HealthEquity, Inc. — FY2018 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended January 31, 2018 (FY2018), not a calendar-year 2017 fourth quarter. HealthEquity provides a technology platform for HSAs and other healthcare benefit accounts, including administration, payment, investment and member-support services. It served 124 health-plan and administrator partners and more than 40,000 employer clients. HSA members reached 3.40 million, up 24%, and custodial assets held for members reached $6.78 billion, up 35%.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $229.5 million | $178.4 million | +29% |
| Gross profit / margin | $134.9 million / 58.8% | $106.4 million / 59.6% | Profit +27%; margin down 0.8 percentage points |
| Operating income | $54.4 million | $41.2 million | +32% |
| Net income / diluted EPS | $47.4 million / $0.77 | $26.4 million / $0.44 | Net income +80% |
| Adjusted EBITDA (non-GAAP) | $84.7 million; 37% of revenue | $62.8 million; 35% of revenue | +35% |
| Cash from operating activities | $81.7 million | $45.6 million | +79% |
Revenue grew across all three streams: service revenue was $91.6 million (+19%), custodial revenue $87.2 million (+46%), and interchange revenue $50.7 million (+22%). Custodial revenue growth reflected higher average cash balances and an increase in average yield from 1.58% to 1.83%. The company said payment-card fees represented 22% of total revenue.
At year-end, cash, cash equivalents and marketable securities were $240.3 million, working capital was $244.9 million, and total liabilities were $22.9 million. The company had no borrowings under its $100 million revolving credit facility and reported compliance with its covenants. The $6.78 billion of custodial assets belongs to HSA members and is distinct from the company’s own cash and investments.
Changes, outlook and notable items
- Growth was supported by member and asset gains, partner penetration, higher custodial yields, and acquisitions of HSA portfolios. The company also acquired BenefitGuard, a 401(k) plan-services business.
- Service revenue per HSA member declined about 6%, partly reflecting tiered partner pricing; interchange revenue per member declined about 3%. Overall revenue per HSA member rose about 2% as custodial revenue per member increased.
- Net income benefited from $14.1 million of excess tax benefits on stock-based compensation under a newly adopted accounting standard. The effective tax rate fell to 9.2% from 34.3%; the company also recorded a provisional $458,000 tax charge from the Tax Cuts and Jobs Act. These items make the year-over-year net-income comparison less indicative of underlying operating growth.
- Fourth-quarter revenue was $60.4 million and net income $5.9 million. Management described seasonal implementation, staffing and sales-commission costs around January plan-year starts; the filing does not provide formal numerical revenue or earnings guidance.
- Management expected near-term gross margin to remain relatively steady, while technology and development spending and capital expenditures were expected to increase. It said existing liquidity should fund operating and capital needs for at least 12 months. FY2019 capital expenditures were expected to remain elevated as the company upgrades its platform.
- Key risks include changes to HSA tax advantages or healthcare regulation, interest-rate declines, competition and partner attrition, cybersecurity or service interruptions, reliance on banks and third-party vendors, execution of platform upgrades and acquisitions, and the ability to manage rapid growth. The company reported no material pending litigation. Its financial statements and internal controls received clean auditor opinions.
Important facts for investors to verify
- Whether custodial yields, cash balances and member asset growth can sustain custodial revenue growth, and how sensitive earnings are to interest rates.
- How much of reported net-income growth reflects the $14.1 million stock-compensation tax benefit, and the effect of tax reform as estimates are finalized.
- Whether falling service and interchange revenue per member, alongside slightly lower gross margin, affects future profitability as the member base expands.
- Progress and spending on platform upgrades, acquisitions and integration, and the impact of the new revenue standard’s capitalization of sales commissions.
- Exposure to cyber incidents, payment-card processing, custodial bank partners and the single card BIN sponsor, as well as continued compliance with non-bank custodian net-worth requirements.