HealthEquity, Inc. — Q1 fiscal 2019 (three months ended April 30, 2018)
HealthEquity provides technology-enabled administration and custodial services for HSAs and other healthcare accounts. It reported this Form 10-Q on June 7, 2018. Comparisons below are with the three months ended April 30, 2017, unless otherwise stated.
Financial and operating performance
| Metric | Q1 2019 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $69.9 million | $55.4 million | +26% |
| Gross profit / margin | $44.4 million / 63.4% | $33.7 million / 60.9% | Margin +2.5 percentage points |
| Operating income / margin | $20.5 million / 29.4% | $15.9 million / 28.7% | Operating income +29% |
| Net income / diluted EPS | $22.6 million / $0.36 | $14.0 million / $0.23 | Net income +61% |
| Adjusted EBITDA / margin | $29.6 million / 42% | $22.4 million / 40% | +32% |
| Operating cash flow | $22.7 million | $15.6 million | +$7.1 million |
- Revenue by source: service $24.8 million (+10%), custodial $28.4 million (+47%), and interchange $16.6 million (+22%). Custodial revenue growth reflected average custodial cash balances up 24% and yield rising from 1.72% to 2.04%.
- Costs of revenue rose 18% to $25.5 million; operating expenses rose 34% to $23.8 million. The filing attributes expense growth to staffing, technology investment, stock compensation, and servicing a larger account base.
- Cash and marketable securities were $269.8 million at April 30, 2018, versus $240.3 million at January 31, 2018. Cash and cash equivalents were $228.9 million. Current assets were $303.8 million and current liabilities $17.2 million.
- Investing activities used $3.4 million, including $2.1 million for software and capitalized development and $1.1 million for property and equipment. Financing provided $10.2 million, primarily from stock-option exercises.
- No borrowings were outstanding under the $100 million revolving credit facility; the company reported compliance with its covenants. Total liabilities were $21.1 million.
- Custodial assets, held for HSA members rather than reported as company assets, totaled $6.86 billion, up 31% year over year. HSA members increased 24% to 3.48 million; members with investments increased 74% to 134,246.
Material changes and accounting
- Service revenue grew more slowly than membership: service revenue per HSA member declined approximately 11%, partly reflecting tiered partner pricing. Interchange revenue per member declined approximately 1%; custodial revenue per member increased approximately 19%.
- HealthEquity adopted ASC 606 on February 1, 2018 using the modified retrospective method. Revenue was not materially affected. Capitalizing eligible sales commissions increased Q1 operating income by $310,000 and net income by $213,000 versus the amount that would have been reported without adoption. A $17.2 million cumulative contract-cost asset was recorded at adoption; net capitalized contract costs were $17.5 million at April 30.
- The income tax benefit was $2.0 million, versus a $1.8 million tax provision a year earlier. The reported 9.9% tax benefit rate reflected, among other items, excess stock-compensation tax benefits, the reduction in the federal corporate rate, and R&D credits.
Outlook, commentary and risks
- No numerical revenue or earnings guidance is provided. Management expects annual gross margin to remain relatively steady in the near term, while sales and marketing, technology and development, and general and administrative expenses are expected to increase in absolute dollars as the business grows.
- Management expects capital expenditures to increase during the remainder of fiscal 2019, mainly for the proprietary platform’s architecture and functionality. It stated existing cash, cash equivalents, and marketable securities should cover operating and capital requirements for at least 12 months.
- Key sensitivities include HSA adoption and healthcare policy, partner additions and penetration, custodial cash balances and interest yields, competition, regulation and data security, and successful technology investment and acquisitions. A sustained decline in interest rates could reduce custodial revenue; management notes that partner diversification and contract terms mitigate short-term rate exposure.
- Seasonality affects costs: onboarding and support expenses typically rise ahead of January benefit-plan starts. The company reported no material change in disclosed risk factors, no material litigation, and no material changes to contractual obligations outside the ordinary course.
- After quarter-end, the company acquired HSA portfolio custodial rights for $1.0 million.
Important facts for investors to verify
- Whether growth in custodial yield and balances is sustainable, and how interest-rate changes or partner contract renewals affect custodial revenue and margins.
- Whether HSA membership growth converts into durable service revenue despite lower service revenue per member and tiered pricing.
- How much reported earnings growth reflects underlying operations versus the tax benefit and ASC 606 commission capitalization; assess Adjusted EBITDA alongside GAAP results.
- Execution, returns, and future spending for the platform upgrade, acquisitions, and the planned increase in capital expenditures.
- Exposure to regulatory, healthcare-policy, cybersecurity, and counterparty risks. The filing notes that only $750,000 of the company’s $269.8 million in cash, cash equivalents, and marketable securities was covered by federal deposit insurance.