Jon Kessler: I’m guessing there might be another one about this topic. So, we’re happy to go into more. Who’s next?
Operator: The next question is from Stan Berenshteyn with Wells Fargo. Please go ahead.
Stan Berenshteyn: Hi, thanks for taking my questions. Maybe first on the preliminary — hi. On the preliminary guidance, I guess, first, how should we think about the BenefitWallet assets that are flowing in? Can you give us a sense of the timing of when these tranches are going to come in? To what extent are we getting the benefit through the year? And associated with that, maybe I’ll layer a couple of more questions in here. Do you have to pay any fees on those assets moving into your custodial accounts let’s start there.
Jon Kessler: Yeah. I think I can take this one. So, let me start with the second part of your question, Stan. As you recall, in prior transactions, we’ve had a component where there’s a seller — a third-party custodian that we have to pay. We had that in the WageWorks transaction. We have that here. That’s baked into — technically the way it works in this case is, it’s the seller paying the fees, and we have agreed as part of — and I think we disclosed this at the time the agreement was signed. We have agreed to cover, I believe, someone correct me if I’m wrong, $20 million of such fees within the purchase price. So that doesn’t impact our projection of go-forward income or the income statement in any way, it’s just — it’s a purchase price accounting issue.
And then with regard to the first part of your question, the way to think about this, I think, is that — and Jim mentioned this briefly in his opening remarks, is that we will see incremental service expense effectively our busy season extending into the first bit of the fiscal year as we prepare to bring on these accounts, it would be silly to fully ramp down and then ramp back up again. So, there’ll be some — and even if we were doing that, we would still see incremental costs. So, you’ll see some incremental service costs. And then in Q2, we should start to kind of net out to a positive here as we begin to onboard these accounts. And so, our guidance kind of reflects that idea that these placements — sorry — these transitions will occur kind of in that timeframe.
And by the second half of the year, we’ll be at run rate. And as we’ve discussed elsewhere, this kind of accretes very quickly. So, if that’s helpful for you. We can’t — I would say there’s some uncertainty here as there often is, but that’s our current expectation.
Stan Berenshteyn: That’s helpful. Thank you. Maybe just a quick one on services gross margin. Clearly, you’re making some progress here. Can you maybe share any updates on the adoption of your tech-based communications with your members and whether or not that’s — you’re recognizing some tangible improvements on the gross margin side there?
Jon Kessler: Yeah. Well, Jim talked about the progress on gross margin generally. I think, obviously, if you look at service expense and the like, the ability to kind of be in a good spot here relative to volume growth speaks to the point that you’re making, particularly given that we’re also fighting things like wage growth, there are headwinds in this area. And so, yeah, I commented elsewhere that we’ve made — we look at this month-over-month. And what we’re really trying to do is ultimately, it’s not just — it’s in part the move from voice to chat, but it’s also ultimately the move from live to automated in areas where members really get value out of that. And there are clearly a lot of those. And so, we continue to see kind of, I would just say, quarter-over-quarter progress.
It’s not — and we’ve never suggested it was the magic bullet, but the ultimate opportunity to take significant costs out of service delivery while delivering actually a better experience for members through digitization. I mean this is, as I’ve said, elsewhere, is a no-brainer in terms of sort of ironic to say this in terms of the applications for generative AI, just damp this stuff really works. And so, we think that, that will continue. And we think that what we do is actually an excellent application for it because precisely because it’s not — it’s always as simple and people’s questions aren’t always as formed in exactly the same way. And yet, we want to be able to generate the right answers.
Richard Putnam: Thanks Stan.
Operator: Thank you. The next question is from Allen Lutz with Bank of America. Please go ahead.
Jon Kessler: Hey, Allen.
Allen Lutz: Thanks for taking the questions and welcome, Jim. A couple on the financial side. So, I just want to ask on the 3% custodial yield guide for next year, how much of those contracts have already been set? And then, one follow-up related to the financials. Is BenefitWallet fully incorporated into the fiscal 2025 guide? And then I have a follow-up.
Jon Kessler: That sounds like three, that’s three.
James Lucania: Yeah. So, as Jon said, our expectation about the — both the ramp-up cost, the transition cost, migration costs and then, of course, the benefit of having the accounts on our platform are built in to the 2025 guide. As our — those assets will be invested at market rates, which will obviously pull up the average rate earned on HSA yield. So yes, BenefitWallet is a contributor to revenue and to the higher yield that we’re going to be guiding to here.
Jon Kessler: And then just to the first part of your question about placements, the math is a little different with enhanced rates now, where we can do placements throughout the year. So, it’s a little less relevant, but a way to think about it is that we will do — we do placements mostly when money moves in terms of when rates are cut. So about a third of that happens in the — if you sort of think about that year-end bulk, about a third of it’s in fiscal Q4 and say calendar Q4 and then two-third is kind of in that change rate period. But I would caution that — just I would caution on that last point, enhanced rates does have the benefit that allows us to draw that out a little bit. And so, over time, what you’ll have to get used to is — and I think this will be good is that it’s not going to be sitting and waiting for what the rate is on a given day, that’s going to matter as much for those kinds of placements.
Operator: Thank you. The next question comes from David Larsen with BTIG. Please go ahead.
David Larsen: Hi. Congratulations on an excellent quarter. Can you maybe just talk a little bit about expectations for yield longer term? Obviously, I wouldn’t ask for guidance for fiscal 2026. But since it takes three years to recontract your book of business, let’s say, rates hold steady or decline slightly next year, maybe they declined slightly in fiscal 2026. Could your yield still go up, which would obviously benefit custodial in fiscal 2026?
Jon Kessler: Jim, do you want to hit this one?
James Lucania: Simple answer is yes. Obviously, it depends how far rates decline. But yeah, I think you said if rates remain stable, then yes, we’d expect the average rate to continue. There are strong tailwinds in that number.
David Larsen: Okay.
