HealthEquity, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended July 31, 2020. Results include WageWorks, acquired August 30, 2019; prior-year comparisons exclude it, limiting comparability.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $176.0 million | $86.6 million | $366.1 million | $173.7 million |
| Gross profit / margin | $101.8 million / 57.8% | $58.4 million / 67.5% | $209.9 million / 57.3% | $116.2 million / 66.9% |
| Operating income / margin | $9.0 million / 5.1% | $24.9 million / 28.7% | $24.1 million / 6.6% | $52.5 million / 30.3% |
| Net income (loss) | $(0.1) million | $19.4 million | $1.7 million | $61.2 million |
| Adjusted EBITDA (non-GAAP) | $60.0 million | $40.6 million | $123.0 million | $79.6 million |
| Operating cash flow | Not separately presented for the quarter | $68.7 million | $56.8 million |
Q2 revenue rose 103%; six-month revenue rose 111%, primarily reflecting WageWorks and realized net revenue synergies. Q2 service revenue was $103.8 million, custodial revenue $46.9 million, and interchange revenue $25.3 million. Q2 Adjusted EBITDA increased 48%, but its share of revenue fell to 34% from 47%.
Margins and GAAP earnings declined as service costs and operating expenses increased with the acquired business. Q2 included $19.1 million of acquired-intangible amortization, $10.4 million of merger-integration expense, and $8.9 million of interest expense. The prior-year six-month period included a $27.3 million gain on equity securities, affecting the comparison.
Balance sheet, liquidity, and capital
- At July 31, cash and cash equivalents were $268.9 million, up from $191.7 million at January 31. Current assets were $383.1 million and current liabilities $153.8 million.
- Term-loan principal was $1.027 billion; debt reported net of issuance costs was approximately $1.008 billion. The company prepaid $200 million in July. The $350 million revolving facility had no borrowings; the company reported compliance with debt covenants.
- Six-month investing cash outflow was $55.7 million, including $21.8 million for software and capitalized development, $9.0 million for property and equipment, and $24.9 million for acquired member assets. Financing cash inflow was $64.2 million, mainly from the equity offering, partly offset by debt repayments.
- The July follow-on offering of 5.29 million shares generated approximately $286.8 million net proceeds. The company said existing cash, operating cash flow, and revolving-credit availability should meet operating and capital needs for at least 12 months.
- HSA Assets were $12.2 billion, up 43% year over year; the company administered 5.4 million HSAs and 7.1 million complementary benefit accounts.
Outlook, risks, and unusual items
- Integration: Management said it achieved approximately $50 million in annualized ongoing net synergies by the end of Q2 and raised its target to $80 million over the following 18 months. It expected $80–$100 million in total non-recurring integration costs over 24–36 months after the acquisition; approximately $55 million had been incurred by July 31.
- COVID-19 and rates: Management cited lower interest rates, reduced commuter-benefit use and healthcare spending, lower interchange activity, delayed sales opportunities, potential client payment issues, and possible service disruptions. The extent and duration of impact were uncertain.
- Interest-rate exposure: Custodial revenue benefited from larger average cash balances but was partly offset by lower yields: Q2 yield fell to 2.10% from 2.54%. Management expected rate cuts to continue pressuring custodial revenue. A one-percentage-point increase in rates on outstanding credit-facility borrowings would add approximately $10.2 million of annual interest expense.
- Controls: The company disclosed material weaknesses inherited from WageWorks, including in financial close and reporting, revenue billing and collection processes, transaction review, reconciliations, and IT controls. Remediation was underway. The disclosure-controls assessment excluded acquired WageWorks controls; WageWorks represented about 49% of consolidated quarterly revenue.
- Legal matters: WageWorks-related government, securities, and derivative matters remained outstanding. The company said losses were not considered probable or reasonably estimable, but an unfavorable outcome could materially affect results.
- Other outlook: Management expected elevated technology investment and capital expenditures to continue, and anticipated lower interest expense following debt repayments. No specific revenue or earnings guidance is provided in the filing text.
Investor facts to verify
- How much reported growth and profitability reflects WageWorks acquisition effects versus organic performance and realized synergies.
- Progress toward the $80 million synergy target and remaining integration costs, including whether projected benefits are achieved on schedule.
- The durability of custodial revenue amid low rates, and the effects of COVID-19 on interchange, commuter benefits, client retention, and collections.
- Remediation and independent effectiveness of WageWorks’ material-weakness controls, particularly given its contribution to quarterly revenue.
- Debt repayment capacity, covenant headroom, and the use of remaining equity-offering proceeds.