Healthequity Inc

NASDAQ:HQY

Q3-2026 Earnings Call

[Operator]

Good day, and welcome to the HealthEquity Third Quarter 2026 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Richard Putnam. Please go ahead.

[Richard Putnam, executive]

Thank you, Dave. Hello, everyone. Thank you for joining us this afternoon. This is HealthEquity's Third Quarter Fiscal Year 2026 Earnings Conference Call. My name is Richard Putnam. I do Investor Relations for HealthEquity. Joining me today are Scott Cutler, President and CEO; Dr. Steve Neeleman, Vice Chair and Founder of the company; and James Lucania, Executive Vice President and CFO. Before I turn the call over to Scott for prepared remarks, we note that a press release announcing our third quarter financial results was issued after the market closed this afternoon and that it included certain non-GAAP financial measures that we will reference here today.

You can find a copy of today's press release, including reconciliation of these non-GAAP measures with comparable GAAP measures on our Investor Relations website, which is ir.healthequity.com. We also note that our comments and responses to your questions today reflect management's views as of today, December 3, 2025, and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates or other information that might be considered forward-looking. There are many important factors relating to our business, which could affect our results. These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from statements made here today.

We caution against placing undue reliance on these forward-looking statements, and we also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock as detailed in our latest annual report on Form 10-K and in subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information or future events. With that out of the way, let's go to Scott.

[Scott Cutler, executive]

Thank you, Richard. Happy holidays, and welcome, everyone. I'll start with the key metrics that reflect our continued strong fiscal 2026 results and the progress we're making on our strategy. Steve will then speak to the regulatory environment, and Jim will walk through our third quarter financials and our raised outlook for fiscal year '26. The team again delivered strong year-over-year growth and margin expansion across our key metrics in Q3, including revenue up 7%, net income up 806% year-over-year, a result that Jim will explain in more detail in a moment, adjusted EBITDA up 20%, driven by gross margin of 71% and adjusted EBITDA margin of 44%. HSAs grew 6% CDB accounts up 3%, driving total accounts up 5% and HSA assets up 15%.

Behind these numbers is a clear strategy, helping our members better save, spend and invest for health and strengthening the flywheel in each of those areas. We are operating against a real affordability challenge for American families and employers. Health care costs continue to rise faster than wages and both households and enterprises are looking for more practical ways to budget for health care today while preparing for tomorrow. HSAs sit at the center of our solution to that challenge. They are a proven engine for consumer-directed health care and long-term health savings. On the better save side of the flywheel, we are helping more members build tax-advantaged health savings and making it easier for them to contribute.

HealthEquity ended Q3 with more than 17 million total accounts, including more than 10 million HSAs. We grew net CDB accounts by over 200,000 year-over-year, and Team Purple opened approximately 175,000 new HSAs from sales in the quarter. The average HSA balances grew 8% year-over-year, contributing to the 15% increase in HSA assets. We remain optimistic about new account growth in Q4. That optimism is grounded in the work we're doing with employers and partners on plan design to support HSA adoption, new employer clients, including those offering HSAs for the first time and the large new opportunity to open retail HSAs for those choosing Bronze plans on the ACA exchanges.

To support this opportunity, we launched a new direct HSA enrollment platform with a streamlined digital experience, enabling individuals to open and fund HSAs directly through HealthEquity's mobile and web platforms. This positions us well as millions of households consider Bronze plans in the months ahead. The better spend flywheel is about helping members stretch their health care dollars further and gaining greater access to health resources. Last year, more than $40 billion was spent by Americans through HSAs on eligible medical products, programs and services. We are pleased with the early momentum of the HealthEquity Marketplace platform, which is providing access to affordable health care solutions, including our first program supporting weight loss through GLP-1s.

Early adoption from subscribing members has been encouraging, and the early retention data is positive. By offering GLP-1s through the HealthEquity marketplace, members experience a coordinated journey from within the HealthEquity app and web portal to an HSA-eligible program that supports healthier outcomes and helps employers mitigate rising cost pressures. Payments made with HSAs may be tax advantaged, providing additional savings for members. Later this month, we will be expanding our marketplace further, providing greater access to health care solutions for our members. The better and best flywheel is about securing our members' assets and helping them grow health care savings for the future. Our HSA members now hold over $34 billion in HSA assets, up $4.5 billion year-over-year. The number of our HSA members who invest grew 12% and HSA invested assets grew 29% to $17.5 billion.

As more members move from saving to investing, they build long-term tax advantage health wealth that can support care needs well into retirement. We are entering our busy season well prepared to welcome new members with an enhanced member-first secure mobile experience and market-leading products and services. Our members benefit from advanced security features, including passkey technology and from our integrated network of leading health plans and our growing marketplace, all accessible through our intuitive HealthEquity app and web experience. Our investments in security are delivering strong results for our members. In the third quarter, fraud costs totaled approximately $0.3 million, well below our run rate target of 1 basis point of total HSA assets per year.

We continue to invest in additional security measures and technologies to protect our members' health savings while maintaining a simple, seamless experience in our secure mobile channel. We are proving that we can deliver industry-leading security and a remarkable experience at the same time. We are committed to continually strengthening our defenses as threats evolve. We will also see significant potential in AI. We believe AI will unlock a more personalized, efficient and empowering future for health care consumers, and HealthEquity is uniquely positioned to lead that transformation. Our expedited claims solution is already providing quicker and more accurate payments to members while reducing service costs.

HSAnswers and HealthEquity Assist, along with our work with CX leader Parloa, are building an integrated AI experience that supports members wherever they are through voice calls, support lines, chat or web-based conversations. These capabilities are designed to improve service, reduce friction and help members save, spend and invest for health. Taken together, these experience enhancements, our mobile platform, our fraud and security investments, our marketplace and our emerging AI capabilities are essential to HealthEquity's broader strategy and to the flywheels that drive our growth.

On the legislative front, our leaders in Washington continue to focus on expanding the use of HSAs to address health care affordability. Steve and our government affairs team continue to do a remarkable job of educating our legislators and their staff about the benefits of HSAs and the growing demand for greater access from American families and employers. With that, let me turn it over to Steve to walk through the policy landscape and how HSAs are being discussed in Washington.

[Stephen D. Neeleman, executive]

Thanks, Scott. Let me touch on the public policy environment and how HSAs are being talked about in Washington. First is the nation's leading custodian of HSAs and one of the first companies to launch them after their enactment over 20 years ago. We are strong believers in HSAs and the role they play in empowering health care consumers, helping employers focus their health care investment and supporting a broader health system that delivers more value through lower costs and better outcomes. We are encouraged that policymakers in Washington are considering options that could make HSAs available to more Americans and to use them as a key mechanism for delivering government support to improve affordability. We support President Trump's proposal that aligns with our long-standing belief that every American should have an HSA.

At the same time, our core business is not predicting public policy or legislative outcomes, which specific bills will or won't pass, how ACA subsidies may change or which legislative mechanisms might carry them. Our mission is to save and improve lives by empowering health care consumers. We stand ready to assist policymakers who are considering ways to expand the ability of more Americans to benefit from HSAs. As we shared during our last earnings call, we were encouraged for the first time in roughly 20 years, there was meaningful expansion of HSA eligibility this summer. We view that change as a sign of growing recognition that HSAs are a powerful tool to help Americans prepare for current and future health care needs. There is a real affordability challenge affecting many American families, employers and the health care system overall.

In a recent third-party study with some of our largest employers, representing nearly 1 million employees, those employers with higher HSA adoption experienced significantly lower per employee health care costs than those with lower adoption in HSAs, while their employees save more premiums and taxes while growing their HSA balances. That is what consumer empowerment looks like in practice. Our position is straightforward: expand access to HSAs and strengthen consumer control. Our focus has been and will continue to be on helping policymakers understand how HSAs work in the real world, why they are a practical consumer-focused tool and how HealthEquity as a leader in this space can help more Americans use HSAs to better save, spend and invest for health under a variety of policy scenarios.

We are encouraged by the elevation of HSAs into the national health care discussion and view this as a very positive development. And whatever form future legislation takes, our job does not change. I'll pass it over to Jim now to discuss our financials. Jim?

[James Lucania, executive]

Thanks, Steve. I'll review our third quarter fiscal 2026 GAAP and non-GAAP financial results. As always, we provide a reconciliation of GAAP measures to non-GAAP measures in the press release. Third quarter revenue increased 7% year-over-year. Service revenue increased 1% year-over-year to $120.3 million. Custodial revenue grew 13% to $159.1 million in the third quarter. The annualized yield on HSA cash was 3.53% for the quarter as a result of higher placement rates and continued increase in balances and the number of accounts participating in enhanced rates. Interchange revenue grew 6% to $42.8 million, again, ahead of our 5% total account growth. Gross profit of $228.1 million resulted in 71% gross margin in the third quarter, up from 66% in the third quarter last year.

Service costs declined $10 million year-over-year in the quarter, even more than the $8 million in elevated service costs that impacted the third quarter last year. The third quarter this year included approximately $0.3 million of fraud reimbursements to members. And as Scott mentioned, we are ahead of our goal to achieve a run rate of 1 basis point of total assets and fraud costs per year. Our investments in fraud prevention and detection capabilities, AI service technologies and our member-first secure mobile experience are delivering greater member functionality and satisfaction while improving margins at the same time. The actions we're taking and are expected to drive efficiency in our operations, not only this year but into fiscal '27 and beyond.

Net income for the third quarter was $51.7 million or $0.59 per share. As Scott mentioned earlier, net income is up 806% compared to the third quarter last year, which included a $30 million onetime legal settlement. The settlement was backed out of last year's non-GAAP measures, so non-GAAP net income increased 26% to $87.7 million and non-GAAP net income per share grew 29% to $1.01. Adjusted EBITDA for the quarter was $141.8 million, up 20% compared to Q3 last year, and adjusted EBITDA as a percentage of revenue was 44%, up 460 basis points compared to 39% in the third quarter last year.

Turning to the balance sheet. As of October 31, 2025, cash on hand was $309 million as we generated $339 million of cash flows from operations in the first 9 months of fiscal '26. We ended the quarter with approximately $982 million of debt outstanding net of issuance costs after paying down $25 million on the revolver during the quarter. We also repurchased approximately $94 million of our outstanding shares during the quarter, and we have approximately $259 million remaining on our previously announced share repurchase authorization. For the first 9 months of fiscal '26, revenue was $978.8 million, up 10% compared to the first 9 months of last year. GAAP net income was $165.5 million or $1.88 per diluted share. Non-GAAP net income was $268.1 million or $3.05 per diluted share. And adjusted EBITDA was $433.1 million, up 19% from the prior year, resulting in 44% adjusted EBITDA margin for the first 9 months of this year.

Before I detail our raised guidance and assumptions, let me briefly update you on the interest rate forward contracts we've discussed on prior calls. As a reminder, we expect these contracts to have little to no impact on our FY '26 income statement, and we expect they will further derisk potential interest rate volatility on future HSA cash deposit contracts. To date, we've entered into U.S. treasury bond forward contracts with a notional amount of approximately $2.3 billion, tied to basic rate contract maturities between January 2026 and August 2027 and a blended rate lock of 3.94%, not including the negotiated premium that we receive above the 5-year treasury benchmark on our enhanced rates placement. We expect to execute additional interest rate hedges depending on market conditions.

We expect the average yield on HSA cash will be approximately 3.54% for fiscal '26. As a reminder, our custodial yield assumptions are based on projected HSA cash deployments and rollovers, which are detailed in today's release. We also consider a range of forward-looking market indicators, including the secured overnight financing rate and mid-duration treasury forward curves. These indicators are, of course, subject to change and are not perfect predictors of future market conditions, but they provide a consistent framework for how we set our outlook.

Our fiscal 2026 guidance reflects the expected carryforward of current trajectories for revenue and margins over the remaining of this year along with continued investment in technology and security as we enhance our member-first secure mobile experience and deliver innovative products across the platform. We expect to continue closing fraud attack vectors and to support our members in securing their assets while investing in sales and marketing to drive HSA adoption on the ACA exchanges.

For fiscal 2026, we now expect revenue in a range between $1.302 billion and $1.312 billion, GAAP net income in the range of $197 million to $205 million or $2.24 to $2.33 per share. We expect non-GAAP net income to be between $341 million and $348 million or $3.87 and $3.95 per share based upon an estimated 88 million shares outstanding for the year. Finally, we expect adjusted EBITDA to be between $555 million and $565 million. We're pleased with how we exited the third quarter and expect to make additional progress as we finish fiscal 2026. Our guidance also assumes continued capital return and a strong balance sheet. We expect to make additional share repurchases under the remaining $259 million repurchase authorization and may reduce borrowings on our revolver during the fiscal year.

With continued strong cash flows and available revolver capacity, we will maintain ample flexibility for portfolio acquisitions should attractive opportunities arise. We assume a GAAP and a non-GAAP income tax rate of approximately 25% and diluted share count of 88 million, including common share equivalents. As in prior periods, our fiscal 2026 guidance includes a reconciliation of GAAP to the non-GAAP metrics and a definition of all the non-GAAP metrics can be found in today's earnings release. While we exclude the amortization of acquired intangible assets from non-GAAP net income, the revenue generated from those acquired intangible assets is included. We'll provide our initial outlook of fiscal 2027 at the JPMorgan Healthcare Conference in January. Now let's go to the Q&A, operator.

[Operator]

[Operator Instructions] Our first question comes from Stan Berenshteyn with Wells Fargo.

[Stanislav Berenshteyn, analyst]

On the direct HSA enrollment platform being set up for qualified ACA members, what are your marketing plans there? And how should we think about the progression of your sales and marketing expenses over the coming quarters pertaining to that? And maybe just a quick follow-up. Regarding your forward contracts, do you plan to derisk any longer duration assets beyond August 2027?

[Scott Cutler, executive]

Great, Stan. Thank you. I'll take the first 2, and I'll let Jim talk about the forward contract strategy. So first, as it relates to the direct HSA enrollment, we call it the new retail enrollment flow, obviously, to take advantage of the expansion provided by legislative activity over the summer. As we look at how we're going to compete for those new eligible HSA accounts, we want to make sure that, number one, the enrollment experience is seamless, frictionless and easy. And so we rolled out a new experience to make sure that we make it as easy and frictionless as it can be. So we're really pleased with that new experience flow. We also know that the new experience flow will roll into the core business as we go into the open enrollment season here.

We are -- we believe that we've got the most competitive offer in the industry with a $25 match for a new account. And so that's one of the marketing features we're using. We're going to market with integrated plan partners. And so we think with the power of our distribution platform that going to market with integrated plan partners helps to enhance the value proposition. And then last, as we look at the marketing expenditures, we've been leaning in on brand marketing, sort of upper funnel awareness and consideration as well as what I would call growth marketing initiatives from paid search to key terms as well as the appearance of an education of HSAs in social channels to be able to drive awareness around this new opportunity.

As we look at the opportunity overall, consistent with what we've talked about, we believe that this is a marathon, not a sprint. We think that these new enrollees are going to come in over time. When we look to our plan partners, they're still early in terms of having integrated marketing plans and integrated technology to be able to bring in these new enrollees. And so we're taking a longer-term look at it. I'd say the early results on some aspects are encouraging. When I look at contribution levels as one example, the average contribution level of these new retail enrollees is about $1,550 versus industry-wide, your average contribution to an HSA would be about $1,800.

So I think we're pleased with the quality of the retail members that are signing up. And again, we're going to be continuing to work with our plan partners to expand that. As it relates to the progression of the expenses, again, as we've looked at how to make sure we're going after that efficiency, as we had communicated before, we -- in terms of quarterizing the sales and marketing expenditures, we're ramping that spend here in the fourth quarter to be able to go after coincident with open enrollment. And we'll continue to lean into our brand and marketing activities and go-to-market rhythms to attract these new members. Maybe, Jim, you can talk about the forward contract strategy.

[James Lucania, executive]

Yes, sure. So obviously, as you can see, we reached out a little bit further into the future here. In the previous quarter, we talked about -- we had hedged maturities out, the furthest out was January of '27. Obviously, during the last quarter, we stretched a bit into the summer of '27, and those deposits were -- like we have a little midyear bolus because of further migrations that came over. So there are some basic rates maturities in the middle of fiscal '28 for us.

And then, yes, I think you can sort of expect will sort of reach out into the future a little bit to chip away. But as you can see the updated maturity schedule, it's materially less that's maturing in fiscal '28 and fiscal '29. So the heavy concentration of what we've done had been on the front end.

[Operator]

And the next question comes from Allen Lutz with Bank of America.

[Allen Lutz, analyst]

I want to follow up to Stan's question around the Bronze exchange plans. Scott, you talked a little bit about going to market with integrated plan partners. Can you talk about the split between how much contribution you would expect from those plan partners? And would there be a material contribution from sort of stand-alone HealthEquity going direct? Or is the vast majority or all of the growth going to come from where HealthEquity sits with those integrated plan partners?

[Scott Cutler, executive]

Yes. Thanks, Allen. I think when we look at the core business, as you know, we have a very efficient distribution channel, and we receive a majority of our business through a partner, and that could be through an integrated plan partner or a relationship that we might have with brokers. And so we're going to continue to leverage that distribution channel. I wouldn't say I know exactly what that's going to look like for the retail channel because, again, many of these are coming individually to the market one-to-one and not coming with an associated file with an employer as an example, which is what the core new member acquisition looks like on our platform.

And so that's why we've made such a significant investment in the retail experience to make sure that we're actually going to market with an attractive marketing message that we're educating the market around eligibility of bronze participants. I don't know as if all bronze participants know that the new legislation enables them to have access to an HSA. And so there's awareness around what the product is, their eligibility that again, as we're focused on our market activities, we're focused on targeting those places in those regions where we believe is the largest concentration of those potential members.

And so again, I think as we look at it, we want to make sure that, a, that we have a really strong integrated offering. And when I say integrated, it might be an offer that's got a click-through screen in that plan partners as well as our own and links directly to a sign-up on our own retail flow as well as showing up as a retail offering out to a general member. And so again, as we think about how that's going to progress, that's another reason why we think this is going to be a market that yes, it's expanded, but it's going to grow over time as both awareness and consideration and then enrollment evolve for, again, what I would call a retail member.

[Allen Lutz, analyst]

Really helpful. And then for my follow-up, either for Scott or for Jim, the average cash per account has been pretty consistent around $1,700 per account. As you think about all the inflation we've seen over the past 10 years or so, it seems like the minimum threshold before investing hasn't really changed much either for HealthEquity or at the industry level. As we think about all the inflation that's taken that's gone through the market over that time period, is there an opportunity to increase that minimum threshold before HSA consumers can invest? Is that something where the market is moving? Is there an opportunity? Is that something you think about? Any color would be helpful.

[Scott Cutler, executive]

Yes. So if I understand you correctly, I mean, the minimum threshold typically is set by our enterprise client. We want to make sure that people are taking advantage of the save, spend and aspect of the product of the HSA. But I think as we look at and take a step back and look at the industry overall, we still have a small percentage of members that are contributing at the max that they could allow. And so there's a big opportunity to effectively drive engagement in the actual HSA product as an example. And then if you look across the industry, only about 9% of HSA account holders are investors. And that's irrespective of what a minimum threshold would be. That number hasn't moved significantly over the years.

And so on both of those things, we have strategies to drive how we can effectively try and move that. Number one, we really need to be able to educate the market as the market leader around what are the advantages of having these accounts. I think given the health care affordability crisis that all are experiencing today, we think that value proposition is very strong. In our conversations with our clients, given that the affordability is also hitting the enterprise and that the enterprise can save on their annual increases in health care costs by driving greater adoption, we think we can have great partnership with our clients in driving that education awareness of, one, sign up for a high deductible health plan; and number two, contribute so that you have more power and ownership over your dollar.

The other thing as we think about bringing people along that progression of the flywheel from save to spend, which I'm sure we'll talk about later, to invest, we recognize that an investor actually contributes significantly more than a noninvestor. And so we're actually looking at our own experience flow in the app to make sure that the setup for investing is easy, is seamless, that you know how to do that, that the investment choices and the lineup is attractive because we know a lot of people, if they could be made aware at the time of setting up an account that also to think about how that account can be used can really drive that outcome over time.

And so I guess, Allen, I would just say is it's on us to be able to drive those numbers. I think for the industry overall, raising awareness of the product, but also driving enrollment, engagement, what we think is through a great digital experience is the way that we can bend that curve over time.

[Operator]

And the next question comes from George Hill with Deutsche Bank.

[George Hill, analyst]

Yes. I have 2 quick -- well, one quick one and one not so quick one. So I guess, number one, on the last earnings call, you guys had talked about seeing a slowdown in the HSA market at a high level. I guess, number one, could you kind of provide some more -- like an updated version of what you're seeing? And I'd be interested if you could comment on your conversations with employer sponsors around like is the -- will they -- we're seeing a shift like an acceleration in benefit buydowns in the commercial space. Are you seeing a greater shift towards HSAs in 2026 versus 2025, kind of like the greater rate?

And then my second question is kind of like, Scott, it's like given some of the macro news that we've seen, there would seem to be other large custodial opportunities that have the opportunity to present themselves going forward as new markets develop. Is that anything that you guys would look at or consider? And I'm kind of talking about like the Dell stuff and when we see more stuff that looks like the Dell stuff.

[Scott Cutler, executive]

The what stuff, sorry? The Dell stuff. You talking about....

[George Hill, analyst]

[Technical Difficulty] to fund 25 million children's accounts. Like is that -- like are there going to be more of these opportunities to kind of create new markets for you guys? And how are you thinking about that?

[Scott Cutler, executive]

Okay. And on your first part of your question because you had a 2-part on the first part. I didn't -- you said something about seeing something, but you broke up. I just want to make sure I've got your employer sponsors.

[George Hill, analyst]

Are you seeing -- I'll distill my question. Are you seeing employer sponsors move people towards HSAs at an accelerating rate for 2026, given that we're seeing -- because utilization is so high, we're seeing benefit buy down at a higher rate than we've seen kind of in the last decade. So is that driving an acceleration of moving beneficiaries towards HSAs? And just kind of what are you seeing in the commercial market?

[Scott Cutler, executive]

Okay. Yes. So I think I've got it. So on the commercial side or what we call the client side, right now, we -- what we're really driving towards is just the realization across the entire industry that health care costs are rising significantly for the enterprise as well as the consumer. Those health care costs are rising significantly more and multiples -- faster than wages are. And so as any enterprise, and this is a CEO and a CFO level conversation, when you look at those health care costs, which is one of the most significant input costs for your organization, you have to start to think about what are the strategies that we can address that.

And so when we're talking affordability with our clients, we've been going with our analyzer product, which actually helps an enterprise to be able to compare, for example, their enrollment rates, their contribution levels, what percentage of their employees are investors, what are the balances that they hold and compare those to their industry average as well as what best-in-class would look like. What best-in-class looks like for our large enterprise clients are clients that are driving high deductible adoption or only providing that as an adoption north of 75%, 80%. And in fact, we have been working with the industry where we've done studies that have actually shown that employers that drive a strategy like that can save in the thousands of dollars per employee per year by driving that type of strategy.

So the affordability strategy right now, we think is resonating. In terms of it showing an accelerating rate, I think we're going to see that this year because we're having a lot of conversations with our clients around this. And I think we're hoping that we will see greater adoption this year over last year. And so we'll see that in open enrollment, which is happening right now. In terms of the macro news around Trump accounts or Michael Dell's contributions just the other day, I think, again, what we're seeing is that when you look at the triple tax advantaged nature of an HSA account, and the massive needs that Americans have to handle their future health care needs as well as the fact that 40% of Americans can't even afford a $400 unexpected medical cost that the need for an HSA for all Americans is quite significant.

And so this is actually why we're so active in Washington, why this topic of health care affordability is on the desk of the President as well as Senate and Congress in terms of driving solutions to address the affordability crisis. And we really do think that HSAs in terms of empowering health care consumption and preparing more Americans for their future health care needs is one of those solutions that's actually getting a lot of focus and attention in D.C. I don't know, Steve, would you add anything more to that?

[Stephen D. Neeleman, executive]

I think you're right on. I mean we just -- as I mentioned in my comments, we just keep seeing the same think over and over again, when you see large populations of people going into HSAs, they spend less. And yet the people save more. I mean, obviously, you all follow our custodial asset report pretty carefully and you see how much money are in these assets. There's a lot of money and it's not our money. We get a chance to manage it for a while. It's people's money. And I just think that this concept of people having their own accounts, spending their own money is working. And so the more we kind of get that message out to employers, this study that was done just really has been done in the last month.

We're going to start spending more time with employers, helping them understand that if they can take their adoption from 30% or 40% adoption to 60% or 70%, that we're talking about thousands of dollars a year in savings per employee, which is pretty remarkable, especially in this time where people are really struggling to pay help right now. So we're all in.

[Operator]

The next question comes from Mark Marcon with Baird.

[Mark Marcon, analyst]

With regards to just the enhanced yield product, Jim, can you remind us where we are with regards to what percentage of the cash assets are currently in the enhanced yield? And where do you anticipate that, that would be by the time we get to the end of January of '27 and August of '27? That's the first question. And then, Scott or Jim, the margin improvement continues to be really impressive. How much further can we continue to improve the efficiency and the reduction in terms of the cost per account? How should we think about that because it has been quite impressive, but I'm wondering if you think there's some pricing pressures that would come from employers that would slow down that rate of increase that we're seeing on the margins.

[Scott Cutler, executive]

Jim, why don't you take the enhanced rate portion, and I'll talk about margins.

[James Lucania, executive]

Yes. So as you know, we're -- we have not provided that number on a quarterly basis. So I'm not going to say anything other than we started the year around 50-50. I would expect we'll give you an update where we end the year. And as you know, like there weren't a ton of maturities during fiscal '26. So our ability to move that number was not great for the first 3 quarters of this year. And then obviously, we would expect a nice cash inflow in January that would -- with all the new accounts and employer matches, et cetera, that would help drive that number up a bit. The target we had set was to be at 60-40 by the end of next year. And obviously, we're in very good shape to achieve that target. So I'd say stay tuned for our fourth quarter when we would give you that breakdown.

[Scott Cutler, executive]

Mark, the only other thing I would add on the enhanced rate side, and then we've talked about this, when we look at the maturities that are rolling over into the enhanced rates, we do have about 90% plus adoption of enhanced rates as those things roll over. And so as we look at this progression, it really is a business as usual in terms of what that progression is going to look like. We feel very strong about how that's going to naturally just evolve as those contracts mature.

On the margin improvement side, yes, thanks for highlighting that. We're really focused on making sure that the service that we provide is a great service and that we're continuing to improve that service. And we truly do believe and know that for example, the use of more technology, more automation, we're in the early phases of deployment of AI across our service center that we can do both things, both deliver a better experience and to be able to deliver it more efficiently.

And so when I look at, for example, the early wins that we've had in AI, whether that is in claims automation, how we're trying to get more people to engage in answers or in chat and then now how we're rolling out more agentic experiences across our service center, we see significant opportunity for further efficiencies across how we serve our customers, but ultimately very much aligned to the idea that we can do it in a better way.

And so take a typical phone interaction if that phone interaction, for example, is based on data, it's a routine call. These could be things like checking a balance, replacing a card, trying to get into a password. These can be phone conversations today that might last 5 to 10 minutes that can be automated through an IVR to an agentic experience in less than a minute, resolve that issue, have that self-serve by a member. That's a better experience for the member and a much more efficient experience as well.

And so again, strategically, we look at the use of these technologies to drive that efficiency. And we still believe that we're in the early innings of what that is ultimately going to look like across services as one example.

[Operator]

And the next question comes from Brian Tanquilut with Jefferies.

[Brian Tanquilut, analyst]

Maybe as I think about the competitive nature of the HSA space, I mean, you guys have continually gained market share and maintain high client retention rates. So just curious, are you seeing any shift in pricing or competitive behavior, particularly as you expand to smaller employers and new exchange-based accounts? And how are you leveraging the scale and the product breadth to sustain that growth in margins in face of competition?

[Scott Cutler, executive]

Yes. Thanks. I'll take that. Yes, it's a competitive market. We're pleased with our leading position in the marketplace. I think as we look at the importance of the strategy and the flywheel of better save, spend and invest for health, we truly believe that, that's a differentiator in the strategy because it's not just about acquiring assets, it's really about how do we leverage the effective use of this savings vehicle for all 3 of those strategies. So for example, on the spend side, we have $40 billion that is spent in the industry today on programs and products and services that are HSA eligible.

Increasingly, more and more places where these products are being sold are advertising the use of -- use your HSA dollars to power up your purchasing power for this program or service. What we know, and this is part of our strategy around marketplaces is that if we can provide greater, more seamless access to the spend part of the flywheel, we also know that, that member is likely to contribute more. All of this is also very much integrated into a -- for health value proposition which for us, since we're integrated with the most plan partners, and that's the entire focus of our platform, we think that drives greater differentiation for us in the marketplace.

In terms of where we see the pressure, of course, these are competitive processes. I think as we see the shift of our business go towards HSA accounts, there's obviously a different revenue profile associated with that. Pricing pressure is typically seen at the high end of the market, and that's where there's a lot of competition more on the other types of accounts. But again, we feel very well positioned given the focus that we have on the platform, being the leader in the space to be able to drive a differentiated solution.

I think when we look at our retention rates as one example of that in the high 90s percent, we're also really pleased that the quality of the service that we're providing to our clients also is showing up in the way we're able to retain clients in the business.

[Operator]

And the next question comes from Sean Dodge with BMO Capital Markets.

[Sean Dodge, analyst]

Yes. Maybe just going back to the AI and automation investments and coming at it from a little bit of a different angle. What percent of your cost structure can you address with these new capabilities or enhancements? Like high level, you're spending $320 million, $330 million a year on service costs. How much of that is labor? How much of that's like physical card costs? So like what proportion of that can you go after? And then maybe conversely, like what proportion is like technology and infrastructure spend that you really can't do much about? Or is that just not the right way of looking at it? And should we be thinking about these kind of long-term savings opportunities in a different way?

[Scott Cutler, executive]

Yes. Well, first, Sean, welcome back to the fold. We're excited to have you back. So yes, so as you think about it, AI has broad application across nearly all functions of our business. And so we're deploying agentic's AI in -- again, across all of our functions. So if I would break it down into a couple of areas to get to your question. So take on the services side, we kind of look at as maybe 1/3, 1/3, 1/3 between member services, client services and then sort of like the back office type of operations. All 3 of those areas have slightly different needs and slightly different applications that AI can be deployed against.

Most of our efforts today have really been focused on the member services portion of that because that's where a significant amount of our call volume has. And when I think about that opportunity, where we're starting from, and you should go back and look at the press release that we just put out in terms of our partnership with Parloa, we're looking at a lot of those voice interactions and trying to figure out how can we improve those interactions with an agentic experience. And so Parloa, as an example, will be our partner in terms of go-to-market there.

On the client side, there's a lot of work that we do in terms of integrating files, taking large data sets in. A lot of that work, we actually believe that we can automate with AI. So those are like a couple of examples of things that, a, we have in market, we're thinking about in addition to Claims AI as an example. When we look at product and technology, slightly different, we certainly can see efficiencies that can be derived from AI in our product and tech team. But our product and tech team, we're really looking at AI to think about how is it that we can drive greater productivity enhancements. That productivity enhancements can show up in the speed and quality with which we can deploy code, but it also can be represented by the number of agents that we have deployed that are actually helping to create the next new product or the next new experience or the next new integration in a more seamless and integrated way.

I think that's also where we have -- where we've really been focused on APIs and data to expose, again, those experiences that we can roll out AI against. So as it relates to AI, we -- again, we think we're in the early innings of a longer marathon that we're optimistic because we're focused on it as a company and as each functions to find those opportunities to, again, improve the experience, do it in more efficient or a faster way.

[Operator]

And the next question comes from Scott Schoenhaus with KeyBanc.

[Scott Schoenhaus, analyst]

I wanted to follow up on the app downloads. We're seeing close to 400,000 downloads in the month of October alone. We'll get the November reading here shortly. That's a big spike up from what you've seen throughout the rest of the year. I'm wondering how that impacts your -- not only your new clients, but obviously, your legacy clients on downloading the app and pushing them towards enhanced rates?

And then maybe to put a fine-tune on the margin expansion since October was the last month of your quarter and you saw this big spike up. Can you attribute what that -- what those app downloads during open enrollment contributed to the margins or the person in the app versus a person not in the app, what that contributed to margins for the quarter, if so?

[Scott Cutler, executive]

Okay. Yes. So first, as it relates to our app strategy, it starts with really our belief of creating a member-first secure mobile experience. We've obviously made great strides this year on the security side. And I would say the security issues that we experienced early in the year was the first thing that said, "Hey, we really need to be able to provide a secure experience, and we know that we can do that best through the app." What we also know is that the app, particularly for the younger generation of workers, remember that 75% of the workforce in the next 5 years will be millennial and Gen Z. I think their expectation of a digital experience is app first or app only.

And so all of those things like inform us to say driving towards app engagement is one of the most important things that we can do in the product experience itself. We've been rolling out Passkey, which effectively for the HealthEquity app, any active members, so you want to do anything in your app, you want to sign in, log in, you want to check your balance today, you have to download the app and you have to authenticate via passkey. So that's driving the app adoption because it's required to authenticate through the platform itself. And so what I would expect is it will continue to drive app downloads.

We're seeing really great success in terms of passkey and its success rate because in that experience as well, an app download via passkey, you don't have to remember your password anymore, which again is a top call driver into our service center. So we do believe that with greater app adoption, with passkey adoption, one of our top call drivers goes away, which is I forgot my password. I wouldn't say that we have a one-to-one relationship of app downloads to margin expansion, although, again, in the example that I just provided, we're eliminating those call drivers that certainly does contribute to a lower cost to serve for those members.

And so again, I think for us, it's just a strategic priority, but it also is going to be a more efficient channel to serve members with either questions or engagement or education. And so I think for us, in looking at how many active users we have in the app, how many people are downloading it is going to be, for us, kind of a key indicator of how engaging the experience is for our member. And certainly, most of the investment that we have or a lot of the investment that we have in product and tech that's incremental is going into making that app experience, that product experience truly remarkable.

[Operator]

The next question comes from Steven Valiquette with Mizuho Securities.

[Steven Valiquette, analyst]

So I guess I just want to follow up on your positive comments about remaining optimistic on the new account growth in the fiscal fourth quarter, and that's kind of grounded on the work you're doing with employers. So I certainly get all the higher demand by employers that want to reduce rising medical costs. But I guess given the last couple of quarters, you were talking about some of that macro uncertainty, soft labor markets. So I want to just -- isolate just on that part in particular.

I guess the question is, are you still worried about the soft labor market, but there's just such strong demand to control medical costs is more than offsetting that? Or are you much less worried about the macro end markets and the impact from that versus what your view was like 6 months ago? Just trying to hone in on that part of the overall outlook.

[Scott Cutler, executive]

Yes. So our view on the macro hasn't changed. In fact, our story around the macro has been consistent over the course of the year. Where we see the macro showing up is effectively maybe less job growth or job churn for -- remember, only this cohort of members that bring in. We've got over 20 years of cohorts of members. The least valuable cohort is the members that are signing up this year. Typically, they're coming in new with 0 balances. So it will have no impact on our near-term financials overall in terms of what Q4 looks like or quite frankly, even over of the course of this year.

So our view on the macro is unchanged. And I think all of this is kind of balanced because while the macro might be weak, the value proposition for enterprises is quite large given the affordability challenges with health care costs rising. We also have the benefit associated with the first expansion of the HSA market through what we've talked with the Bronze plan and the retail expansion. And we're going to market in a new rhythm with a really strong value proposition. Again, that's tied to affordability that's essentially going and educating our enterprise clients around here are the strategies that you can be using to drive adoption.

So Steve, I think it's all of those things kind of combined. But again, as we look at our optimism coming into Q4, we see optimism in the quality of the enterprise pipeline that we see. We're optimistic around the retention rates with our clients that we've seen going into Q4. And Q4 is always the biggest quarter of the year always. And effectively, we drive a strategy over the course of the entire year to make Q4 selling season as strong as it can be.

[Operator]

And the next question comes from Greg Peters with Raymond James.

[Charles Peters, analyst]

Is there any update you could provide on what you're seeing in the M&A environment for additional HSA portfolios? And could you provide us an update on how you're thinking about capital allocation in fiscal '27?

[Scott Cutler, executive]

Yes. So as we think about capital allocation, unchanged. We have had a very strong cash-generating profile in the business. In fact, first 9 months of the year, exceeding what we did all of last year. As we look at what we're going to do to deploy that, we'll look at continuing stock buybacks, continue to pay back debt, and we'll look at M&A from an opportunistic perspective. And when we say opportunistic, we just really have a high bar in terms of what is going to be an acquisition that would make sense.

Certainly, portfolio acquisitions are quite attractive to us pretty much down the fairway. So we would look at those. And so again, I would say all of that remains unchanged. And I think as we look at the earnings profile of the business and the cash generation profile of the business and strength of that we're excited what we can do with respect to shareholders with cash in a disciplined and shareholder-friendly way.

[Operator]

And the next question comes from David Roman with Goldman Sachs.

[David Roman, analyst]

I -- Jim, I heard -- we heard the comments that you're going to give 2017 guidance at JPMorgan in January. But just 1 dynamic that sticks out here is the magnitude of HSA is expected to reprice in '27 versus both with remaining here in 2016 and also what will occur in '28 and '29. Can you maybe just give us some parameters how to think about that repricing that's coming and in comparison to the current yield that's just sitting under 2%.

[James Lucania, executive]

Yes. Well, yes, nothing has really changed with the story there, right? They will reprice higher. Obviously, we've hedged some of those repricing. So you have with sort of much more certainty than you've had in prior years where they're going to reprice. But as for the sort of quarterly outlook, it's not numbers that we've provided. So I can't -- sort of can't get into that. But yes, like as Scott sort of said to the earlier question, there's no risk to the actual migration, right? The basic rates to enhance rates migration, we're up to like the 30th wave of contracts migrating. So it's -- I'm not going to call it autopilot, it's work. There's notices that go out, communications to all those affected members.

But as Scott said, sort of 90-ish percent adopt in. So it's going to happen. Obviously, we do have large Q4 flows into our business. So that's always going to be part of the math. So you got to wait for the full year to get the actual impact of that. Where you have in the bag numbers for '27 is what we're going to reprice here in Q4. And to get the full benefit of what's repricing in '27, that's really a '28 revenue uplift item. So I will tell you what our yield forecast is in a few weeks at JPMorgan.

[David Roman, analyst]

Okay. Look forward to that. And maybe just a follow-up. One of the earlier questions addressed the significant improvement you're seeing in cost to service members, and that obviously is coming through in the gross profit improvement here year-over-year. Can you maybe just go into a little bit more detail, Scott, where you are redeploying some of that top line and gross profit upside back into the business? What are some of the key investment priorities for you, both from a T&D perspective as well as headcount standpoint? And when -- how that starts to show up driving a return in the business either in fiscal '27 or thereafter?

[Scott Cutler, executive]

Yes. So a couple of things. One, we're obviously showing some of that actually just dropping all the way through to the bottom line. So I would expect for us to continue to seek to do that. I think when it looks at our operating expenses as an example, I don't expect a significant change in the framework, for example, as to the percentage of revenue that we allocate towards sales and marketing and product and technology. So we want those efficiencies, but we also see that opportunity as we're also growing on the top line to be able to reinvest back in the business.

I think consistent with the earlier question that I highlighted below -- I highlighted before on the service side as it relates to gross margin, that's where we're going to continue to focus on the efficiency gains. And that's going to be through -- we highlighted some of the actions that we took earlier this year to drive those efficiencies. We've obviously had a tremendous amount of success on the efforts around reducing fraud. And even outside of that, when you look at taking out the year-over-year benefit that we had from fraud savings, but essentially just looking at how much more efficient that we can be on the service line with top line growth, we're going to continue to drive that through the deployment of AI and deployment of technology across that.

When it gets down to our product and technology side, as I look at what are our big priorities going into the year, I really think it starts with the app experience, how is it that we can create a product experience that is engaging for our members. To make that app experience great, we've got to be able to invest in the data and in the APIs to be able to expose all of that information and that data to our members in a better way. I think of the opportunity that we're going to continue to invest around service center modernization, which again is investment in technologies that will deliver experience savings.

And so as I look at how those strategies play out, I think you're also going to see us continue to make investments. We haven't talked much about it on this call on the quality of that marketplace experience. So this is the center of the flywheel around spend. And this is going to be continued investment that we have in the marketplace platform. And so what you're going to see, for example, just literally in the coming weeks is continued expansion of what that experience looks like. So the addition of programs, potentially products, how that shows up in terms of a carousel of experiences that would be in the app and the web version so that we can, again, provide a more engaging experience.

And so we think about that investment in the product experience showing up in terms of how we can potentially drive other opportunities that would show up in service revenue over time. So those are kind of a couple of highlights that we're really excited about, David.

[Operator]

And the next question comes from Alexei Gogolev with JPMorgan.

[Unknown Analyst]

This is Destiny on for Alexei. You mentioned encouraging early adoption of the GLP-1 program. I just wanted to touch on what's the revenue sharing opportunity for directly referring members to the Agile platform and if this is a material revenue opportunity for the company?

[Scott Cutler, executive]

Yes. So certainly, right now, it's immaterial to our current results. And I would say that we're really pleased with the uptake effort. I think as we look at why we think we're in a strong position, we have 10 million members. They're spending significantly across these platforms on product and services. So bringing those experiences into the platform itself is something that we're excited about. Over time, this would show up in service revenue, much like our marketing arrangements we have today with FSA, HSA store show up there.

We think the model is going to evolve over time, kind of a combination of the recurring administrative fee associated with members signing up to programs. You can look to other direct-to-consumer health care platforms in terms of what that looks like as well as essentially the administration fees or fees that we could get by promoting product or providing affiliate links to other platforms. So again, I think that the model is going to evolve over time, really driven by a tailwind of member adoption of these, again, programs, products and services.

[Operator]

And the next question comes from David Larsen with BTIG.

[David Larsen, analyst]

Can you just size the TAM expansion with the Bronze product opportunity? I think there's like 7 million people enrolled in Bronze compared to the 10 million that you have in HSAs now. It sounds like a very significant opportunity. Just any color on like how to quantify this? Maybe I think, Steve, you may have quantified this in the past.

[Stephen D. Neeleman, executive]

Yes, sure. Thanks, David. Yes. So $7 million is what's in it now. And the question is what happens with these premiums going up and what's going to happen with the subsidies. And of course, you've all read all about that. We don't know the answer to that, as we said earlier. But there is a possibility. We're starting to see some people and some reports from our health plans saying that people are going from silver to bronze, which is a good opportunity because people that are in silver going down to bronze, they're probably more likely to fund the accounts because we've started to set up some of these accounts, it's very early innings, but we're starting to see account contributions being stronger than we frankly thought. People are putting money in these accounts, which is exciting.

And so look, whether all -- remember, it's 7 million people. And so our estimate is that's probably closer to a couple -- 2 million or 3 million households, if that makes sense. Question is what percentage of those with some migration from silver would the industry be able to capture? I know there's a CMS report out there that's been circulated that things they think there'll be 1.6 million people in these HSAs coming out of this open enrollment cycle, but we're going to -- we're doing everything we can to get more than our fair share of those. But it's really hard to know exactly what it's going to be like. I can tell you, though, that it's going to be one of these journeys, David, because the beautiful thing about the health savings account and helping people pay for their out-of-pocket.

Scott mentioned that crisis people have, most people except those have HSAs, obviously, don't have the ability to pay a $500 expense or a $400 expense without going into debt. HSAs totally change that game. But the beautiful thing about these is that as they start to -- let's say, the Senate for Bronze plan goes effective January 1, '26. They start to use their health insurance throughout the course of the year. we're going to be reminding them, of course, if you haven't signed up for an HSA, sign up for now because if you have an out-of-pocket, roll the money through the HSA, I will gladly take that money, help them spend it wisely and then we're going to make some transaction fees and things like that on it.

But the beautiful thing to them is they're going to save probably 30 -- 20%, 30%. It depends on what their tax rate is, it could be as high as 40% on the cost of that care. And so I would say that even though we're going to have obviously a lot better numbers in the next few months than we do today, it's going to take several months before the market really understands. I mean we've been trying to educate people on HSAs for years in the commercial market, and this is a whole new market for us. But we don't know exactly what the TAM will be. But Scott, I don't know, you looked at these numbers a lot.

And I think we're hopeful there'll be a lot more HSAs coming out of this channel than there ever was. When the law passed back in and was signed in the law back in July 4, we looked at it then at about 90% of the plans that were bronze at that moment were not HSA qualified. January 1 of '26, they'll all be HSA qualified. So there is going to be this hopefully steep but fast learning curve where we can get people to understand it.

[David Larsen, analyst]

Can you use HSA dollars to pay the premium? So can you buy the premium, like pay the premium with a tax advantage on a tax advantage basis?

[Stephen D. Neeleman, executive]

There's only a couple of situations where you can use HSA dollars to pay premiums. One is if you're just unemployed. The other one is if you're formally on COBRA. But [Audio Gap] been talking about and other lawmakers, they're saying, why not roll money into HSAs, change the law. It doesn't take a lot of change, just to say you can use it for premiums more broadly speaking, and we're completely supportive of that. We -- the technology is there. Obviously, our expertise would be that, yes, the money comes in the HSA, they want to use it on premiums, let them use it on premiums or let them use it on their out of pockets, let them use it on our marketplace, you name it. So right now, you cannot unless you're unemployed and on COBRA.

[Operator]

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, executive]

Thanks a lot. It's been a year. So I was first introduced to everybody here on our last Q3 earnings call. I joined HealthEquity knowing the company by reputation only. And I've just been so humbled and honored to be able to be side-by-side with our dedicated and passionate Purple teammates over the last year. We really have a significant opportunity ahead of us. We're going to be going after that aggressively.

We think as we can reach and influence more employers and more families turn to HSAs to address affordability and take control of their health care spending that we're going to be closer to achieving the mission that Steve set out for us so ambitiously many, many years ago. So we welcome you, our shareholders, and everybody to help continue on this journey with us. So thank you today.

[Operator]

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