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 months ended April 30, 2022, compared with the three months ended April 30, 2021. The company reported 7.4 million HSAs, 7.1 million CDBs and 14.5 million total accounts at quarter-end. HSA assets under custody were $20.3 billion; these are member assets, not company balance-sheet assets.
Key financial metrics
Amounts below are in millions of dollars, except per-share data, percentages and account figures.
| Metric | Three months ended Apr. 30, 2022 | Three months ended Apr. 30, 2021 | Change |
|---|---|---|---|
| Revenue | $205.7 | $184.2 | +12% |
| Gross profit | $111.2 | $103.1 | +8% |
| Gross margin | 54.1% | 56.0% | Down 1.9 percentage points |
| Operating income (loss) | $(7.3) | $4.3 | Down $11.5 |
| Net income (loss) | $(13.6) | $(2.6) | Loss widened $11.0 |
| Diluted loss per share | $(0.16) | $(0.03) | — |
| Adjusted EBITDA (non-GAAP) | $58.3 | $59.0 | Down 1%; margin 28% vs. 32% |
| Operating cash flow | $7.1 | $30.9 | Down $23.8 |
| Cash and cash equivalents, quarter-end | $161.2 | $225.4 at Jan. 31, 2022 | Down $64.2 during quarter |
Revenue by source: service $104.3 million (+2% year over year), custodial $59.4 million (+26%) and interchange $42.0 million (+21%). Total cost of revenue rose 17% to $94.5 million; operating expenses rose 20% to $118.5 million. Interest expense was $10.5 million, up from $6.7 million. The income tax benefit was $4.4 million.
Investing cash use was $74.2 million, including $59.4 million for acquired HSA member assets, $13.6 million for software and capitalized development, and $1.2 million for property and equipment. Financing cash provided was $3.0 million. Capital expenditures were $14.8 million, compared with $18.0 million a year earlier.
At April 30, 2022, total debt principal was $947.8 million: $600 million of 4.50% senior notes due 2029 and $347.8 million under the term loan. Reported debt, net, was $929.5 million, including current debt. The $1.0 billion revolving facility had no borrowings outstanding. Cash was $161.2 million. The company reported compliance with credit agreement covenants.
Material changes versus the prior comparable period
- Revenue growth was led by custodial and interchange revenue. Average daily HSA cash increased 28% year over year, while the average annualized HSA cash yield declined to 1.69% from 1.79%.
- Account growth reflected sales and acquisitions: HSAs increased 26% year over year, while CDBs increased 2%. HSA assets under custody rose 35% to $20.3 billion.
- Expenses outpaced revenue growth, and the company moved from operating income to an operating loss. Management attributed higher costs to the Further acquisition, staffing and other growth-related spending, technology investment, stock compensation, acquired-intangible amortization and integration.
- Adjusted EBITDA was nearly flat, but its margin fell from 32% to 28%. Management cited increased personnel and related costs, partly offset by higher revenue.
- Cash declined by $64.2 million during the quarter, principally reflecting investing outflows and working-capital movements. The prior-year quarter included $456.6 million of net follow-on offering proceeds, making financing cash flow substantially higher then.
Outlook, risks and unusual items
- No specific revenue, earnings or EBITDA guidance was provided. Management expected existing cash, cash equivalents and revolving-credit availability to cover operating and capital requirements for at least the next 12 months.
- Management expected increased capital expenditure to continue through the fiscal year ending January 31, 2023, primarily for technology architecture and functionality. It also expected operating expenses to rise as the business grows and integrates Further.
- Further-related merger integration expenses were expected to total approximately $55 million over about three years from the November 2021 acquisition.
- Management warned that custodial yields remained below pre-pandemic levels despite rising market rates, partly because of fixed-rate partner contracts. Commuter benefit activity remained affected by remote and hybrid work; pandemic-related changes may continue to weigh on results.
- Variable-rate term-loan and revolving-facility borrowings expose the company to higher interest expense. The filing estimated that a 1 percentage-point rate increase on amounts outstanding under the credit facilities at quarter-end would add about $3.5 million of interest expense over 12 months.
- Disclosure controls and procedures were deemed ineffective because of material weaknesses in the contract-to-cash process and IT general controls, previously associated with WageWorks. Remediation was ongoing. Management nevertheless concluded the interim financial statements were fairly presented in all material respects.
- WageWorks is in litigation with a landlord over termination of an uncommenced Mesa, Arizona lease. The landlord drew $2.8 million under a letter of credit and filed counterclaims; the filing states that the ultimate outcome is uncertain. Other legal claims were not considered probable or reasonably estimable, though an adverse outcome could materially affect results.
- Other risks discussed include changes in tax and healthcare regulation, competition, inflation, data security, and the potential business effects of COVID-19 and the Russia-Ukraine war. The company also noted that most of its $161.2 million of cash was not covered by federal deposit insurance.
Most important facts for investors to verify
- Whether account and HSA-asset growth translates into durable revenue and improved margins, particularly as custodial yields and interest rates change.
- Progress on Further integration, expected $55 million integration costs, and realization of expected operating benefits.
- Remediation and testing of the contract-to-cash and IT-control material weaknesses, including whether disclosure controls become effective.
- Cash generation, technology investment needs, debt service and compliance with credit covenants as variable-rate interest costs evolve.
- Developments in the Mesa lease dispute and any resulting financial exposure.