And so I’m really excited about where we’re headed with it. I’m excited to have Jim take a look at it and see where he can add and improve, and we’ll have more to say about it as we go in the next couple of quarters.
Operator: Thank you. And our next question today comes from Glen Santangelo with Jefferies.
Glen Santangelo: Just 2 quick ones for me. Jon, I was kind of curious if you can give us any update on the average duration of the portfolio and if that’s changing at all with this enhanced rates product because I think as most of us are probably aware, I mean, and you are 3 years ago, today, the 10-year was sitting at 65, 70 basis points, right? So you’re getting ready to do a replacement kind of coming up here in a few months. And I was kind of curious if you could help us in any way think about the waterfall. And then I just had a follow-up on margins.
Jon Kessler: Yes. I’m going to give you a lot of words that I’m not sure are going to answer the question you asked, okay?
Glen Santangelo: So, let me just — let me copy [ph].
Jon Kessler: In general, we have not made any change with regard to the fundamentally with regard to the approach we take to the duration of our cash portfolio. I think that’s fundamentally what you’re asking that is to say with — and by cash, in particular, I mean our deposit portfolio, right? We deploy the actual contracts that are deployed or 4- or 5-year contracts. And when you kind of swizzle in the fact that there’s variable rate cash and there’s money above the minimums and whatnot, right? You’re really talking about duration historically, and by duration here, I mean, liquidity-related duration that’s around 3 years. Now so I think the premise is right. There are a couple of things that — I mean — and I think generally, the premise that your question, I think suggest that you have, Glenn, which is that over the next couple of years here, there’s a lot of cash that will be running out of deposit contracts and particularly to the extent — well, even if it were placed on new deposit contracts, but particularly the extent it’s place enhanced rates, right, is going to produce a nice bump here and that will include all of the COVID re-cash [ph].
So you think about — and that includes both the natural runoffs, but also the kind of roughly 5-year single placement associated with the timing of the wage conversions in calendar 2020, I believe. I may have that wrong, 20 or 21 one of the 2. But — so there is a lot of opportunity here. We think it was absolutely the right time to be looking at whether the deposit instruments were really serving our needs and those of our members. And I think we’ve made the right choice in pursuing this mechanism. And look, the result is going to be under any reasonable economic scenario or any plausible economics not at the moment is going to be that it’s not just that cyclically, we’re going to see higher profits. It’s that on an ongoing basis, we’re going to see higher profits from the custodial line, and that seems good.
Glen Santangelo: Right. I mean just to use your words, Jon, I mean, you said there’s a bump comment, and I just want to make sure I’m correct in thinking there is a bump company even if you don’t want to size it today because when we go back and we look at those consort of cash rates, I mean, it’s pretty clear there’s a big bump coming…
Jon Kessler: Yes. I mean, you — as you well know, Glenn, when — I think people got a little ahead of their skis at the beginning of calendar ’23. And maybe — and so I want to be thoughtful about not creating an even bigger on your skis to yard sell, but — but I think — but the premise is correct, and I think it will be sizeable.
Glen Santangelo: All right. And maybe Tyson, just one quick one on the margins. I mean the EBITDA was up — adjusted EBITDA was up 360 basis points year-over-year. And I know there was some membrane balance growth and the improvement in the custodial yields obviously and some technology benefits. But I was wondering if you could just real quickly sort of unpack that to help us think about what’s really driving that better EBITDA when you think about those 3 contributors.
Tyson Murdock: Yes. I mean it is the custodial revenue obviously falling down to the model, and we knew that would drive it. And like we’ve talked about, you go back to history and way back, and we did hit a 40% EBITDA margin in one of the quarters in the middle of the summer, like this one. And so we’re moving back towards that as that moves up. But I do think that we’ve been very thoughtful about how we’ve managed the controllable costs. And when I say that, I mean not something like stock comp, which is — which we benchmark just fine with all of our peers, but it does get added back into EBITDA. What I’m talking about is what our executives work on every single day. And we’re very thoughtful about how we build budgets and who we hire and how much we improve compensation and those types of things.
And so, I think that’s just a matter of the seriousness with which the team takes that and that’s why we’re able to raise our EBITDA guidance by 5% along with the top line. Normally, you see it as a percentage of that top line raise. So it’s just being thoughtful about those efficiencies. I do think that it’s also true that there’s efficiencies to be gained and have been gained on the service cost line item. And that’s again where a lot of the executives are working on that. And I think we’ve set ourselves up for longer-term success there as well, and it will start to show. And so I think those are some of the things that are sort of showing through on that. And I think we’ll continue to get the benefit of the enhanced rate program, pushing down through there as well like we’ve been talking about.
So that will continue for some time.
Glen Santangelo: Awesome. And best luck, Tyson.
Tyson Murdock: Thanks.
Operator: And our next question today comes from Sean Dodge with RBC Capital Markets.
Sean Dodge: Sure. Thanks. Maybe just going back to the enhanced product. And just to further clarify how those work. I know, Jon, you said you placed cash in those for 5 years, but you’ve also said before they’re designed to produce more smoothness and yields over time. So does that mean — should we think about these being more like a variable rate product? Or is that smoothness coming more from the fact that these are layered in over the course of the year and not all happening in lumps around the January time frame. And so as these roll kind of on their 5-year ladder, it’s happening more intra-year instead of in January, and that’s where the movement is coming from. Maybe just to help clarify that.
Jon Kessler: The answer is there are really 3 sources of this, and we thought quite a bit about this as we work through these products. The first is the second point you mentioned, that is to say the fact that money — when you do cash — I’m sorry, keep saying when you do deposits like you strike the deal and you send all the money, and that’s it. Here, you do have the ability to layer money in kind of for lack of from dollar cost average in and out. And so that does really help. And at some point, we’re not going to be talking about if we have our way, we’re not going to be talking about tremendous uncertainty on this topic when we announced the December quarter and the like, and I’m sure you’ll all look forward to that as we will.
