HealthEquity, Inc. — Q1 FY2016 (2015 Q1) Form 10-Q
Reporting period: Three months ended April 30, 2015; comparisons are with the three months ended April 30, 2014. Financial statements are unaudited. HealthEquity provides technology-enabled healthcare savings and spending services, with revenue primarily from account, custodial and payment-card fees.
Financial and operating results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $29.85 million | $20.23 million | +48% |
| Gross profit / margin | $17.91 million / 60% | $11.46 million / 57% | Margin +3 percentage points |
| Operating income / margin | $7.98 million / 27% | $5.49 million / 27% | +45% |
| Net income / margin | $4.98 million / 17% | $2.72 million / 13% | +83% |
| Adjusted EBITDA (non-GAAP) | $10.82 million / 36% of revenue | $6.80 million / 34% | +59% |
| Operating cash flow | $1.77 million | $1.46 million | +$0.31 million |
| Investing cash flow | $(42.34) million | $(2.19) million | Primarily securities purchases |
- Account fees rose 39% to $14.40 million, custodial fees rose 55% to $8.42 million, and card fees rose 59% to $6.82 million. Growth reflected more members and card activity; custodial revenue also benefited from higher average cash assets under management (AUM) and yield.
- HSA members reached 1.47 million, up 46% year over year. Total AUM was $2.54 billion, up 50%; cash AUM was $2.20 billion and investment AUM $345.8 million.
- Operating expenses increased 66% to $9.92 million, including general and administrative expense up 176% to $3.16 million, primarily reflecting higher staffing, professional fees, stock compensation and public-company costs. Stock-based compensation was $1.09 million versus $65,000.
- Basic and diluted EPS were each $0.09, versus prior-year basic EPS of $0.52 and diluted EPS of $0.08. The prior-year basic figure was affected by preferred-stock allocation and the share-count basis changed following the preferred-stock conversion; per-share comparisons are therefore not straightforward.
Financial position and liquidity
- At April 30, 2015, cash and cash equivalents were $74.9 million and marketable securities were $40.0 million, totaling $114.9 million, versus $111.0 million at January 31, 2015. The quarter-end cash balance fell by $36.1 million, largely because the company invested $40.1 million in marketable securities.
- Total assets were $165.3 million; total liabilities were $10.7 million, including $5.2 million current liabilities. The balance sheet reports no debt. Stockholders’ equity was $154.6 million.
- Operating cash flow included working-capital outflows, notably accrued compensation of $3.3 million and accounts receivable of $1.4 million. Capital expenditures were $2.4 million, including property, equipment and software-related spending.
- Management said existing cash, cash equivalents and marketable securities were expected to fund operating and capital needs for at least 12 months. No material change in contractual obligations outside the ordinary course was reported.
Changes, outlook and risks
- Revenue growth and gross-margin expansion were driven by membership, AUM and payment-card activity. Operating income grew 45%; the prior-year period included a $735,000 preferred-stock derivative revaluation loss that did not recur.
- Management expects continued investment in sales and marketing, technology and development, and general and administrative capacity. Capital spending was expected to remain elevated through the fiscal year as the company upgraded its platform architecture. Management expected gross margin to remain relatively steady in the near term; no specific revenue or earnings guidance was provided.
- Seasonality is significant: many partners add members around January benefit-plan renewals, while implementation and support costs ramp in the preceding quarters.
- Key exposures include changes to healthcare and tax rules governing HSAs, competition, privacy and data-security regulation, execution of technology upgrades, and interest rates. Custodial fees depend in part on yields earned on member cash AUM; management noted that sustained rate declines could pressure those fees.
- Marketable securities were available-for-sale mutual funds with a $22,000 unrealized loss; none were reported as other-than-temporarily impaired. Cash and securities totaled $114.9 million, of which $500,000 was federally insured. No customer represented more than 5% of revenue.
- No litigation was reported that management expected to have a material adverse effect, and the filing reported no material change to previously disclosed risk factors. Disclosure controls were deemed effective; no material internal-control change was identified.
Subsequent events and unusual items
- On May 11, 2015, after quarter-end, the company sold 972,500 shares in a follow-on offering and received approximately $23.5 million net. Selling stockholders sold an additional 3,455,000 shares; the company did not receive proceeds from those sales other than option exercise proceeds.
- On May 15, 2015, the company entered into leases relating to an expanded Draper headquarters. The leases have initial terms of 129 months, with annual base rent initially approximately $1.0 million for the new building and $1.6 million for existing space, each subject to 2.5% annual increases. The new-building lease depends on construction and delivery; the amended existing-space lease may be terminated if the landlord does not acquire the property by July 31, 2015.
- The company was evaluating the effect and transition method for the new revenue-recognition standard, then scheduled to become effective for its reporting periods beginning February 1, 2017.
Important facts for investors to verify
- Whether member and AUM growth converts into durable revenue and cash-flow growth, given rising servicing and technology costs.
- The sustainability of custodial yields and the resulting custodial-fee contribution, including sensitivity to interest-rate changes.
- Execution, cost and timing of the platform architecture upgrade and the headquarters lease commitments.
- Effects of healthcare, tax, privacy and other regulatory changes on HSA demand and the company’s operations.
- Adjusted EBITDA is a non-GAAP measure; assess it alongside GAAP earnings, stock-based compensation and operating cash flow.