HealthEquity, Inc. — FY2019 Form 10-K
Business context and reporting period. HealthEquity operates a U.S. technology-enabled healthcare savings and spending platform, centered on health savings accounts (HSAs), with related reimbursement-account, investment, and retirement services. This 10-K covers the fiscal year ended January 31, 2019; the fourth quarter ended on that date. Unless noted, amounts are in U.S. dollars.
Financial and operating performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $287.2 million | $229.5 million | +25% |
| Gross profit / gross margin | $181.2 million / 63.1% | $134.9 million / 58.8% | Margin +4.3 percentage points |
| Operating income / margin | $77.7 million / 27.0% | $54.4 million / 23.7% | +43% operating income |
| Net income | $73.9 million | $47.4 million | +56% |
| Diluted EPS | $1.17 | $0.77 | +52% |
| Cash from operations | $113.4 million | $81.7 million | +39% |
| Cash, cash equivalents and marketable securities at year-end | $361.5 million | $240.3 million | +50% |
| Total liabilities | $32.9 million | $22.9 million | +44% |
Revenue mix: service revenue was $100.6 million (+10%); custodial revenue was $126.2 million (+45%); and interchange revenue was $60.5 million (+19%). Custodial revenue represented about 44% of total revenue, compared with 38% in FY2018. Management attributed its increase to growth in average custodial cash and a higher yield: average cash increased 22% to $5.6 billion, while yield rose from 1.83% to 2.15%.
At January 31, 2019, the platform had approximately 4.0 million HSAs, up 17%, and $8.1 billion in custodial assets, up 19%. HSA members with investments increased 34% to 163,000. Adjusted EBITDA, a non-GAAP measure, was $118.4 million, up 40%, or 41% of revenue versus 37% in FY2018.
Liquidity and debt. Working capital was $365.6 million and stockholders’ equity was $477.1 million. The company had no borrowings on its $100 million revolving credit facility and reported compliance with its covenants. Management stated that available liquidity should meet operating and capital expenditure needs for at least 12 months. FY2019 investing cash flow was $25.7 million, primarily reflecting $41.4 million of proceeds from sales of marketable securities; capital expenditures were $13.8 million.
Fourth-quarter results
For the three months ended January 31, 2019, revenue was $75.8 million, up from $60.4 million in the prior-year quarter. Gross profit was $44.4 million versus $31.6 million; net income was $13.1 million versus $5.9 million; and diluted EPS was $0.21 versus $0.09. The FY2019 fourth-quarter income tax provision was $3.2 million, compared with $0.8 million in the prior-year quarter.
Material changes, outlook, and risks
- Growth was led by custodial revenue, supported by higher balances and yield. Service revenue grew more slowly than HSA membership, partly because partner pricing tiers reduce fees per member as accounts scale. Service revenue per HSA member fell about 10%.
- Operating expenses increased 29% to $103.5 million, including higher personnel, sales and partner commissions, technology spending, and stock-based compensation. Stock-based compensation rose to $21.1 million from $14.3 million.
- The effective tax rate fell to 2.5% from 9.2%, reflecting the lower federal corporate tax rate and tax credits, including $14.3 million of excess stock-compensation tax benefits. Tax benefits materially affect comparability of reported earnings.
- ASC 606 adoption led to capitalization and amortization of eligible sales commissions. It increased FY2019 net income by $1.4 million relative to the prior accounting treatment; the filing says the adoption did not materially affect FY2019 revenue.
- Management expects continued investment in platform architecture, functionality, and security, and higher capital expenditures in FY2020. Sales and marketing and technology and development expenses were expected to increase; no specific revenue, earnings, or margin guidance is provided in this filing.
- Major risks include dependence on HSA tax advantages and healthcare policy, interest rates and custodial yields, competition, partner and vendor reliance, and execution of technology upgrades and acquisitions. The company disclosed several data privacy incidents in 2018 and warned that further incidents could cause liability, costs, reputational damage, and customer losses.
- There were no material pending or threatened legal proceedings reported. The company had $77.8 million of non-cancelable lease and other contractual obligations, including $69.1 million of office leases, and a processing-services agreement with potential termination costs.
Important facts for investors to verify
- Whether custodial cash growth and the 2.15% yield are sustainable, and how deposit-partner contracts and member interest rates respond to changing market rates.
- Whether the company can maintain member growth and payment-card activity while service revenue per member and interchange revenue per member face pressure.
- How much of earnings growth reflects underlying operations versus tax benefits, stock-based compensation, and ASC 606 commission capitalization; compare GAAP net income with Adjusted EBITDA.
- Progress and costs of platform upgrades, security improvements, and remediation of the disclosed 2018 privacy incidents.
- Future cash use, lease commitments, capital spending, acquisition activity, and any borrowing under the credit facility.