Business context and reporting period
HealthEquity, Inc. administers health savings accounts (HSAs) and other consumer-directed benefits. This unaudited Form 10-Q covers the three and six months ended July 31, 2022; comparisons are with the corresponding 2021 periods. Unless noted otherwise, financial amounts below are in millions.
At July 31, 2022, the company administered 7.5 million HSAs with $20.5 billion of HSA assets, and 7.0 million complementary benefit accounts, for 14.5 million total accounts. HSA assets are member custodial assets, not company balance-sheet cash.
Financial performance and liquidity
| Metric | Three months ended July 31, 2022 | Year-over-year change | Six months ended July 31, 2022 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $206.1 | +9% | $411.8 | +10% |
| Gross profit | $117.8 | +$5.8 | $229.0 | +$13.9 |
| Gross margin | 57.2% | 59.2% prior year | 55.6% | 57.6% prior year |
| Operating income (loss) | $(2.4) | $(0.9) prior year | $(9.7) | $3.4 prior year |
| Net income (loss) | $(10.7) | $(3.8) prior year | $(24.3) | $(6.4) prior year |
| Adjusted EBITDA, non-GAAP | $67.0 | +2% | $125.4 | +1% |
Quarterly service revenue declined 6% to $103.0 million, while custodial revenue rose 34% to $65.6 million and interchange revenue rose 20% to $37.5 million. For the six months, service revenue declined 2% to $207.4 million; custodial revenue rose 31% to $125.0 million and interchange revenue rose 21% to $79.5 million. Custodial growth reflected higher average HSA cash balances; quarterly yield increased to 1.80% from 1.77%, while the six-month yield declined to 1.75% from 1.78%.
Cash from operations was $47.2 million for the six months, down from $68.2 million. Investing used $95.3 million, including $68.7 million for acquired HSA member assets; financing used $0.4 million. Cash and cash equivalents fell to $176.9 million from $225.4 million at January 31, 2022. Current assets were $308.6 million versus current liabilities of $125.5 million.
Debt principal totaled $945.6 million: $600.0 million of 4.50% senior notes due 2029 and a $345.6 million variable-rate term loan. The company had no revolver borrowings and reported $1.0 billion of revolving capacity. It was in compliance with credit-agreement covenants. Management stated available cash, cash generation, and the revolver should meet operating and capital needs for at least 12 months.
Material changes and management outlook
- Total revenue growth was driven by custodial and interchange revenue, partly offset by lower service revenue. Service revenue was affected by prior-year non-recurring COBRA revenue and FSA/COBRA fee attrition associated with platform migrations.
- Revenue growth did not translate into higher GAAP earnings: operating expenses rose 7% for the quarter and 13% for the six months, including higher technology and development, acquired-intangible amortization, and general and administrative costs. Merger integration expense fell year over year but remained $7.7 million for the quarter and $17.0 million for the six months.
- Interest expense increased to $11.5 million for the quarter and $22.0 million for the six months, reflecting debt issued in October 2021 and higher variable-rate borrowing costs. The company estimated a 1 percentage-point rate increase on credit-facility borrowings outstanding at quarter-end would add about $3.5 million of interest expense over the next 12 months.
- Management expected Further-related integration expenses of approximately $55 million over about three years from its November 2021 acquisition. It expected capital expenditures to continue at the current level for the remainder of fiscal 2023 and ongoing increases in technology, sales and marketing, and general and administrative spending. No specific revenue or earnings guidance was provided in the filing text.
- Management said pandemic-era deposit contracts continue to constrain custodial yields despite rising market rates. Remote and hybrid work continues to weigh on commuter-benefit usage; COVID-19 effects and the duration of those impacts remain uncertain. The company also cited seasonality, inflation, interest-rate changes, competitive pressure, and potential healthcare or tax-policy changes as business factors.
Risks, contingencies, and unusual items
- Disclosure controls and procedures were ineffective as of July 31, 2022 because of material weaknesses in the contract-to-cash process and IT general controls. Management described remediation efforts, but the weaknesses could result in material misstatements. The evaluation excluded certain Further controls under the acquisition-related transition provision.
- A dispute with Union Mesa concerns WageWorks’ termination of an uncommenced Arizona office lease with claimed aggregate payments of $63.1 million. The landlord drew the full $2.8 million letter of credit and has counterclaimed; the company is seeking return of the funds. Management said losses on the described matters were not considered probable or estimable, while acknowledging an unfavorable outcome could materially affect results or cash flows.
- Cash of $176.9 million was held largely in excess of federally insured limits. The company also disclosed IRS and Texas tax examinations and $12.0 million of gross unrecognized tax benefits at quarter-end.
- The HealthSavings HSA portfolio was acquired for $60 million cash in March 2022. The company reported no material expected impact from the Inflation Reduction Act provisions enacted August 16, 2022.
Important facts for investors to verify
- Whether service-revenue declines and platform-migration attrition stabilize, and whether custodial yield gains persist as partner contracts reset.
- Integration progress and realized benefits from Further and other portfolio acquisitions, alongside remaining integration costs and amortization.
- Remediation and independent validation of the contract-to-cash and IT-control material weaknesses.
- Cash conversion, capital spending, acquisition spending, debt service, and compliance with leverage and interest-coverage covenants.
- Developments in the Union Mesa litigation, tax examinations, and any other contingencies that could affect liquidity or reported results.