HealthEquity, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2019, compared with the three months ended April 30, 2018. Amounts below are in millions unless otherwise noted.
Business context
HealthEquity provides technology-enabled administration and services for health savings and other healthcare accounts. Revenue comes primarily from service fees, custodial revenue on member cash and investments, and payment-card interchange. At quarter-end, the company reported 4.054 million HSA members, 141 health plan and administrator partners, and more than 45,000 employer clients.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $87.1 | $69.9 | +25% |
| Gross profit | $57.8 | $44.4 | +30% |
| Gross margin | 66.3% | 63.5% | +2.8 percentage points |
| Income from operations | $27.7 | $20.5 | +35% |
| Net income | $41.8 | $22.6 | +85% |
| Diluted EPS | $0.65 | $0.36 | +81% |
| Adjusted EBITDA (non-GAAP) | $38.9 | $29.6 | +31% |
| Operating cash flow | $25.3 | $22.7 | +$2.6 |
Service revenue rose 8% to $26.8 million, custodial revenue rose 48% to $42.0 million, and interchange revenue rose 10% to $18.3 million. Custodial revenue benefited from average custodial cash growth of 17% and an increase in yield from 2.04% to 2.53%. Operating expenses increased 26% to $30.1 million, led by technology and development (+37%) and sales and marketing (+31%).
Net income included a $23.5 million pre-tax unrealized gain on the company’s WageWorks investment, recorded in other income. Excluding that gain, net income growth was substantially less than reported growth; the filing does not provide a directly stated adjusted net income figure. The effective tax rate was 18.4%, versus a 9.9% tax benefit rate in the prior-year quarter.
Liquidity, assets, and debt
- Cash and cash equivalents were $329.3 million at April 30, down from $361.5 million at January 31, 2019. Operating cash flow was $25.3 million; investing activities used $61.7 million, including $53.8 million to buy WageWorks shares; financing activities provided $4.2 million.
- Total assets were $596.6 million and stockholders’ equity was $529.3 million. Other investments included $77.4 million of WageWorks marketable equity securities.
- No borrowings were outstanding under the $100 million revolving credit facility. The company reported compliance with its covenants. It said cash on hand should cover operating and capital expenditure needs for at least 12 months.
- Customer custodial assets—held for HSA members and not company cash—totaled $8.321 billion, up 21% year over year. Custodial cash was $6.404 billion and custodial investments were $1.917 billion.
- Adoption of lease accounting on February 1, 2019 added $40.6 million of operating lease liabilities and $38.0 million of right-of-use assets. The company also disclosed a not-yet-commenced office lease with $17.1 million of undiscounted payments.
Material changes, outlook, and risks
- HSA members grew 17% year over year to 4.054 million; active members grew 13% to 3.245 million. Members with investments increased 32% to 177,000.
- Management attributed revenue growth to member and custodial-asset expansion, as well as improved custodial yields. Service revenue per average HSA member declined about 8%, and interchange revenue per average member declined about 6%, partly offsetting custodial revenue gains.
- From February 1 through April 4, the company bought approximately 1.6 million WageWorks shares for $53.8 million. On April 11, it proposed to acquire all outstanding WageWorks shares for $50.50 per share in cash, approximately $2 billion. The filing describes a proposal; it does not establish that the acquisition was completed.
- Management expected capital expenditures to increase during the remainder of fiscal 2020, principally for platform architecture and functionality, and expected sales and marketing, technology and development, and general and administrative expenses to rise in dollars as the business grows. No specific earnings or revenue guidance was provided.
- Key disclosed risks include sensitivity of custodial revenue to interest rates, changes in healthcare policy and tax treatment of HSAs, competition, privacy and regulatory requirements, and volatility in reported earnings from the WageWorks investment’s fair-value changes. Management also noted seasonality tied to benefit-plan enrollment and member onboarding.
- The company reported no material changes to its previously disclosed risk factors, no material litigation expected to adversely affect it, and effective disclosure controls. No customer accounted for more than 10% of revenue.
Important facts for investors to verify
- Whether the WageWorks acquisition proposal advanced, its financing and transaction terms, and the resulting exposure to market-price changes in the WageWorks shares.
- How much of reported earnings growth reflects recurring operations versus the $23.5 million unrealized investment gain and related tax effects.
- Whether custodial yields and cash balances can sustain custodial revenue growth, and how any rate changes may affect member interest and margins.
- Progress and costs of the platform architecture program, planned capital spending, and operating expense growth relative to revenue.
- Liquidity and covenant position if the proposed WageWorks transaction or other acquisitions require substantial cash or financing.