HealthEquity, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended January 31, 2015. Amounts are in U.S. dollars; financial figures are consolidated. The filing also provides unaudited quarterly data, including the three months ended January 31, 2015.
Business context
HealthEquity operates a technology-enabled healthcare savings and spending platform, centered on health savings accounts (HSAs), with related reimbursement-account administration, payment cards, investment options and consumer support. It distributes largely through health-plan and employer partners. At year-end, it administered approximately 1.43 million HSAs and $2.36 billion of assets under management (AUM), and reported approximately 27,000 employer clients and access through network partners to more than 60 million consumer lives.
Key financial and operating metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $87.9 million | $62.0 million | +42% |
| Gross profit / gross margin | $48.0 million / 54% | $32.8 million / 53% | Margin +1 percentage point |
| Operating income / margin | $16.9 million / 19% | $11.5 million / 19% | Income +46% |
| Net income | $10.2 million | $1.2 million | Higher |
| Adjusted EBITDA (non-GAAP) | $25.2 million / 29% of revenue | $15.8 million / 25% | +60% |
| Operating cash flow | $15.0 million | $18.0 million | Lower |
| Cash and cash equivalents at year-end | $111.0 million | $13.9 million | Higher, mainly following IPO |
| Total liabilities at year-end | $14.7 million | $21.1 million | Lower |
| Working capital at year-end | $115.9 million | $14.3 million | Higher |
| Total AUM at year-end | $2.36 billion | $1.62 billion | +45% |
| HSA members at year-end | 1.43 million | 0.97 million | +47% |
Revenue comprised account fees of $45.0 million (+47%), custodial fees of $24.4 million (+29%), card fees of $17.7 million (+49%) and other revenue of $0.7 million. Account fees were 51% of revenue, custodial fees 28% and card fees 20%. Cash AUM averaged $1.55 billion during the year; its yield declined to 1.52% from 1.64%, partially offsetting growth in balances. The filing reports no outstanding notes payable at year-end; total liabilities also include accrued and deferred-tax liabilities.
Investing activities used $8.4 million, including $6.4 million for software and capitalized development and $1.7 million for property and equipment. Financing activities provided $90.5 million, principally from net IPO proceeds of $132.6 million, offset in part by $50.3 million of dividends. The $111.0 million of corporate cash is distinct from approximately $2.1 billion of custodial cash AUM held for account holders.
Material changes and unusual items
- Revenue, HSA membership and AUM grew substantially; 80% of new HSA members came through existing network partners, according to management.
- Gross margin improved slightly. Operating expenses rose 46%, including higher technology-development spending and public-company costs; general and administrative expense more than doubled.
- Net income increased from $1.2 million to $10.2 million. Comparability is affected by preferred-stock derivative revaluation losses ($0.7 million in FY2015 versus $5.4 million in FY2014), preferred-stock conversion in connection with the IPO, and differing tax effects. FY2015 basic and diluted EPS attributable to common stockholders were $0.39 and $0.21; FY2014 reported a $1.26 loss per share for both.
- The August 2014 IPO issued 10.465 million shares at $14 each and generated approximately $132.6 million net proceeds. Preferred shares converted into common stock. The company also paid a previously declared $50.0 million common-stock dividend and $0.35 million on Series D-3 preferred stock; it says there was no material change to planned IPO-proceeds use.
- FY2015 fourth-quarter revenue was $24.9 million and net income was $1.4 million. The quarter included a $408,000 out-of-period revenue correction for prior periods, increasing quarter net income by $246,000. Management stated it did not consider the correction material to prior periods or the quarter.
Outlook, commentary and risks
The filing provides no formal numerical revenue or earnings guidance. Management said it historically had approximately 90% visibility into the following fiscal year’s revenue at the start of a year; expects near-term annual gross margin to remain relatively steady; and anticipates increased capital expenditures in FY2016 for platform improvements. It considered existing cash sufficient for operating and capital needs for at least 12 months. Management expects sales and marketing, technology and development, and general and administrative expenses to rise in dollars, with technology and development increasing as a share of revenue in the near term.
Management’s growth case rests on wider HSA adoption, further penetration of existing partners, increasing account balances and card use, and platform scalability. These are expectations, not assured outcomes. Key risks include changes to HSA tax advantages or healthcare regulation; low or falling interest rates and custodial yields; competitive pricing and partner dependence; reliance on a single payment-card BIN sponsor and other vendors; cybersecurity, fraud and service interruptions; execution of platform upgrades and growth; and compliance with privacy, investment-adviser and non-bank-custodian requirements. The filing disclosed a prior material weakness in financial reporting related to complex transactions, which management said was remediated as of January 31, 2015. No material litigation was reported.
Important facts for investors to verify
- Whether member, AUM and revenue growth continues, and how much comes from existing versus new partners.
- Custodial-fee sensitivity to interest rates, deposit agreements and member cash yields; cash AUM yield fell year over year.
- Whether card use and interchange revenue remain durable, given reliance on a single BIN sponsor and payment processors.
- Cash-flow conversion and the returns from higher technology investment and capitalized software development.
- The scope and implications of the $408,000 prior-period revenue correction, and continued effectiveness of financial controls.
- Potential dilution from outstanding options, equity-plan share increases and future stock-based compensation.