HealthEquity, Inc. — Q2 FY2016 Form 10-Q
Reporting period: Three and six months ended July 31, 2015; comparative periods ended July 31, 2014. HealthEquity provides technology-enabled health savings and spending services, principally HSAs, through health plan and employer partners. The filing describes approximately 27,000 employer clients and 1.54 million HSA members.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Revenue | $30.5 million | $20.9 million | $60.3 million | $41.1 million |
| Gross profit / margin | $18.6 million / 61% | $11.8 million / 56% | $36.5 million / 60% | $23.2 million / 56% |
| Operating income / margin | $7.5 million / 25% | $5.1 million / 24% | $15.5 million / 26% | $10.6 million / 26% |
| Net income | $4.4 million | $3.0 million | $9.4 million | $5.7 million |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $7.3 million | $5.3 million |
- Q2 revenue rose 46% year over year. Account fees increased 38%, custodial fees 52%, and card fees 60%. For the first half, revenue rose 47%.
- Management reported Q2 Adjusted EBITDA of $11.1 million, up 62%, or 36% of revenue versus 33% a year earlier. First-half Adjusted EBITDA was $21.9 million, up 60%. This is a non-GAAP measure.
- HSA members increased 45% year over year to 1.54 million. Total assets under management rose 47% to $2.63 billion; average daily cash AUM was $2.21 billion in Q2.
- At July 31, cash and cash equivalents were $108.9 million and marketable securities were $40.1 million, totaling $148.9 million, versus $111.0 million at January 31. Total liabilities were $11.8 million; the balance sheet reports no borrowings.
- First-half investing cash outflow was $44.4 million, mainly $40.1 million of marketable-security purchases and $3.0 million of software development costs. Financing cash inflow was $34.9 million, including $23.5 million net proceeds from a follow-on offering. Cash declined $2.2 million during the period.
Material changes and notable items
- Growth reflected more members, higher AUM, and increased card use. Q2 custodial revenue also benefited from a higher average cash yield, 1.56% versus 1.52% a year earlier. Account fees per member fell about 5%, partly offset by higher custodial fees per member and card fees per member.
- Operating expenses rose 66% in Q2. Technology and development expense increased 74%, and general and administrative expense increased 137%, with added staffing, stock compensation, technology investment, and public-company costs among the drivers. First-half stock-based compensation was $2.8 million, versus $0.5 million.
- Q2 other expense included $571,000 of acquisition-related costs; first-half acquisition-related costs were $661,000. No business combination occurred during the reported periods.
- The company completed a May 2015 follow-on offering, issuing 972,500 shares and receiving approximately $23.5 million net. Selling stockholders also sold shares; the company received no proceeds from those sales except option exercise proceeds.
- New and amended headquarters leases carry initial annual base rents of approximately $1.0 million and $1.6 million, respectively, with 2.5% annual increases and 129-month initial terms. The new building was expected to be substantially complete by July 2016.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management expected gross margin to remain relatively steady in the near term, while anticipating higher sales and marketing, technology and development, and general and administrative expenses. It expected increased capital expenditures for the remainder of FY2016 to improve its proprietary platform.
- Management expected approximately $1 million of card replacement costs to shift into Q3 from Q4, and approximately $1 million of technology and development expense in each of Q3 and Q4 that had previously been planned for FY2017.
- Management believed cash, cash equivalents, and marketable securities would cover operating and capital needs for at least 12 months. It noted that further financing might be needed if liquidity proves insufficient, and could not assure favorable terms or availability.
- Risks include dependence on growth in HSAs and favorable healthcare tax rules, partner and member growth, competition, regulatory and data-security requirements, and interest rates. A sustained decline in prevailing rates could reduce custodial fee margins. Approximately $2.3 billion of cash AUM was held with banking partners; only $750,000 of the company’s own $148.9 million of cash and marketable securities was covered by federal deposit insurance.
- The filing reports no litigation expected to have a material adverse effect and no material changes to previously disclosed risk factors. Disclosure controls were considered effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether rapid member and AUM growth continues to translate into revenue and operating cash flow, and whether margins hold as service costs and investment spending rise.
- The sustainability of custodial yields and the sensitivity of custodial revenue to interest rates, partner agreements, and member cash balances.
- The scale and timing of planned technology investment, capital expenditures, shifted expenses, and headquarters lease commitments.
- The effect of stock-based compensation and acquisition-related costs on GAAP earnings compared with Adjusted EBITDA.
- The filing’s reported diluted EPS comparisons warrant context: 2014 included preferred-stock allocation and conversion effects, so per-share comparisons are not directly representative of underlying operating growth.
- The eventual impact and adoption approach for the new revenue-recognition standard were still under evaluation; the filing does not provide a clear quantified effect.