HealthEquity, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 31, 2015. Unless otherwise noted, financial figures are in millions of dollars. Comparisons are with the corresponding 2014 periods.
Business context and operating metrics
HealthEquity provides technology-enabled administration and custodial services for health savings and other healthcare accounts. Revenue is primarily from account, custodial and payment-card fees. At quarter-end, the company reported 1.60 million HSA members, up 45%, and $2.69 billion in assets under management (AUM), up 47%. Management attributed member growth to new and existing network partners and AUM growth to member additions and higher balances. These operating metrics exclude the effect of the October HSA portfolio acquisition.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $30.6 million; +40% | $90.9 million; +44% |
| Gross profit / gross margin | $17.7 million / 57.9% (56.0% prior year) | $54.2 million / 59.6% (56.3% prior year) |
| Operating income / margin | $6.3 million / 20.6% | $21.8 million / 24.0% |
| Net income | $4.1 million, versus $3.0 million | $13.5 million, versus $8.8 million |
| Adjusted EBITDA (non-GAAP) | $9.9 million; 32% of revenue, versus $6.1 million; 28% | $31.8 million; 35% of revenue, versus $19.7 million; 31% |
For the quarter, account fees were $15.0 million (+36%), custodial fees $9.1 million (+48%) and card fees $6.2 million (+44%). For the nine months, the respective amounts were $44.0 million (+38%), $26.6 million (+51%) and $19.8 million (+54%). Growth reflected member and AUM expansion, increased card activity, and higher custodial yields. Average cash AUM yield was 1.55% for the quarter and 1.56% year to date, compared with 1.52% and 1.51% in 2014.
Operating expenses rose 43% for the quarter and 57% for the nine months, with higher technology and development, general and administrative, and sales and marketing spending. Nine-month diluted EPS was $0.23 versus $0.19; basic EPS was $0.24 versus $0.44. The prior-year per-share comparison is affected by preferred-stock allocation and conversion, so it is not directly comparable to the 2015 period.
Cash flow, liquidity and debt
Nine-month operating cash flow was $18.8 million, versus $10.6 million. Investing cash outflow was $81.2 million, including $40.2 million of marketable-security purchases, the $33.8 million HSA portfolio acquisition and software investment. Financing cash inflow was $36.4 million, including $23.5 million net proceeds from the May follow-on offering and $11.3 million in tax benefits from stock-option exercises. Cash and cash equivalents declined to $85.0 million from $111.0 million at January 31; cash, equivalents and marketable securities totaled $125.1 million.
The company had no debt outstanding at October 31 and entered into a five-year, secured $100 million revolving credit facility. The facility includes quarterly leverage and interest-coverage covenants, each with a 3.00-to-1.00 threshold. Management stated existing liquidity should cover operating and capital expenditure needs for at least 12 months. Capital spending was $6.6 million for the nine months, and management expected it to increase for the remainder of fiscal 2016 as it upgraded platform architecture.
Material changes, outlook and risks
- In October, HealthEquity acquired an HSA portfolio for $33.8 million in cash, accounted for as an asset acquisition and allocated to member-related intangible assets with a 15-year useful life. Related amortization is expected to increase.
- The company expanded and amended its Draper, Utah office leases. The new building lease is expected to commence after construction, targeted for substantial completion by July 2016; initial annual base rents are approximately $1.0 million for the new space and $1.6 million for existing space, each with 2.5% annual increases.
- Management expects continued investment in technology and development, sales and marketing, and public-company infrastructure. It expects annual gross margin to remain relatively steady in the near term, while noting that interest rates, service mix, card costs and spending timing can affect margins and expenses.
- Principal business risks include changes to healthcare and HSA regulation, interest-rate movements that may affect custodial revenue, competition, partner/member growth and execution of technology investments. A significant downturn in tax-advantaged healthcare accounts could materially harm results. No customer represented more than 5% of revenue.
- The filing reports no material litigation, no material change in previously disclosed risk factors, and no material change in internal control over financial reporting. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether member growth, AUM growth and custodial yields continue to support revenue growth, particularly as account fees per member declined approximately 6%.
- The acquired portfolio’s contribution to members, AUM and revenue, and the resulting amortization and integration costs.
- Cash generation and planned technology capital expenditures, alongside the liquidity impact of the acquisition and expanded leases.
- Credit-facility covenant compliance and the effects of interest-rate changes on custodial revenue and marketable-security values.
- Adjusted EBITDA is a non-GAAP measure; assess its reconciliation and the effects of stock compensation and other adjustments alongside GAAP results.