis given your market share where those types of companies are critical to the growth rate? Maybe a follow-up, as you think about capital allocation, you talked a little bit about the balance sheet. The WageWorks acquisition has, I think, gone really, you know, quite well for the company.

Maybe you could sort of talk about the M&A environment and any latest thinking on prioritization of internal versus external investment.

Scott Cutler (CEO)

All right. More than one question in that one. I'll see if I can remember, re-remember that. Thanks. On the HSA growth side, you know, again, when we're looking at our opportunity, as we look at the market segments, you know, one amongst our largest clients, we're really looking at, again, as we talked about, leveraging all of the insight for us to be able to drive more adoption and enrollment within our existing client base. On the new logos, you know, while we see growth on different sizes of enterprise, we saw more this last year from that small and medium-sized business.

You know, in terms of that as a, as a long-term trend, you know, I guess what I would say is that I wouldn't ex—we're not, we're not changing our approach, other than the fact that we're trying to, you know, again, leverage technology to put our sales team in a position to be leveraging data that is at the fingertips of our, of our clients and our brokers so that they can drive a more engaged experience for, you know, for their, for their clients, as well. I think as you also look at, this was a record year, and I just really wanna congratulate our team for doing that. Surpassing the million new HSA accounts has never been done by anyone before in our industry.

You know, I think as we look at the market share numbers that will probably come out in the coming weeks, we're, you know, we're optimistic in terms of the growth that we're seeing in the business overall. As it relates to the M&A environment, I think was just another question that you had. David, I don't know if you were just talking about that generally or, you know, what is our strategy? Make sure I answered that right.

David Roman (Managing Director)

Yeah. I was talking more about your strategy and how you're thinking about organic investment in the business versus,

Scott Cutler (CEO)

Yeah.

David Roman (Managing Director)

M&A and then the interplay between the two.

Scott Cutler (CEO)

Okay. You know, on that side, from an M&A perspective, we're gonna have a very high bar for inorganic opportunities for expansion. We've got a great track record at looking at portfolios, non-operating businesses, portfolio acquisitions that would still be right down the fairway for us. I think anything outside of that is gonna be a very, very high bar that really has to deliver both financial results and be consistent with our mission. I think we see a much greater opportunity, and really all of our focus, is gonna be around our own execution against growth in the industry. Again, when you take a step back and you look at the penetration, the awareness, the knowledge of the benefit of HSAs for both clients and with members, that's where we see the most significant opportunity for growth.

You know, the focus on our 3D strategy of deepening our partnerships as an example, using more technology to drive a digitized sales experience, creating greater connectivity, and creating more products to, again, drive enrollment, drive adoption, drive contribution. We think those are the ways that we can lean in and control the destiny of how we continue to grow the business.

David Roman (Managing Director)

Great. Thanks for taking the questions.

Operator (participant)

The next question is from Scott Schoenhaus with KeyBank. Please go ahead.

Scott Schoenhaus (Managing Director of Healthcare Technology)

Hey, team. Thanks for taking my question. I just wanted to drill in more on the cadence of the margin, the gross margins on the services side. Is this something, you know, is the improvement in the back half of the year driven by an assumption of, you know, less fraud actors, or is it more that you'll shift more people onto the app and drive down service costs for calls? Can you help us, like, mitigate what's driving the re-expansion of margins in the back half of the year? Thanks.

James Lucania (EVP and CFO)

Yeah.

Scott Cutler (CEO)

Yeah. The answer is part of that?

James Lucania (EVP and CFO)

Yeah. Yeah. I can do yeah. The first part. Yeah. The answer is yes, both of those things, right? So, but for these excess costs that we were talking about, you would have seen us report another significant reduction in service costs per account, right? And that, and that's the north star of, of my service and ops partners. Like that, that work has not stopped. And they achieved, you know, pretty great results during the year aside from these, these sort of point-of-time, events here. Yes, we are assuming in our guidance that the steps we're taking are going to stem this, like, fraud and related items around it, meaning excess calls, just excess contacts, and excess work for our service center. The day-to-day performance of that team has been excellent. And we're assuming that trend continues into next year.

It, it, it's exactly that, right? We'll sort of get if, if we can eliminate these, these event-driven costs, right, we'll, we'll get a service cost reduction there, for free, for, for lack of a better word, and then sort of return, return to normal, going forward. And our, our sort of, you know, fraud position is like you're talking about like one basis point on our total assets for annual fraud is kind of a, a benchmark for us. This, that, that's a very, very small number.

Scott Cutler (CEO)

Yeah. I guess I'll, I'll speak to it also, also strategically is that, you know, as it relates to, as we talked about here, our fraud and security posture, my first hire as CEO was a, is our CISO, Sunil Seshadri. We are prioritizing that member-first secure mobile experience. We're investing against that.

We're prioritizing security and fraud prevention efforts as we have in the past. We're gonna continue to build a great team in this area, you know, as we're enhancing our systems and platform, and our apps from a security perspective. I, you know, I think that the investment there, you know, we should expect to see those costs associated with fraud moderate, as we've highlighted. I think the second thing is that going a little bit deeper into service modernization, as we think about the opportunity, you know, we handle millions of calls, phone-based calls from our members every single year. A significant percentage of those calls are used to authenticate who the member is. Many of those calls are things like, what is my account balance, change address, reset my password.

As we look at our ability to automate a lot of those interactions, whether or not that be on the front end or be able to reduce contact drivers as well, we just see significant opportunity on the overall service cost per account, to be able to use technology to drive down those call drivers, drive down the cost while also increasing the quality of the experience and the channels that our members sort of expect from us. That really does get to ultimately, over time, a lower service cost per account. Great. Thank you.

Operator (participant)

The next question is from Mark Marcon with Baird. Please go ahead.

Mark Marcon (Senior Research, Human Capital Technology and Solutions)

Good afternoon, and thanks for taking my question. With regards to, you know, these issues that came up during the third and now the fourth quarter, can you talk a little bit about what the member reaction is and what the employer reaction is? Can you let us know, you know, what client retention from an employer perspective was over the course of this year?

James Lucania (EVP and CFO)

Yeah. I'll take that. You know, our highest priority is delivering a remarkable experience for our clients and for our members. You know, protecting our members' accounts is kind of a joint opportunity in the sense that the members, with respect to a physical card or their passwords as an example, need to be protected. We stand behind the service that we provide and the experience that we provide. You know, our team, which is Team Purple, is so committed to delivering that remarkable experience. You know, we really do, and the team prides itself on how we handle those issues when they come up.

And certainly for a member or a client that has, you know, something less than remarkable, our team does everything that we can do to make sure that we make that right. How that, you know, translates into our business, you know, obviously as we look at that, we want to make sure that we're retaining clients and members. You know, proud to say on top of, you know, really strong sales momentum, we're really proud of our retention results, which are in the high 90% in terms of clients that we retain. We're, and so that has been unchanged, even as we've gone through some of these challenges associated with Q3 and Q4.

I think, again, continuing to drive differentiation in our service, differentiation in our product, and then delivering on both of those things, you know, I think is the promise that we expect from our clients. We are certainly seeing a strong trend in that regard for them.

Mark Marcon (Senior Research, Human Capital Technology and Solutions)

That's good to hear. Thank you.

Scott Cutler (CEO)

Thanks, Mark.

Operator (participant)

The next question is from Allen Lutz with Bank of America. Please go ahead.

Allen Lutz (Equity Research, Healthcare Technology & Distribution)

Good afternoon, and thanks for taking the questions. I wanted to ask one for Steve. Last quarter, you talked a lot about just general excitement around, expanding access to portable health accounts. I think you mentioned the HOPE Act, HSA modernization, and then other things the incoming administration can do. Can you just give us an update on where things stand today relative to December, if anything's moved? And then a quick one for Jim. Do you have insurance for the fraud activity that took place? Thanks, guys.

James Lucania (EVP and CFO)

Yep. I'll start. Thanks, Alan. You know, I think good news is, is the government remains open for business now, so they can keep working on getting this reconciliation bill put together. As we said, we think that there are still these three clear pathways, whether it be the re-reconciliation bill, which, you know, we've continued to kind of discuss different opportunities with the legislators there. We do think that there's, you know, a piece of this package that will allow for HSA expansion or HOPE accounts that have been introduced. Also, you know, we've got the bipartisan legislation that continues to grow that, as you know, it was reintroduced in February, February 4th, in a bipartisan way. It's great to see these legislators coming together.

These regulatory changes, I think in the last Trump administration, they did some pretty important things that would allow employers to continue to expand their HSA offering. We know that, look, that it's a $4.5 trillion-$5 trillion package. It's, you know, they're working towards this reconciliation budget resolution process, but what we're hearing is that they're doing everything they can to create some space for this type of expansion in HSAs. I mean, that's what they've talked about publicly. There are several bills that have been introduced beyond the HOPE Act, which allows for HSA expansion. We know there's a lot of legislators out there that feel like this is really important as they're doing this tax package that goes through. We remain optimistic and hopeful.

We won't know until, you know, it really starts coming out of committee in probably the next month or two. It depends on the timing. I mean, there are some folks out there that think they can get this all put together before Memorial Day, but we'll see if that's true. We do remain hopeful and that you, you know, there's a lot of talk around there about HSA expansion. We're gonna keep doing everything we can to support the effort and with both HSAs and HOPE.

Scott Cutler (CEO)

Yeah. On the, Yeah. Thanks, Steven. On the insurance question, right, there's not really a lot to talk about yet on it, but like yes, under sort of a general crime policy, we will work with our insurers over the next quarter or so to see what can be recovered there from those policies.

Allen Lutz (Equity Research, Healthcare Technology & Distribution)

Great. Thank you.

Scott Cutler (CEO)

Thanks, Alan.

Operator (participant)

The next question is from David Larsen with BTIG. Please go ahead.

David Larsen (Managing Director of Healthcare IT and Digital Health)

Hi. It seems to me like you're building exactly what RFK, Jr. would want, a technology platform that can provide nudges and incentives to members to keep them healthy and seek quality, care at lower-cost sites. That would obviously be a benefit to the cost of total Medicare longer term. Hopefully, the Congress Budget Office is taking that into account when they're doing their scoring. My question is really related to the fraud activity. It sounds like it was one large actor who did this thing. Has it been resolved? Like, were those costs, did those include like programmers from an external security firm that sealed, like sort of breaches in the software? Did you implement like a dual mobile sort of identification process for all members so they're now verified when they dial in?

Did you have to pay a ransom? Was the FBI contacted, and were the malicious actors arrested? Basically, was this whole thing resolved, so we can expect the margins to get back up to like 65% in the fourth quarter of your gross margins? Thanks a lot.

Scott Cutler (CEO)

Thanks. Thanks, David. I'll take that. A couple of things. One, just wanna make sure we're not confusing two things. One, as it relates to, you know, data itself, securing personal information, that's not what we're talking about here. We're talking about fraud, and it is not one actor. As you look at the profile of what's happening out there in the market, you know, we have continuously taken steps designed to ensure that our platforms, our data, our systems remain available and secure. At the same time, the number of bad actors, state actors that are leveraging technologies, you know, continue to focus on, you know, financial services, companies like us. These things are tricky in the sense that there's not one bad actor, there's not one single party involved.

For us, as we think about the strategy therefore, you know, we have to look at various levels of security in terms of the internal controls, the protections that we provide from a network perspective, an application perspective, an identity perspective. We think about it holistically in terms of how we have to both protect accounts from being taken over, how we have to identify fraud or fraud that might be happening to a member or their card. You know, that is, you know, largely it gives you a sense of kind of like the scope of the things that we're focused on.

You know, and I think from an experience perspective, as we look at different ways to secure the member experience as we, you know, make a move towards a stronger mobility, introduce, you know, even more efforts associated with multi-factor authentication, you know, we think all of these things, combined, help us to be able to stem the recent trends that we've been seeing on fraud. I don't know, Jim, would you have anything else to add? Yeah. No, that's the core point. I think couple questions, or comments from the group, right? Like, this is not a cybersecurity in-incident, right? Like, this is your good old-fashioned account takeover, bad actors impersonating you, right, and act, and entering your accounts.

Like, I'm sure many of you have had bad credit card payments or bank account transactions that you didn't recognize. This is the type of activity that we're talking about and vis-à-vis that insurance claim. That's why we're talking about the crime insurance policy, not some sort of cybersecurity incident. I just wanna make that distinction crystal clear.

David Larsen (Managing Director of Healthcare IT and Digital Health)

Jim, when do you think you'll get back up to a 65% gross margin? Thanks.

James Lucania (EVP and CFO)

Yeah. Again, like, we don't, we don't provide the quarterly guidance or detailed guidance like that. I think what we have said is, like, we're gonna see elevated service costs in the first half of the year. We expect to be more back to normal in the back half of the year. We expect to exit this year in a really strong, in a really strong position in the service cost. Again, we are not targeting a service margin per se or gross margin per se. Like, what we're trying to do is drive down the unit cost to serve 'cause that, that's in our control. The, you know, interchange is gonna, is kinda gonna be what it's gonna be, right?

Like, with our ability to sell, our ability to sell accounts is gonna keep growing the interchange line. Our ability to keep driving contributions is gonna drive the custodial line. And mixed towards those lines drives gross margin higher. But, you know, what we're trying to do is drive down unit service cost, because that's like the most tangible, controllable above-the-line expense that, that we can, that we can bend the curve in.

David Larsen (Managing Director of Healthcare IT and Digital Health)

Thanks very much.

Operator (participant)

The next question is from Steve Valiquette with Mizuho. Please go ahead.

Sam Hasanov (Equity Research Associate)

Hi, team. Thanks for taking the question. This is Sam Hasanov asking for Steve. Just wanted to gauge your guys' thoughts on any incremental or high-level color on EBIT growth, by segment for 2026, particularly in custodial EBIT. Thanks.

Scott Cutler (CEO)

Yeah. Again, we wanted to further to the, yeah, to the comment that we just made, right? We don't provide any detailed guidance at that level. We don't have segments, or report EBIT or operating income at that level. So, we're just not gonna provide that kind of granularity. Understood. Thank you.

Operator (participant)

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

Scott Cutler (CEO)

Thank you. I just wanna thank our team, Team Purple, for the great results from this last quarter. This is one of those quarters that it was a team effort. It was a team effort for the year. Our team is prepared for the years to come. We wanna thank our shareholders. We wanna thank each of you for your support. I look forward to meeting many of you face-to-face in the upcoming weeks and months, and we'll continue to report to you our progress against these objectives. Thank you, everybody.

Operator (participant)

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