HealthEquity, Inc. — Form 10-K summary
Reporting period: Fiscal year ended January 31, 2023, compared primarily with the fiscal year ended January 31, 2022. This is an annual filing, not a standalone fourth-quarter report.
Business context
HealthEquity provides technology-enabled administration of health savings accounts (HSAs) and other consumer-directed benefits, including FSAs, HRAs, COBRA and commuter benefits. It reaches consumers mainly through employers and network partners. At fiscal year-end, it administered 8.0 million HSAs holding $22.1 billion in HSA assets, plus 6.9 million other benefit accounts, for 14.9 million total accounts. The company reported 20% U.S. HSA asset market share as of December 2022.
Financial and operating performance
| Metric | FY ended Jan. 31, 2023 | Prior year | Change |
|---|---|---|---|
| Total revenue | $861.7 million | $756.6 million | Up 14% |
| Gross profit / margin | $490.1 million / 56.9% | $423.7 million / 56.0% | Margin up 0.9 percentage points |
| Operating income (loss) | $9.1 million | $(24.2) million | Improved |
| Net income (loss) | $(26.1) million; $(0.31) per share | $(44.3) million; $(0.53) per share | Loss narrowed 41% |
| Adjusted EBITDA (non-GAAP) | $272.3 million; 32% of revenue | $236.0 million; 31% of revenue | Up 15% |
| Cash from operating activities | $150.7 million | $141.0 million | Up $9.7 million |
Revenue mix: service revenue was $430.2 million, up 1%; custodial revenue was $283.1 million, up 40%; and interchange revenue was $148.4 million, up 17%. Higher average HSA cash balances and yield drove custodial growth: average annualized HSA cash yield rose to 1.90% from 1.75%. Interchange growth reflected higher spend per account and account growth.
Operating expenses increased 7% to $481.0 million. Technology and development rose 23% to $193.4 million, sales and marketing rose 17% to $68.8 million, and general and administrative expense rose 13% to $95.6 million. Merger integration expense fell 56% to $28.6 million, mainly as WageWorks integration activity declined. Interest expense increased to $48.4 million from $36.6 million, primarily due to higher variable rates.
Cash and cash equivalents were $254.3 million, versus $225.4 million. Investing activities used $119.1 million, including $70.6 million for HSA portfolio acquisitions and $45.2 million for software and capitalized software development. Capital expenditures were $48.5 million. The company reported $941.3 million of debt principal outstanding: $600 million of 4.50% senior notes due 2029 and $341.3 million under its term loan. Debt carrying value, net of issuance costs, was $925.3 million. No revolving-credit-facility borrowings were outstanding; the facility provides up to $1.0 billion. The company said it was in covenant compliance and expected existing cash and credit availability to cover operating and capital needs for at least 12 months.
HSA assets increased 13% to $22.1 billion, and HSA accounts increased 11% to 8.0 million. Other CDB accounts decreased 4% to 6.9 million, partly reflecting COBRA platform migration and a change in how accounts on a discontinued platform were counted. Cash flows and HSA assets are distinct: HSA assets and client-held funds are held for members or clients, not presented as corporate cash.
Changes, outlook and notable matters
- Growth in revenue and gross profit supported improved operating results, but the company remained unprofitable under GAAP. Net loss narrowed partly because of higher gross profit and lower integration expense; higher technology, amortization, general and administrative, and interest costs offset some of that improvement.
- Management expected custodial revenue to benefit if the prevailing rate environment continued, as partner contracts renew or are replaced and more HSA cash uses the Enhanced Rates offering. Existing fixed-rate partner agreements can delay the impact of rate increases. A 1 percentage-point increase on term-loan borrowings outstanding at year-end was estimated to add about $3.4 million of interest expense over the next 12 months.
- Management expected fiscal 2024 capital expenditures to remain around the current level as it invests in technology architecture and functionality. It expected cost of revenue to decline as a percentage of revenue, primarily due to custodial revenue growth, while technology and development spending was expected to rise in dollars. No overall numerical revenue or earnings guidance is provided in this filing.
- The Further acquisition expanded the business; the company expected about $55 million of Further integration expenses over approximately three to four years from the acquisition date. It acquired the HealthSavings HSA portfolio for $60 million in cash in March 2022.
- COVID-era work-from-home and hybrid-work patterns continued to weigh on commuter benefit usage and related service and interchange revenue. Extended COBRA election deadlines also affected COBRA usage and administration; management noted the national emergency was scheduled to end after May 11, 2023.
- Key risks include changes to tax advantages for HSAs and other benefits, interest-rate and deposit-partner exposure, acquisition integration and customer attrition, competition, cyber and privacy incidents, dependence on network and payment partners, and substantial debt. The company also highlighted that goodwill and intangible assets totaled about $2.58 billion, making impairment a potential source of non-cash charges.
- WageWorks litigation concerns a disputed Arizona office lease that the subsidiary says it terminated. The landlord drew $2.8 million under a letter of credit, recorded as merger integration expense, and counterclaims remain in litigation. The company said it could not determine the ultimate outcome or potential impact of litigation matters.
- Management and the auditor concluded internal control over financial reporting was effective as of January 31, 2023; previously reported WageWorks contract-to-cash and IT general-control material weaknesses were reported as remediated. The auditor issued an unqualified opinion and identified service revenue recognition as a critical audit matter.
Important facts for investors to verify
- Whether custodial yields and revenue improve as partner agreements reset, and how quickly fixed-rate contracts permit that benefit.
- Whether HSA account and asset growth, customer retention, and CDB account trends continue after acquisitions and platform migrations.
- Progress, costs and customer impact of Further integration, including the remaining estimated integration expense.
- Debt service, variable-rate exposure, covenant headroom and liquidity; distinguish debt principal from the lower balance-sheet carrying amount.
- Developments in the WageWorks lease litigation and any resulting liability or recovery of the $2.8 million letter-of-credit draw.
- Whether commuter usage recovers and whether cybersecurity, privacy, regulatory or HSA tax-policy changes materially affect operations.