Tyson Murdock: Stick to the plan.
Jon Kessler: Yes. I mean, I don’t €“ at this point, I don’t think duration is €“ I mean you’ve got an inverted curve. I don’t think duration is our friend. But even if it were the normal version, we’re basically of the view that you don’t pay us to gamble on that and shareholders don’t pay us to gamble on that. We’re trying to stay consistent, and there’s enough other moving pieces out there.
Stanislav Berenshteyn: Got it. Helpful. Thank you so much.
Jon Kessler: Thanks, Stan.
Operator: Our next question comes from Cindy Motz with Goldman Sachs. Please go ahead.
Cynthia Motz: Hi. Thanks for taking my questions and nice quarter. Thank you for the preliminary guidance for 2024. Did just want to ask a little bit more about 2024 not to beat a dead horse. But is it fair to say that basically, what you’re doing is you’re anticipating passing through maybe higher rates or some of the rates, and you want to see how it goes in terms of balancing the growth because, obviously, you want to retained customers and members and then balance it, but maybe has it gotten a little more competitive? I mean, is it fair to characterize it like that’s what you’re doing. And like when you say you’re just sort of going to look and see how it goes? Thanks.
Jon Kessler: Yes. It might be worth noting here with regard specifically to the custodial expense that what we think of as our crediting rates, I mean those are mathematically determined and meaning they’re based on what our competitors do there. We have not seen a lot of what one might call deposit beta nor did we in prior upswings. But there’s a little, and we’ve tried to reflect that in our guidance as Tyson commented, both for the remainder of 2023 and 2024. I think more broadly, I mean, what we’ve tried to do is basically reflect our view of the growth that is resulting from the sales cycle that we’re now finishing and understanding things like we’re trying to be thoughtful about what the needs of our teammates are going to be as we go into wage cycle and all that. And tried to take what I think is a various overview of what fiscal 2024 might look like and use that as a baseline. That seems like a useful again, useful thing to do.
Cynthia Motz: And then just in terms of the overall margin, so that’s what we’re seeing. There’s nothing else going on in terms of other expenses and things like that. It’s just basically the mix. I mean, obviously, it’s very strong margin improvement that I guess you €“ I mean, I know you’re not going to give us 2025 guidance, but I would expect that, that would continue as the mix shifts into 2025, maybe similar improvement.
Jon Kessler: I think it’s €“ I mean our general view has been that as we see mix shift in a number of different ways that we have an opportunity to expand margin. So I think your conclusion would be consistent with that view.
Tyson Murdock: The only thing I would add to that, too, just to make a point of it is that the contracts that will replace fiscal 2025 or not this January, but next were the contracts that were placed in zero interest rate environment, they were negotiated in the zero interest rate environment. So if rate stays steady, they stay at the averages. It will be an improvement over those contractual placements in that period. So there should be acceleration there. We’ve talked about that before. And then the other thing, Cindy, that I’ll just make a point or two since you brought it up, just on the custodial cost side. And it is interesting because we’ve been in the zero interest rate environment for a long time. And so we saw this move that I pointed out in the script that increased the cost by 5 basis points.
That undoubtedly will happen again based on that mathematical calculation where we use inputs from what our competitors are doing, and it’s right in the small print of the member agreement. And we’ll increase that rate as our competitors increase the rate. So those should be being built into models and so forth based on what we think will happen there.
Cynthia Motz: Great. Thank you very much.
Tyson Murdock: Thanks, Cindy.
Operator: Our next question comes from George Hill with Deutsche Bank. Please go ahead.
Jon Kessler: Hi, George.
George Hill: Good evening, guys. I hope you can hear me okay and I hope I’m not about to embarrass myself as I try to do math from the back of a cab. But my question is also on the fiscal 2024 guide and the rate environment. And if I’m doing the math right, your annualized custodial yield this quarter was about 2.3%. And you guys are guiding to 2.25% for fiscal 2024. So I guess, can you either walk me through the expectation of rate cadence? Or should I think of that as conservatism with respect to rates? And I have a quick follow-up.
Tyson Murdock: All right. I’ll give you the correct numbers, I’m watching metric because I’d be looking at the piece of paper. So for Q3, it was 200 basis points even for Q3 that we just reported. And then for the annualized number, Richard, was it
Richard Putnam: 190 annual, which implies a little better than like 210 for Q4.
