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HealthEquity, Inc. (NASDAQ:HQY)
Q2 2019 Earnings Conference Call
Sep. 4, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to HealthEquity's second quarter 2019 earnings conference call. Please note that this event is being recorded. I would now like to turn the conference over to Richard Putnam, Investor Relations. Go ahead, Mr. Putnam.

Richard Putnam -- Investor Relations

Thank you, Nicole. And good afternoon everyone. We wish you a warm September welcome to HealthEquity's second quarter earnings conference call. With me today we have Jon Kessler, our President and Chief Executive Officer. Steven Neeleman, our Founder and Vice Chair. Darcy Mott, our Executive Vice President and Chief Financial Officer. Ted Bloomberg, our recently announced Executive Vice President and Chief Operating Officer. And Tyson Murdock, our Senior Vice President and Controller.

Before I turn the call over to Jon, I would like to remind those participating with us that there is a copy of today's earnings release and the accompanying financial information posted on our investor relations website, which is ir.healthequity.com. We also will be claiming Safe Harbor on the forward-looking statements included in today's earnings release and they will also be made during this conference call with you, which include predictions, expectations, estimates, or other information that might be considered forward-looking.

Throughout today's discussion, we will present some important factors relating to our business, which could affect those forward-looking statements. These forward-looking statements are subject to risk and uncertainties that may cause our actual results to vary or differ materially from the statements made here today.

As a result, we caution you against placing undue reliance on these forward-looking statements. And we encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock detailed in our annual report on Form 10K filed with the SEC on March 28, 2018, along with any other subsequent periodic or current reports filed with the SEC. We may provide updates to the factors affecting these forward-looking statements in light of new information or future events but we are not obligating ourselves to do so.

There's one other housekeeping item in connection with this earnings conference call and webcast. After our prepared remarks, we will open up lines for questions. However, given the length of our last earnings call, we will be limiting questions to one with a follow-up at a time. You can reenter the queue if you have additional questions that have not been asked and please we ask that there are no seven-part questions and our goal is to try and keep this earnings call under one hour. With that out of the way, I'll turn the call over to Mr. Jon Kessler.

Jon Kessler -- President and Chief Executive Officer

Thanks, Richard, and thanks everyone for joining our second quarter fiscal 2019 earnings call. Joining Darcy and me today is Ted Bloomberg, our newly appointed Chief Operating Officer. I'll have prepared remarks, Ted will introduce himself, and Darcy will as always bring us home with a recap of the financials in guidance. We are coming to you from Boston and Steve is also on the call holding down the fort in Draper.

HealthEquity team delivered a standout performance in the second quarter across the key metrics that drive the business. Revenue of 71.1 million was a record high for quarterly revenue and an increase of 25% year-over-year. Adjusted EBITDA of 31.8 million, another quarterly record and up an even larger 33% year-over-year. Once again generating margin expansion, custodial assets at the end of the second quarter surpassed 7 billion up 31% from a year ago. And total HSA members at quarters end reached 3.6 million up 23% year-over-year. Turning to new accounts and sales, the team added 121,000 new HSAs and custodial assets grew by a robust 170 million during the second quarter. HealthEquity continues to grow the share of members investing for the long-term.

During the second quarter, custodial invested assets grew 72% and the number of investing HSA members grew 64% year-over-year. How do these results compare to the market? They compare well. Devenir released its report -- that was mad lib for those who don't know -- Devenir released its report on the first half of the year for the HSA market just a couple of weeks ago. On a mid-year over year basis, Devenir estimates that 20% growth in HSA custodial assets. So, our year-over-year growth of 31% continues to handily outpace the market and we continue to gain market share with about 14% of the market's custodial assets according to Devenir. They expect custodial assets to grow from about 50 billion now to about 75 billion by the end of 2020 and we expect to be a big part of that growth.

Today we are expanding our reporting to include a metric we call active HSA members. Before describing the metric, let me explain why we are doing this. Darcy and I are sometimes asked about HSAs that are un- or non-funded. We see this as an opportunity to explain yet another reason to have and to keep in HSA. HSAs offer the flexibility of tax-free reimbursements at any time for life for qualified medical expenses incurred at any time from the date the HSA was established in so long as it is open. This is true even if the account holder has changed jobs or situations and isn't presently in an HSA qualified health plan. HealthEquity's technology and eco-system integrations help members build a complete record of their eligible expenses from day one but since members can only contribute to HSAs while enrolled in an HSA compatible plan, they may have no balance for an extended period.

Many of these members will be in an HSA plan again especially as HSAs grow in popularity. So HealthEquity continues to deliver value with access to their record of prior medical expenses, of course, but also by providing them the ability to continue adding to that record for future tax reimbursement even for expenses incurred in a non-HSA compatible plan. We can do this with minimal expense because HealthEquity owns its own platform. And we keep in contact with these members through ongoing education and of course access to our health savings specialists. The active HSA member metric helps us to evaluate unit economics excluding these members. We define active HSA members as HSA members that are either associated with a partner as of the end of the period or that have held a custodial balance at any point during the previous 12 months.

As of the end of the second quarter, 82% of our HSA members were active HSA members and the total number of active HSA members grew 19% year-over-year to 2.9 million in Q2. We hope this additional reporting is helpful and highlights HealthEquity's unparalleled ability to help every member connect health and wealth. The team has delivered a strong first half for FY19 as we continue to substantially outpace the market and our largest competitors. Now the busy season gets going in earnest. And speaking of busy, allow me to introduce Ted Bloomberg. Ted joined us last month coming from Financial Engines, TD Ameritrade, and Invest Tools.

Ted has a very strong resume leading organizations, utilizing technology and tools to engage consumers to build wealth and achieve retirement goals. As Chief Operating Officer, Ted leads HealthEquity's technology, operations, service delivery, sales, and marketing teams. COO is a new role in our structure which I believe will accelerate the development of company leaders and keep them moving forward and fast in the right direction. Ted, his wife Jamie, who is a physician, and their children have already relocated to Utah and he has hit the ground running.

Ted Bloomberg -- Executive Vice President and Chief Operating Officer

Thank you, Jon, for the kind remarks and introduction. First of all, I want to thank the entire HealthEquity team for welcoming me and my family into the purple fold. As I did my due diligence on HealthEquity, I was very impressed with the leadership team and the service orientation of our team members. The company is truly committed to helping people manage their healthcare expenses, become educated consumers, and connect health and wealth. I'm honored to be apart of the team and I look forward to rolling up my sleeves in joining our efforts to serve members, employers, health plans, and other partners.

Two of the greatest challenges facing working Americans today are healthcare and retirement. These challenges are extremely complex and they are intertwined. I'm hopeful that my experience can be useful to our members and partners facing these challenges in two ways. The first is what we call total engagement, which really means helping educate our members on how best to use HSAs and RAs. Much of my career has been spent helping build and execute multichannel communications and my recent experience at Financial Engines helped me learn how to do this in a B2B2C way in partnership with employers. The second is in connecting health and wealth. Steve, Jon, and Darcy have long talked about how HSAs are the most tax efficient saving and investing vehicles available but they are often thought of and utilized as spending accounts. The huge initiative at HealthEquity is to help our members understand and realize the full potential and value of HSAs and how they fit into the retirement puzzle alongside employer-sponsored retirement accounts and other savings vehicles. My experience in the financial services industry and specifically in retirement planning will help inform our strategy here as we seek to ensure that our members have the best chance to achieve a happy and healthy retirement. I look forward to working with our team members, partners, and employers to make HSAs available to all Americans and to help them use these accounts as effectively as possible. The team has set a high bar with its performance both historically and in the first half of fiscal 2019. I'm committed to helping deliver strong results in the back half of this year and beyond. Now, I'll turn the call over to Darcy for comments on the quarter's financial results and our outlook.

Darcy Mott -- Executive Vice President and Chief Financial Officer

Thanks, Ted, and welcome aboard. I will discuss our results on both a GAAP and a non-GAAP basis. A reconciliation of non-GAAP results and guidance that we discussed here to their nearest GAAP measurement is provided in the press release that was published earlier today. Before I review our second quarter financial results of FY19 and to provide an update of our guidance for the full FY19, I'd like to first add to Jon's introduction of active HSA members. With that gives HSA members, we are introducing a metric that we feel is precise, replicable, relevant to an assessment of unit economics, and perhaps one that educates on the many ways consumers use HSAs.

For clarity, neither total nor active HSA members include the approximately 600,000 reimbursement account arrangements administered by HealthEquity for our small but rapidly growing number of 401K members. I would like to also point out that the introduction of this new metric does not have any impact on our revenues, expenses, or results of operations in the past or in the future. It just provides an additional data point by which to evaluate our business and operations.

Now, turning to our second quarter financials. Revenue for the second quarter grew 25% year-over-year to $71.1 million. Breaking down the revenue into our three categories, we continue to see growth in each of service, custodial, and interchange revenue during the quarter. Service revenue grew 9% year-over-year to $24.9 million in the second quarter. Consistent with the strategy we have outlined over the last five years, service revenue as a percent of total revenue, declined to 35% in the quarter down from 40% of total revenue that are represented in the second quarter last year as the custodial revenue stream has become more predominant.

Service revenue growth was attributable to a 24% year-over-year increase in average HSAs during the quarter partially offset by a 12% decrease in service revenue per average HSA. Remember, HSA service fees are paid primarily by employers on behalf of their employees and so, by bringing these down over time, we deliver more value and help our network partners deliver more value to their customers. It's working and we are going to keep doing it. As we indicated last quarter, we expect a decrease in service revenue per HSA to be toward the high end of our historical 5% to 10% guidance for FY19. Custodial revenue was $30.7 million in the second quarter representing an increase of 44% year-over-year.

The driving factors for this growth were a 31% growth and ending total custodial assets and a higher annualized interest rate yield on custodial cash assets of 2.11% during the quarter. Interchange revenue grew 21% in the second quarter to $15.4 million compared to $12.8 million in the second quarter last year. Interchange revenue benefited from the 24% year-over-year increase into average HSAs in the quarter compared to the second quarter last year with a slight decrease in average spend for HSA member. Gross profit for the second quarter was $46.6 million compared to $35.8 million in the prior year increasing the gross margin level to 66% in the quarter from 63% in the second quarter last year. The higher gross margin was the result of increasing mix to custodial revenue. We expect that the mix shift will continue over time and will continue to drive gross margin expansion as accounts mature and their balances grow.

Operating expenses were $25 million or 35% of revenue compared to $19.3 million or 34% of revenue in the second quarter last year. We expect all categories of operating expenses to increase as a percentage of revenue in the second half of FY19 as we increase our investment in our strategic initiatives. The income from operations was $21.6 million in the second quarter, an increase of 31% year-over-year and generated an income from operations margin of 30% during the quarter. We generated net income of $22.5 million for the second quarter of FY19 compared to $16.9 million in the prior year, an increase of 33%. Our GAAP diluted EPS for the second quarter of FY19 was $0.36 per share compared to $0.27 per share for the prior year. Excluding stock compensation, net of tax, and the tax impact of stock option exercises, our non-GAAP net income and net income per share for the second quarter of FY19 were $21 million and $0.34 per share.

Our non-GAAP adjusted EBITDA for the quarter increased 33% to $31.8 million compared to $23.9 million in the prior year. Adjusted EBITDA margin in the quarter was 45%, the highest quarterly adjusted EBITDA margin in our history. For the first six months of FY19, revenue was $141 million up 26% compared to the first six months of last year. GAAP net income was $45.1 million or $0.72 per diluted share. Non-GAAP net income was $40 million or $0.64 per diluted share. And adjusted EBITDA was $61.4 million up 32% from the prior year. Turning to the balance sheet, as of July 31, 2018, we had $303 million of cash, cash equivalents, and marketable securities with no outstanding debt.

Turning to guidance for fiscal year 2019. Based on where we ended this first half of FY19, we are raising our revenue guidance for FY19 to a range between $279 million and $285 million. We expect non-GAAP net income to be between $67 million and $71 million. Non-GAAP diluted net income per share between a $1.05 and $1.11 per share and adjusted EBITDA between $108 million and $112 million. Our non-GAAP diluted net income per share estimate is based on an estimated diluted weighted average shares outstanding of approximately 64 million shares for the year. The outlook for FY19 assumes a projected statutory income tax rate of approximately 24%.

Before I turn the call back to Jon, I would like to highlight two items reflected in our guidance. First, we expect to sustain or slightly increase our year-to-date interest rate yield on custodial cash assets of 2.07% for the full year of FY19. Second, as we have done in recent reporting periods, our full-year guidance includes a detailed reconciliation of GAAP and non-GAAP metrics. This includes management's estimates of depreciation and amortization of prior capital expenditures and anticipated stock compensation expenses. But this does not include a forecast for stock option exercises for the remainder of the year. With that, I'll turn the call back over to Jon for some closing remarks.

Jon Kessler -- President and Chief Executive Officer

Thank you, Darcy, well done. Darcy, Steve, Ted, myself would like to take a moment to thank HealthEquity team members, our employers, our network ecosystem, and depository partners for delivering extremely strong results. Today, I'd also like to thank you, our shareholders, for your confidence in HealthEquity and its vision. Together with our board of directors, we take stewardship of your investment and currency very, very seriously. Now, we're gonna try to be more efficient with the call today as Richard said. With Richard's leadership, our analysts have embraced a one question at a time rule, and he's done our best to cajole us to be efficient and concise in our responses. Let's see how we do. Operator?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time please press * then the number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. To prevent any background noise, we ask that you mute your line once your question has been stated. And our first question comes from Anne Samuel from JP Morgan. Your line is now open.

Anne Samuel -- JP Morgan -- Analyst

Hi, guys, congrats on the great quarter. I was hoping you could maybe speak to the opportunity from recent legislation around contribution limits for HSAs. Where do we stand on those bills? And how should we think about the potential timing of impact to your model if they were to go through? Thanks.

Steven Neeleman -- Founder and Vice Chair

Thanks for the question. We've been tracking these very closely over the last couple of months to how it's actually passed three bills that we think have very favorable changes to help savings accounts. You mentioned one part of this, which is to double the amount you can put into VHSA or at least take it up to the out of pocket maximum. While we think that would be great, we think that some of the work they're focusing on is even better because it expands the number of people that would actually be eligible in HSAs.

Specifically, there's a lot of folks out there, and it depends on the study you look at, that currently are in plans that have high enough deductibles to have a health savings account but they don't have the right plan design features. And so we think that if they can tweak those plan design features there'll be a lot more people that'll come into the HSA world and we'll be able to benefit from health savings accounts. Where it stands now is, is that as you know, Congress has just come out of recess. The Senate is working on some of the confirmation hearings and things like that.

The word we're hearing is that if you take the three bills that were passed in the house that they certainly been presented to the other side, they're taking a look at it. But we think there should be some action after midterms. We'd love it if it was sooner than that. But we think that's kind of what they're thinking. They are looking at some spending bills and things like that to try and detach some of these HSA provisions. But we're still hopeful. It's been a long time since HSAs have received a legislative boost and yet we think there's some opportunity here.

Anne Samuel -- JP Morgan -- Analyst

Great, thanks very much.

Operator

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

Donald Hooker -- Keybanc -- Analyst

Great, good afternoon. Question on the guidance. I think Darcy mentioned -- it looks like the cash yields were up sequentially, which I think is not normal for you guys, right? I think we normally assume cash yields are stable through the year but you sort of alluded to maybe further increases in cash yields through the rest of the year. Can you maybe elaborate on how we should think about cash yields?

Darcy Mott -- Executive Vice President and Chief Financial Officer

Most of our improvement in cash yields that would happen during the year, unlike last year where we had a major change in one of our custodial agreements, it's just about the balance and the allocation among our different depositories then maybe have yielded a little bit. And it's also relative to the timing of when new custodial assets come onboard during the quarter. Our guidance really for the remainder of the year, we're giving full-year guidance on what we expect that to be and so our year-to-date yield we expect to sustain that or to have a slight increase of that for the full year guidance, which is how we think about that when we give our guidance.

Operator

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

Greg Peters -- Raymond James -- Analyst

Good afternoon. Thanks for the call. Again, the disclosure around active accounts. You mentioned the upcoming enrollment season and I was hoping you could update us on your distribution strategy to the small and middle-sized employer market, especially in the context of your 124 network partners and also the private label strategy of one of your competitors who was recently sold to Vista.

Jon Kessler -- President and Chief Executive Officer

That sounds like a two-parter but I'll do my best.

Greg Peters -- Raymond James -- Analyst

That was one question -- just a complex question. Jon, come on.

Jon Kessler -- President and Chief Executive Officer

I think I just won some money on betting who would try the two-parter. So I appreciate that. Let's see. So, your first question really, I'm gonna say is about the sales cycle and so forth. As you know, the biggest change that we've had this year in the sales cycle is that we increased the investment that we've made in selling to what we call regional employers, both directly and a lot of these are by providing a lot more education and support for the brokers and advisors that serve these folks. And also, by providing more of a product mix that works for these folks.

So for example, earlier this year we began selling our reimbursement accounts sort of outside of just those that are integrated with our health plans, which is something totally new for us. And of course, we also have begun selling a product in retirement space. I think we have the right general product mix and we're seeing some good early results and that's reflected in the fact that even though it's early in the year, we're already up 200,000 new accounts. And that's pretty good.

So I guess I'd say so far, so good on that one. And obviously, as you know, we've got a lot of ways to go. At the end of the year will sort of be the tail of the tape on this one but certainly, if you had told me at the beginning of the year that this is where we'd be, I'd be very pleased in terms of the progress and the sales here. As far as whether we're seeing changes in competition, I'm gonna try and make your two-parter a one-parter. We're not really seeing any effect of that. I guess, Greg, the way I would put it is, is there are different kind of partnerships that make sense for different folks.

There also is a question of what people actually want in the marketplace and ultimately, these products are principally bought through partnerships with employers and there are lots of different people who are speaking to those employers, including our now 124 different health plan and administrative partners. We'll see if anything changes and if it does and whatnot, we'll be here to talk about it. For the moment, we feel like we've had a pretty strong year and that includes beginning to wrap up some partnerships that I think ultimately you'll be pretty excited about.

Greg Peters -- Raymond James -- Analyst

Thank you for that answer, I had another complex second question but can I just -- on your answer you talked about the reimbursement accounts and do you think that's a necessary component as you target the small middle-sized employer market versus the large employer market because it really didn't seem like it was relevant going back years? But maybe you can just clarify for us.

Jon Kessler -- President and Chief Executive Officer

Let's see. We see RA as -- I mean, we've had RA for a long time and we see it as helping us grow the HSA core and by meeting the needs of employers. And also, frankly, meeting more consumers where they are. Remember, as we've discussed, only 20-odd percent of consumers are in HSA plans. So it's an opportunity to meet people earlier on the sort of health savings journey. And so we've added some capabilities.

Again, such as the ability to serve regional suppliers directly on the RA side and we may add some others. I guess it's more in the vain of, this is something that we've had available for our employers in the larger market and we felt that if we were going to serve these employers beyond our integrated health plans, we also had to have the ability to serve them on a non-integrated basis. That is to say, on a direct basis on the RA front. I think it's an important piece of what we offer.

It's been an important piece of what we offer for a long time but I would stress that we don't view it as a business where you should be comparing growth rates relative to the HSA business because the market generally won't support that. And so, we've grown at around 6% a year last year and that's about market rate growth and in the RA business according to IT group and so we feel pretty good about that, recognizing what we're trying to do in that business.

Greg Peters -- Raymond James -- Analyst

Great, thanks for the answers.

Operator

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

Allen Lutz -- Bank of America Merrill Lynch -- Analyst

Hey, everyone. Congrats on the quarter and thanks for taking the questions. You mentioned the 401K business is small but rapidly growing. Can you talk about where you're seeing early success and where it's resonating with clients?

Jon Kessler -- President and Chief Executive Officer

Yes, sure. Two areas: number one is where we're developing partnerships that are similar to the partnerships that we've long had in other areas of benefits with record keepers in the 401K space. And were this not his first call, I would've thrown to Ted unexpectedly right now and he'd be trying to do this. I'm just teasing you, no. And we're having great conversations in that space.

We already have a number of data sharing agreements up and running and certainly I think that will be a very interesting channel to explore as both a new way to bring HSA to market but also really valuable for consumers who really should be thinking about their overall retirement objectives and thinking about the HSA as part of that. So first area of partnership is really with existing record keepers and others in the retirement industry.

The second opportunity is -- and this is more relevant to the smaller groups and the mid-sized groups, what we would call our regional employers -- is offering a sort of a stand-alone solution where we're both managing the HSA and managing the vendor stack and so forth on the retirement side so that we can deliver that experience of helping consumers think about this altogether. That's also really interesting opportunity, something that we're having a lot of dialogue with our existing HSA employer partners.

As you know, we serve more than 40,000 of them so lots of opportunity there. We'll see how that goes. But I think, in either case, the direction that we want to cull the industry is we want the industry to be thinking about HSAs as long-term savings vehicles for life. Both of these initiatives kind of help us do that. We think that they will have kind of whatever their success is directly, we also think they're gonna have significant indirect effect in helping to kind of get more people thinking about the HSAs as a lifetime savings vehicle. That's kind of what we're doing and as we have more tangible things to report, we'll do so.

Operator

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

Mohan Naidu -- Oppenheimer -- Analyst

Thanks for taking my questions, Jon. On the selling season, as you mentioned a lot of opportunities that you're pursuing -- if you're gonna think about the biggest opportunity in terms of new membership additions, which do you see as the most lucrative in the next few years without any legislative action?

Jon Kessler -- President and Chief Executive Officer

The nice thing about this business is there are a lot of different ways to grow the business. And so, there's one that Ted talked about in his opening remarks, and one of the reasons we were really excited to bring him on board and cajole him back to Utah is the opportunity with our existing members. This is something that he worked on very directly, both not just at Financial Engines but back in his investor days and so forth is, really driving individuals down that path of education and savings using all the tools that you have at your disposal from fancy big data all the way to blocking and tackling and messaging delivered in service interactions.

The first opportunity we have is to mature those accounts more quickly and I can't answer your question without starting there. From a membership growth perspective -- look, again, the nice thing is there's multiple ways to do it. We still have a lot of opportunity to grow our existing membership with existing employers. We talked a little bit last quarter about the success that we had in fiscal '18 at the beginning of this fiscal year in doing that, particularly with our largest employers we've expanded that effort down to the next sort of tranche of employers and we'll see how we do it. If we do as well as we did last year, we'll be pretty happy given the group is larger this year.

So that's the next opportunity and then lastly, there's the opportunity to grow that footprint. I can tell you it's really exciting, though it's easy to think of -- as long as we've been talking about health savings, it's easy to think of this as a product where everyone knows about it and everyone's already kind of made up their mind about it. But the truth is, in a way that's true, everyone knows about it and everyone's made up their mind about it. That is to say that people know this is the direction that benefits are heading and should head.

But some people move faster than others and so we continue to see an opportunity in building our employer nameplates as well as logos as well as our partner logos both through the traditional channels we've had through our direct expansion and as we just talked about, by partnering with the retirement side as well as the health plan side. I can't prioritize those. I'm just glad we have all of those opportunities to grow and to meet your expectations for growth.

Mohan Naidu -- Oppenheimer -- Analyst

That's all really exciting, thanks a lot, Jon.

Operator

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

Stephanie Demko -- Citi -- Analyst

Hey guys, thank you for taking my questions. This one's actually for Ted. So congrats on the new role. Could you give us an update on some of the consumer safety initiatives that you've been targeting for the platform? And if I could slip in a follow-up, could you also outline any additional initiative you'd like to tackle in your first year at CLL?

Ted Bloomberg -- Executive Vice President and Chief Operating Officer

Sure. Thank you for giving me three weeks to get my legs under me. I'll take your first question in order. I'm really excited about our opportunity to engage members. And one of the trends that we saw at Financial Engines, which I think applies here, is that we grow our sponsor and employer base first and then over time we learn how better to engage members and how to move them along the journey from spenders to savers and then ultimately to investors. And I think HealthEquity has been able to do that really well but we're just getting warmed up.

I think we have sort of as we are able to study the data that we have, as we're able to implement sort of better marketing, as we're able to get our -- as Jon alluded -- to our members services folks, having the right conversations with people. It's gonna be really important for us to continue to engage and educate. And we probably have a lot of runway to do that. I have to -- I don't have any numbers for you because I'm just getting my legs under me but I'm pretty excited about the opportunity.

And then in terms of other initiatives, I would just echo Jon's sentiments. I think that there are several sales channels that we can pursue ranging from direct selling to smaller companies all the way up to our enterprise and continuing to partner with our health plan. And really, those are the kind of the two areas of focus and then the third one as I alluded to in my opening remarks, is connecting health and wealth. I think that Jon tried to get me off the hook on answering the record keeper question but I'll just -- I won't be specific but I'll just say that I think there are a lot of opportunities in the record keeping space and in the 401K space that we have an opportunity to pursue. And I think we're well situated to do that. Those are probably the three that I'm excited about.

Operator

Thank you. And our next question comes from Mark Marcon from RW Baird. Your line is now open.

Mark Marcon -- RW Baird -- Analyst

Good afternoon. Congratulations and thanks for taking the question. The first question is, just really appreciate the extra disclosure around the active HSA members. I was just wondering; we can kind of see what it looks like from a percentage basis over a one-year period, how would you provide perspective or color in terms of the longer-term trends? And could some of the education efforts actually increase that percentage that are really active?

Jon Kessler -- President and Chief Executive Officer

Mark, as you know, we don't give guidance on account books so we're certainly not gonna give guidance here. That having been said, we do see this as a revenue growth opportunity because particularly as HSA has become more prominent, there's an increased likelihood that these individuals we engage and as our member engagement capabilities continue to progress, we'll keep looking at ways to accelerate that opportunity.

I think the key point to remember about these people is that many of these individuals -- it's not that they run away somewhere. It's that they cannot currently contribute. But just because they can't currently contribute, doesn't mean that they're not building value. They're able to build value by continuing to accumulate eligible expenses, whether they're tracking those on our system, which we allow them to do. Or on their own. That's a real value.

And so, at some level, step one in what you're describing is making sure that our members understand that. So that's what we're trying to do. And so I do think there's an opportunity there as well as -- it's like anything else. The more you study your base of customers, the more you can learn how to provide value to each type of customer.

Mark Marcon -- RW Baird -- Analyst

That's great, thank you. And then, with regards to the investments that you're making, we obviously saw fairly significant step up on a year-over-year basis in sales and marketing. And I was wondering; how long we should think about the step up continuing in that respect?

Darcy Mott -- Executive Vice President and Chief Financial Officer

Thanks, Mark. This is Darcy. With respect to sales and marketing specifically, I think as we alluded to last quarter, we adopted AFC606 in February and so we got a little bit of a pick up for deferral and we told people at that time that we were going to use that opportunity to invest a little bit more in some of these initiatives, particularly with respect to direct to employer and some of our channels but we continue to spend. And we'll continue to do that so when you look at it on a year-over-year basis, you'll see that comparison.

However, I'd also point out that because of the adoption of AFC606, that you won't see the hockey stick impact in the fourth quarter that you've seen typically when we recorded all those sales expenses for commissions. And so what I think you'll see is a little bit more smoothing of the sales and marketing expense as a percentage of revenue as we go throughout the full year. But we've reflected that increase in our guidance.

Operator

Thank you. And our last question comes from Steven Halper from Cantor Fitzgerald. Your line is now open.

Steven Halper -- Cantor Fitzgerald -- Analyst

Hi, the cash balance continues to grow, can you provide an update on what you think your capital deployment opportunities are and specifically the acquisition landscape as we sit here today?

Jon Kessler -- President and Chief Executive Officer

We absolutely plan to deploy capital. As you know, we closed the quarter with over $300 million in cash and we plan to deploy it. We continue to look at the same areas for opportunities. We've announced a couple of smaller direct portfolio acquisitions of course and we'll continue doing those and continue telling you about them. And we do look at things that you might think of as sort of product fill-outs or whatnot. What we're not gonna do, Steve is -- and this relates a little bit to Greg Peters' earlier question.

I've looked and looked and I can't find share price anywhere in our discounted cash flow model. So we're not gonna do things just because share prices there -- and similarly, I haven't seen accumulated tax balance in our discounted cash flow model. So we're trying to be disciplined and I suspect that you and others appreciate that and have seen us not jump at things we might've done based on where they're trading or what have you. It's kind of -- I guess that's the color I can give you. We haven't changed our philosophy on this, frankly, over the course of the last few years. So far, the money we've spent in rewarding for shareholders I think and hopefully, that'll be true as we deploy all the capital we have.

Operator

Thank you. And I am showing no further questions at this time. I would now like to turn the call back to Jon Kessler for any further remarks.

Jon Kessler -- President and Chief Executive Officer

Well, thank you all very much. I appreciate you. We're kind of auditorium style today. We'll see how that goes next time. Thanks, everyone again and particularly we do appreciate the confidence the investors have shown in this team and do take very seriously our obligations to you as we get into our busy season. We'll talk to everyone again in December. Hopefully, a little cooler by then. Have an excellent fall. Bye.

Operator

Ladies and Gentlemen: thank you for your participation in today's conference. This concludes today's conference and you may all disconnect. Everyone, have a great day.

Duration: 44 minutes

Call participants:

Richard Putnam -- Investor Relations

Jon Kessler -- President and Chief Executive Officer

Ted Bloomberg -- Executive Vice President and Chief Operating Officer

Darcy Mott -- Executive Vice President and Chief Financial Officer

Anne Samuel -- JP Morgan -- Analyst

Steven Neeleman -- Founder and Vice Chair

Donald Hooker -- Keybanc -- Analyst

Greg Peters -- Raymond James -- Analyst

Allen Lutz -- Bank of America Merrill Lynch -- Analyst

Mohan Naidu -- Oppenheimer -- Analyst

Stephanie Demko -- Citi -- Analyst

Mark Marcon -- RW Baird -- Analyst

Steven Halper -- Cantor Fitzgerald -- Analyst

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