Business context and reporting period
HealthEquity, Inc. administers health savings accounts (HSAs) and complementary consumer-directed benefits (CDBs). This unaudited Form 10-Q covers the three and six months ended July 31, 2023 (the company’s fiscal second quarter and first half), compared with the same 2022 periods. Unless noted otherwise, financial amounts below are in millions of dollars.
At July 31, 2023, HealthEquity administered 15.0 million total accounts, including 8.2 million HSAs and 6.8 million CDBs. HSA assets were $23.2 billion, comprising $14.0 billion of HSA cash and $9.2 billion of investments; these are member assets, not company cash.
Financial performance and position
| Metric | Three months ended July 31, 2023 | Three months ended July 31, 2022 | Six months ended July 31, 2023 | Six months ended July 31, 2022 |
|---|---|---|---|---|
| Revenue | $243.5 | $206.1 | $488.0 | $411.8 |
| Gross profit (margin) | $150.9 (62.0%) | $117.8 (57.2%) | $298.8 (61.2%) | $229.0 (55.6%) |
| Operating income (loss; margin) | $24.7 (10.2%) | $(2.4) (-1.2%) | $47.9 (9.8%) | $(9.7) (-2.4%) |
| Net income (loss; margin) | $10.6 (4.3%) | $(10.7) (-5.2%) | $14.7 (3.0%) | $(24.3) (-5.9%) |
| Adjusted EBITDA (non-GAAP) | $88.1 | $67.0 | $174.7 | $125.4 |
Quarterly revenue rose 18%, led by custodial revenue, which increased 51% to $98.9 million. Service revenue increased 3% to $105.7 million and interchange revenue increased 4% to $38.9 million. For the first half, revenue rose 18%; custodial revenue increased 55% to $193.4 million. The company attributed custodial growth to higher HSA cash yields and balances, as well as higher interest income on certain client-held funds.
Quarterly operating expenses increased 5% to $126.2 million: higher sales and marketing and technology costs were partly offset by lower merger integration expenses. Net income also benefited from $2.8 million of other income, primarily interest income. Interest expense increased to $13.3 million for the quarter and $28.3 million for the half-year, reflecting higher variable borrowing rates.
For the six months, operating cash flow was $108.6 million, versus $47.2 million in 2022. Investing cash outflow was $19.4 million, versus $95.3 million, largely because there were no HSA portfolio acquisitions in the 2023 period (compared with $68.7 million of acquisition spending in 2022). Financing cash outflow was $53.2 million, mainly reflecting a $50.0 million term-loan prepayment. Cash increased $36.1 million to $290.3 million.
At July 31, 2023, total debt principal was $886.9 million, consisting of $600.0 million of 4.50% senior notes due 2029 and $286.9 million under the term loan; debt net of issuance costs was $873.6 million. The $1.0 billion revolving facility was undrawn. The term loan’s stated rate was 6.92% and effective rate was 7.68%; the company reported covenant compliance. Cash and cash equivalents were $290.3 million, and management said available cash, operating cash flow and the revolver should cover operating and capital needs for at least 12 months.
Material changes, outlook and risks
- Growth and profitability: Revenue and gross margin increased, and the company moved from prior-year losses to GAAP net income in both the quarter and first half. Adjusted EBITDA rose 31% for the quarter and 39% for the half-year.
- Account trends: HSAs increased 9% year over year; total accounts increased 3%. CDBs decreased 3%, which the company attributed primarily to a change in how COBRA accounts were counted after a platform migration. HSA assets increased 13% year over year.
- Management outlook: No specific total-revenue or earnings guidance is provided in the supplied filing text. Management expects custodial revenue to benefit from partner-contract renewals and a larger share of cash in its Enhanced Rates offering, assuming the interest-rate environment continues. It expects interest expense to increase year over year, technology and development expenses to rise in dollars, and capital spending to continue at the current level for the remainder of fiscal 2024. It expects cost of revenue to decline as a share of revenue compared with fiscal 2023.
- Interest-rate and market exposure: Custodial revenue depends on rates and partner agreements; fixed-rate contracts can delay the effect of rate changes. A 1 percentage-point increase on credit-facility borrowings outstanding at quarter-end would add approximately $2.9 million of interest expense over 12 months. Changes to tax treatment or regulation of HSAs, competition, inflation, and persistent work-from-home patterns affecting commuter benefits are identified risks.
- Unusual items and contingencies: The company recorded a $1.2 million debt-extinguishment loss after its April $50.0 million term-loan prepayment. A continuing dispute with Union Mesa concerns WageWorks’ termination of an uncommenced Arizona office lease, originally involving $63.1 million of aggregate lease payments. The landlord drew a $2.8 million letter of credit and is pursuing damages; the parties are in discovery and the company does not consider a loss probable or estimable based on current information. An adverse outcome could materially affect results, cash flows or financial position. The company also expects approximately $55 million of Further-acquisition integration costs over roughly five to six years from the November 2021 acquisition.
Important facts for investors to verify
- Whether higher custodial yields persist as partner contracts renew, and how rate changes affect member interest retained and custodial margins.
- Whether account growth, including HSA additions, offsets slower service-revenue growth and declining CDB counts.
- How variable-rate debt costs, future term-loan repayments and covenant headroom evolve; the filing reports compliance but does not provide current covenant ratios.
- Developments in the Union Mesa litigation, including the potential amount and timing of any damages or recovery of the drawn letter of credit.
- Execution and cost of technology investment, acquisition integration, and the company’s ability to maintain service levels amid regulatory, competitive and operational risks.