Business context and reporting period
HealthEquity, Inc. filed this unaudited Form 10-Q for the three months ended April 30, 2020, its fiscal first quarter of 2021. The company administers health savings accounts (HSAs) and complementary consumer-directed benefits (CDBs). Results include WageWorks, acquired August 30, 2019; the prior-year quarter does not, so year-over-year comparisons are materially affected by the acquisition.
At quarter-end, HealthEquity administered 5.4 million HSAs, 7.3 million CDBs and 12.7 million total accounts. HSA assets were $11.5 billion; client-held funds were $894 million.
Key financial metrics
Amounts below are in U.S. dollars; financial statement amounts are rounded to millions except per-share data.
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $190.0 million | $87.1 million |
| Gross profit / gross margin | $108.1 million / 56.9% | $57.8 million / 66.3% |
| Operating income / margin | $15.1 million / 7.9% | $27.7 million / 31.8% |
| Net income | $1.8 million | $41.8 million |
| Diluted EPS | $0.03 | $0.65 |
| Adjusted EBITDA (non-GAAP) / margin | $63.0 million / 33% | $38.9 million / 45% |
| Operating cash flow | $15.0 million | $25.3 million |
Revenue comprised service $111.3 million, custodial $46.9 million and interchange $31.8 million. Cash and cash equivalents were $171.1 million, down from $191.7 million at January 31, 2020. Current assets were $283.8 million and current liabilities $134.6 million. Term-loan principal outstanding was $1.234 billion; carrying value net of issuance costs was $1.214 billion. No revolving-credit borrowings were outstanding, with up to $350 million available. The company reported covenant compliance.
Investing cash outflow was $25.3 million, including $7.5 million for property and equipment, $11.8 million for software and capitalized development, and $6.0 million for acquired member assets. Financing cash outflow was $10.4 million, including $7.8 million of debt principal payments. Capital expenditures were $19.3 million, versus $6.6 million a year earlier. Management said existing cash, operating cash flow and revolving-credit availability should meet operating and capital needs for at least 12 months.
Changes versus the prior comparable period
- Revenue increased 118%, chiefly because WageWorks contributed a full quarter of results; service revenue rose 315%, interchange 74% and custodial revenue 12%.
- Gross margin declined to 56.9% from 66.3%. Cost of revenue rose 180%, while operating expenses rose 209%, reflecting acquisition-related scale, integration costs and acquired-intangible amortization.
- Net income fell sharply from $41.8 million to $1.8 million. The prior-year quarter included a $23.5 million gain on equity securities; the current quarter included $12.3 million interest expense and $12.8 million merger-integration expense.
- Operating cash flow decreased to $15.0 million from $25.3 million, and cash declined by $20.6 million during the quarter.
- Adjusted EBITDA increased 62% to $63.0 million, but its margin fell to 33% from 45%.
Outlook, commentary and risks
- COVID-19: Management reported lower commuter-benefit use and card spending, pressure on service and interchange revenue, reduced interest yields, delayed or virtual sales opportunities, and potential client payment and service-delivery challenges. The extent and duration of effects were uncertain. Lower employment could also reduce contributions to HSAs and other benefits.
- WageWorks integration: Management targeted approximately $50 million of annualized ongoing net synergies by the end of Q2 FY2021. It estimated total non-recurring integration costs of $80–$100 million over 24–36 months after closing; approximately $45 million had been incurred by April 30, 2020. The quarter included $12.8 million of integration expense.
- Interest rates and debt: Lower rates were expected to pressure custodial revenue; debt carries a variable rate. Management expected interest expense to decrease following rate cuts and scheduled principal payments. A 1% rate increase on outstanding credit-facility borrowings would add approximately $12.4 million of interest expense over 12 months.
- Internal controls: Management concluded disclosure controls were effective, but excluded the portion related to WageWorks from its assessment. Material weaknesses in WageWorks financial-reporting controls remained, involving accounting close, contract-to-cash, risk assessment, significant transactions, reconciliations and IT controls. Remediation work was underway; testing was planned after implementation.
- Contingencies: WageWorks faces litigation concerning a federal contract, securities and derivative claims, and related matters; it is also cooperating with SEC and U.S. Attorney investigations. The company said losses were not considered probable or reasonably estimable, while noting an unfavorable outcome could materially affect results. Insurance coverage may not cover all claims.
- Management expected elevated technology investment and capital expenditures to continue for the remainder of fiscal 2021. No formal earnings guidance was provided in the filing text.
Most important facts for investors to verify
- How much of revenue growth and account expansion reflects WageWorks versus organic growth, and whether integration synergies are being achieved against the stated timing and cost estimates.
- Whether COVID-19 effects on card spending, commuter benefits, client collections, sales and custodial yields persist or deepen.
- Debt repayment, variable-rate exposure, covenant headroom and liquidity if operating cash flow weakens.
- Progress in remediating WageWorks’ material weaknesses and the scope of future control assessments.
- Developments in WageWorks litigation and government investigations, including potential insurance coverage and financial exposure.