HealthEquity, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2017; comparable period is the three months ended April 30, 2016. HealthEquity provides technology-enabled administration and custodial services for health savings and other healthcare accounts.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $55.4 million | $44.0 million | +26% |
| Gross profit / margin | $33.7 million / 60.9% | $27.7 million / 62.9% | Margin down about 2.0 percentage points |
| Operating income | $15.9 million | $13.3 million | +20% |
| Net income | $14.0 million | $8.1 million | +74% |
| Diluted EPS | $0.23 | $0.14 | Increased |
| Adjusted EBITDA (non-GAAP) | $22.4 million; 40% of revenue | $18.0 million; 41% of revenue | +24% |
| Operating cash flow | $15.6 million | $2.1 million | Increased |
Revenue growth reflected service revenue of $22.5 million (+18%), custodial revenue of $19.3 million (+40%), and interchange revenue of $13.6 million (+21%). The company attributed custodial revenue growth to 25% higher average daily custodial cash and an increase in yield from 1.55% to 1.72%. HSA members increased 26% year over year to 2.81 million; total custodial assets rose 28% to $5.23 billion.
Financial position and cash flows
- Cash, cash equivalents, and marketable securities totaled $195.6 million at April 30, 2017, versus $180.4 million at January 31, 2017. Total assets were $302.8 million; total liabilities were $12.0 million.
- No borrowings were outstanding under the $100 million secured revolving credit facility, which expires September 30, 2020. The company reported compliance with its covenants.
- Operating cash flow was $15.6 million; investing cash outflow was $4.3 million, including $2.7 million for software and capitalized development and $1.4 million for property and equipment. Financing cash inflow was $3.8 million, primarily from stock-option exercises.
- Management said existing liquidity should be sufficient for operating and capital expenditure needs for at least 12 months. Capital expenditures are expected to increase for the remainder of fiscal 2018, particularly for platform architecture and office improvements.
Changes, outlook, and notable items
- Revenue expanded faster than cost of revenue (+33%), and gross margin declined. Service costs rose 38%, including higher staffing and processing costs and increased fraud-prevention expenses; service costs per HSA member increased 10%.
- Operating expenses increased 23%, led by technology and development (+35%) and general and administrative (+28%). Management expects sales and marketing, technology and development, and general and administrative expenses to increase in dollars as the business grows. It expects annual gross margin to remain relatively steady over the near term.
- Net income benefited from a lower effective tax rate: 11.4% versus 36.0%. Adoption of ASU 2016-09 resulted in $3.9 million of excess stock-compensation tax benefits recognized in the tax provision and an $8.1 million increase to opening retained earnings. The tax benefit is a significant factor in the year-over-year earnings increase.
- No specific quantitative financial guidance was provided. Management cited growth opportunities from expanding HSA adoption, partner penetration, technology investment, and potential acquisitions; results remain exposed to interest rates, healthcare regulation and market changes, competition, and execution risks.
- Subsequent events: the company agreed to acquire BenefitGuard LLC assets for an estimated $1.5 million–$3.0 million, subject to closing conditions, with completion expected by October 31, 2017. A lease amendment for expanded office space begins January 1, 2018, with initial annual base rent of approximately $513,000 and scheduled increases.
- The company reported no material change in previously disclosed risk factors, no material litigation, and no material change in contractual obligations during the quarter. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether member and custodial-asset growth continues and translates into revenue, particularly as service revenue per member declined about 6%.
- How much earnings growth is sustainable apart from the one-time and ongoing effects of stock-based compensation tax benefits.
- Whether custodial yields, interest-rate conditions, and partner deposit agreements support continued custodial revenue growth.
- Whether rising servicing, technology, fraud-prevention, capital, and office costs affect margins or liquidity.
- Whether the BenefitGuard transaction closes on the stated terms and whether the platform investment delivers the expected capacity and operating benefits.