HealthEquity, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2016 (the company’s fiscal first quarter). HealthEquity provides technology-enabled administration and services for HSAs and other healthcare accounts. Revenue comes primarily from service fees, custodial revenue on member assets, and payment-card interchange.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $44.0 million | $29.9 million | +47% |
| Gross profit / margin | $27.7 million / 63% | $17.9 million / 60% | Margin +3 percentage points |
| Operating income / margin | $13.3 million / 30% | $8.0 million / 27% | +66% |
| Net income / diluted EPS | $8.1 million / $0.14 | $5.0 million / $0.09 | Net income +62% |
| Adjusted EBITDA (non-GAAP) | $18.0 million / 41% of revenue | $10.8 million / 36% | +66% |
| Operating cash flow | $2.1 million | $1.8 million | +$0.3 million |
- Revenue growth reflected service revenue of $19.0 million (+30%), custodial revenue of $13.8 million (+64%), and interchange revenue of $11.2 million (+64%).
- At April 30, 2016, HSA members totaled 2.23 million (+51% year over year); total assets under management were $4.09 billion (+61%), including $3.60 billion of cash AUM and $488 million of investment AUM.
- Cash and marketable securities totaled $132.9 million, up from $123.8 million at January 31, 2016. Total liabilities were $9.5 million; the company reported no drawn borrowings under its $100 million revolving facility.
- Cash flow from investing was a $2.4 million outflow, primarily reflecting $2.0 million of software purchases and capitalized development costs. Financing provided $9.4 million, including a $9.3 million tax benefit from stock-option exercises; cash increased $9.1 million to $92.8 million.
Material changes and notable items
- Operating leverage improved: gross margin increased to 63% from 60%, while operating expenses grew 45%, slightly below revenue growth of 47%.
- Average cash AUM increased 64%; the reported yield declined slightly, from 1.56% to 1.55%. Service revenue per HSA member fell about 14%, partly reflecting lower per-member pricing at higher partner enrollment tiers; custodial and interchange revenue per member each rose about 8%.
- Amortization of acquired intangible assets rose to $1.0 million from $0.4 million, reflecting the prior-year acquisitions of HSA portfolios from The Bancorp Bank and M&T Bank. Acquisition-related expenses were $585,000 for the quarter.
- Cash operating flow was modest relative to net income, in part because of bonus and commission payments after year-end and increases in other assets, receivables, and other working-capital items.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management expected sales and marketing, technology and development, and general and administrative spending to rise in dollars as the business grows. It expected near-term annual gross margin to remain relatively steady and anticipated higher capital expenditures for platform architecture and office improvements.
- Management said existing cash, cash equivalents, marketable securities, operating cash flow, and credit availability should be sufficient for at least the next 12 months. Planned capital spending was expected to increase during the remainder of fiscal 2017.
- Key risks include changes in healthcare laws or HSA tax treatment, interest-rate declines that could pressure custodial revenue, partner/member growth and competition, execution of technology investments, and regulatory, privacy, and data-security requirements. The company also noted seasonal costs associated with account onboarding.
- The credit facility is secured, has leverage and interest-coverage covenants, and had no borrowings outstanding; the company reported covenant compliance. No material change in contractual obligations or material litigation was reported. Management stated disclosure controls were effective and reported no material change in internal controls.
Important facts for investors to verify
- Whether member growth and AUM growth continue to translate into revenue and cash generation, particularly as service revenue per member declines.
- Cash-flow quality and the sustainability of the quarter’s large stock-option-related tax benefit, which boosted financing cash flow and was expected to reduce current-year cash taxes.
- The impact of interest rates and custodial deposit yields on custodial revenue and margins.
- Progress, cost, and expected benefits of platform upgrades, planned capital spending, and integration of acquired HSA portfolios.
- Credit-facility covenant terms and compliance, as well as exposure to uninsured cash balances; only $750,000 of the company’s $132.9 million in cash, cash equivalents, and marketable securities was covered by federal deposit insurance.