HealthEquity, Inc. — Form 10-Q summary
Business context and reporting period. HealthEquity provides technology-enabled administration and custodial services for health savings and other healthcare accounts. This report covers the fiscal second quarter and six months ended July 31, 2014; comparisons are with the corresponding 2013 periods. Financial statements are unaudited.
Financial performance and position
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Revenue | $20.9 million, up 39% | $41.1 million, up 39% |
| Gross profit / gross margin | $11.8 million / 56% (56% prior year) | $23.2 million / 56% (54% prior year) |
| Operating income / margin | $5.1 million / 24% (24% prior year) | $10.6 million / 26% (22% prior year) |
| Net income / margin | $3.0 million / 14% (prior year $2.2 million / 15%) | $5.7 million / 14% (prior year $4.0 million / 13%) |
| Adjusted EBITDA, non-GAAP | $6.9 million, up 48% | $13.7 million, up 61% |
| Operating cash flow | Not separately reported for the quarter | $6.4 million, versus $7.1 million |
| Cash and cash equivalents | $20.9 million at July 31, 2014, versus $13.9 million at January 31, 2014 |
Account fees were the largest revenue stream: $10.5 million for the quarter, up 46%; custodial fees were $5.9 million, up 28%; and card fees were $4.2 million, up 40%. HSA Members increased 46% year over year to approximately 1.06 million. Assets under management rose 41% to $1.78 billion, including cash AUM of $1.55 billion and investment AUM of $238 million.
At July 31, total assets were $65.8 million and current assets were $31.1 million, compared with current liabilities of $6.6 million. The filing reports no notes payable at period-end; the $1.5 million of notes outstanding in the prior-year cash-flow comparison had been repaid. Six-month investing cash outflow was $4.6 million, primarily software development and property/equipment spending, versus $2.4 million in 2013. No cash balance or debt figure after the IPO and dividend is clearly provided.
Changes, outlook, and material items
- Revenue growth reflected increased account volume, member card activity, and AUM. Average daily cash AUM grew, but cash yield declined to 1.52% for the quarter from 1.65% and to 1.50% for the six months from 1.66%; management attributed the pressure partly to lower-rate bank agreements used to accommodate growth.
- Management expected gross margin to remain relatively steady in the near term. It expected sales and marketing, technology and development, and general and administrative expenses to rise in dollars; technology expense was expected to increase as a share of revenue near term. Capital expenditures were expected to remain elevated as the company upgraded its platform. No numerical revenue or earnings guidance was provided.
- On August 5, 2014, after quarter-end, the company completed its IPO of 10.465 million shares at $14 per share and received approximately $132.5 million net proceeds. All preferred shares converted into approximately 32.49 million common shares. The company also paid a previously declared $50 million common-stock dividend and approximately $344,000 of accrued preferred dividends. These events are not reflected in the July 31 balance sheet.
- Seasonality is significant: many new accounts begin in January, while implementation and support costs start rising in the third fiscal quarter and are concentrated in the fourth.
- Management said cash, cash equivalents and IPO proceeds should fund operating and capital needs for at least 12 months. Key risks include dependence on HSA tax treatment and healthcare regulation, sensitivity of custodial revenue to interest rates, competition, reliance on bank and payment-card partners, and privacy, cybersecurity and service-continuity risks.
- A material weakness in financial reporting related to accounting for complex preferred-stock and warrant transactions had caused a prior-period restatement. Remediation actions were underway, but had not operated long enough for management to conclude the weakness was fully remediated; disclosure controls were therefore deemed ineffective as of July 31, 2014. The filing reported no litigation expected to have a material adverse effect.
- A special dividend and the preferred-stock conversion substantially changed the capital structure. The filing also describes new IPO-related option grants, including performance-based awards, and an additional $1.1 million office-lease commitment.
Important facts for investors to verify
- Post-IPO cash and liquidity after payment of the $50 million dividend, and the actual use of remaining proceeds.
- Whether member and AUM growth translates into durable account economics as cash yields decline and newer accounts have lower balances.
- Progress in remediating the material weakness and the reliability of future financial reporting.
- The impact of option awards, preferred-stock conversion, share sales after lock-up expiration, and other dilution on per-share results.
- Exposure to the payment-card bank sponsor, custodial banks, cybersecurity incidents, and changes to HSA tax or healthcare regulations.