HealthEquity, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2024, ended October 31, 2023; comparisons are to the corresponding 2022 periods. HealthEquity administers HSAs and other consumer-directed benefits. At quarter-end it reported 8.3 million HSAs, 7.0 million complementary benefit accounts, 15.3 million total accounts, and $22.6 billion in HSA assets held for members.
Financial performance
| Metric | Three months ended Oct. 31, 2023 | Year-over-year | Nine months ended Oct. 31, 2023 | Year-over-year |
|---|---|---|---|---|
| Revenue | $249.2 million | Up 15% | $737.2 million | Up 17% |
| Gross profit / gross margin | $158.4 million / 63.6% | Up from 58.7% | $457.2 million / 62.0% | Up from 56.7% |
| Operating income (loss) / margin | $30.9 million / 12.4% | Up from $5.5 million / 2.6% | $78.8 million / 10.7% | Up from a $4.2 million loss |
| Net income (loss) | $14.7 million; $0.17 diluted EPS | Compared with a $1.6 million loss | $29.3 million; $0.34 diluted EPS | Compared with a $25.9 million loss |
| Adjusted EBITDA (non-GAAP) | $95.6 million; 38% of revenue | Up 30%; prior margin 34% | $270.3 million; 37% of revenue | Up 36%; prior margin 32% |
| Operating cash flow | Not presented for the quarter | $165.8 million | Compared with $95.2 million |
Custodial revenue drove most of the increase: it rose 43% for the quarter and 50% year to date, primarily from higher yields and higher average HSA cash balances. Service revenue was nearly flat; interchange revenue increased 7% for the quarter and 6% year to date. Operating costs rose more slowly than revenue, while technology and development expense increased 14% for the quarter and 16% year to date.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $334.1 million at October 31, 2023, versus $254.3 million at January 31, 2023. Total assets were $3.09 billion and stockholders’ equity was $1.99 billion.
- Debt principal was $886.9 million: $600 million of 4.50% senior notes due 2029 and $286.9 million under the term loan. Debt, net of issuance costs, was $874.3 million. The company prepaid $50 million of term-loan principal in April. No amounts were drawn on its $1.0 billion revolving facility.
- The term loan’s stated interest rate was 6.68% and effective rate 7.44% at quarter-end. Management estimated that a 1 percentage-point rate increase on credit-facility borrowings outstanding at that date would add approximately $2.9 million of interest expense over the next 12 months. The company reported compliance with debt covenants.
- For the nine months, investing activities used $34.8 million and financing activities used $51.2 million, including debt principal payments. Cash increased by $79.8 million.
- Management said cash, cash equivalents, and revolving-credit availability should cover operating and capital expenditure requirements for at least 12 months. Capital expenditures were $31.5 million year to date.
Material changes, outlook, and risks
- HSA assets increased 12% year over year to $22.6 billion; HSA cash rose 7% to $14.0 billion and HSA investments rose 21% to $8.6 billion. Total accounts increased 5%. New HSAs from sales were down 14% year to date versus the prior-year period.
- Management expected higher custodial yields as partner agreements renew or are replaced, and said increased participation in its Enhanced Rates offering should support custodial revenue. It also expected cost of revenue to decline as a percentage of revenue, but custodial costs to rise. No formal quantified company-wide earnings or revenue guidance is provided in the filing text.
- In September, HealthEquity agreed to acquire the BenefitWallet HSA portfolio for $425 million, plus up to $20 million of transfer-related expenses and approximately $7 million of transaction costs. The portfolio involves approximately 665,000 accounts and $2.8 billion of HSA assets; closing is expected in tranches in the first half of fiscal 2025, subject to conditions. Management expected to fund approximately half of the purchase price and related costs with cash and the remainder through the revolver. A portion of acquired assets would be under a below-market-yield depository contract through June 2026. The company cautioned that the deal may not close or deliver expected benefits, particularly if rates decline significantly.
- Interest expense increased 11% for the quarter and 23% year to date, mainly because of higher variable rates; year-to-date expense also included a $1.2 million debt-extinguishment loss. Higher rates supported custodial revenue but increased borrowing costs.
- Management noted continued pressure on commuter and COBRA products related to work-from-home and hybrid patterns and pandemic-era COBRA election relief; the extent of any recovery is uncertain. Other risks include changes to tax or healthcare policy, regulation and data security, competition, interest-rate movements, and acquisition integration.
- A dispute with Union Mesa over a terminated Arizona office lease remains in litigation. The landlord drew a $2.8 million letter of credit and seeks damages; a motion for partial summary judgment was awaiting a court decision. The company said it could not predict the outcome of litigation generally and had not recorded a probable, estimable loss for these matters.
- Gross unrecognized tax benefits were $13.8 million at October 31, 2023. The company was under a Texas state tax examination; an IRS examination was effectively settled during the quarter with no material adjustments.
Important facts for investors to verify
- Whether BenefitWallet transfer conditions, timing, actual assets transferred, purchase-price adjustments, and financing costs align with the announced expectations.
- How much future revenue growth depends on elevated interest rates, custodial yields, member rate-sharing, and renewal terms with depository partners.
- Whether new-account growth and service revenue improve, given the year-to-date decline in new HSAs from sales and flat service revenue.
- Whether cash generation can support acquisition spending, technology investment, and debt service while variable-rate borrowing costs remain elevated.
- Developments in the Union Mesa litigation and the Texas tax examination, as well as any material changes in related contingencies.