HealthEquity Reports Second Quarter Ended July 31, 2018 Financial Results

Highlights of the second quarter include:

  • Revenue of $71.1 million, an increase of 25% compared to Q2 FY18.
  • Net income of $22.5 million, an increase of 33% compared to Q2 FY18.
  • Net income per diluted share of $0.36 compared to $0.27 in Q2 FY18.
  • Non-GAAP net income per diluted share of $0.34 compared to $0.21 in Q2 FY18.
  • Adjusted EBITDA of $31.8 million, an increase of 33% compared to Q2 FY18.
  • HSA Members of 3.6 million, an increase of 23% compared to Q2 FY18.
  • Total Custodial Assets of $7.0 billion, an increase of 31% compared to Q2 FY18.

DRAPER, Utah, Sept. 04, 2018 (GLOBE NEWSWIRE) -- HealthEquity, Inc. (NASDAQ:HQY) ("HealthEquity" or the "Company"), the nation's largest health savings account ("HSA") non-bank custodian, today announced financial results for its second quarter ended July 31, 2018.

"HealthEquity recorded another strong quarter financially and operationally as we added over 121,000 new HSAs and $170 million to our members' custodial assets, resulting in record quarterly revenue and earnings," said Jon Kessler, HealthEquity's President and CEO. "As we continue to deliver on our commitment to connecting health and wealth for our members, we are well positioned to outpace the market by providing comprehensive retirement solutions to our members and being the market's purple standard for remarkable service."

Second quarter financial results

For the second quarter ended July 31, 2018, HealthEquity reported revenue of $71.1 million, an increase of 25% compared to $56.9 million for the second quarter ended July 31, 2017. Revenue consisted of:

  • Service revenue of $24.9 million, an increase of 9% compared to Q2 FY18.
  • Custodial revenue of $30.7 million, an increase of 44% compared to Q2 FY18.
  • Interchange revenue of $15.4 million, an increase of 21% compared to Q2 FY18.

Net income was $22.5 million for the second quarter ended July 31, 2018, compared to $16.9 million for the second quarter ended July 31, 2017.

Net income per diluted share was $0.36 for the second quarter ended July 31, 2018, compared to $0.27 for the second quarter ended July 31, 2017.

Non-GAAP net income per diluted share was $0.34 for the second quarter ended July 31, 2018, compared to $0.21 for the second quarter ended July 31, 2017.

Non-GAAP Adjusted EBITDA was $31.8 million for the second quarter ended July 31, 2018, an increase of 33% compared to $23.9 million for the second quarter ended July 31, 2017. Adjusted EBITDA was 45% of revenue for the second quarter ended July 31, 2018, compared to 42% for the second quarter ended July 31, 2017.

As of July 31, 2018, we had $302.9 million of cash, cash equivalents and marketable securities and no outstanding debt. This compares to $240.3 million in cash, cash equivalents and marketable securities and no outstanding debt as of January 31, 2018.

HSA Member and Custodial Asset metrics

The total number of HSAs for which we serve as a non-bank custodian ("HSA Members") as of July 31, 2018 was 3.6 million, an increase of 23% from 2.9 million as of July 31, 2017.  Additionally, total Active HSA Members as of July 31, 2018 was 2.9 million, an increase of 19% from 2.5 million as of July 31, 2017. An Active HSA Member is an HSA Member that (i) is associated with a Health Plan and Administrator Partner or an Employer Partner, in each case as of the end of the applicable period; or (ii) has held a custodial balance at any point during the previous twelve month period.

Total Custodial Assets as of July 31, 2018 was $7.0 billion, an increase of 31% year over year, consisting of:

  • Custodial Cash Assets of $5.5 billion, an increase of 23% compared to July 31, 2017; and
  • Custodial Investment Assets of $1.5 billion, an increase of 72% compared to July 31, 2017.

Business outlook

We have modestly increased our outlook for the year ending January 31, 2019. We expect our revenue to be between $279 million and $285 million. Our outlook for net income is a range of $63 million to $67 million, resulting in a net income per diluted share range of $0.98 to $1.05. Our Adjusted EBITDA outlook is a range of $108 million to $112 million. We also expect our non-GAAP net income to be in a range between $67 million and $71 million. Our non-GAAP net income is calculated by adding back to net income all non-cash stock-based compensation expense, net of an estimated statutory tax rate of 24%, and the impact of excess tax benefits due to the adoption of Accounting Standards Update ("ASU") 2016-09. Our non-GAAP net income outlook results in a non-GAAP net income per diluted share range between $1.05 to $1.11 (based on an estimated 64 million weighted-average shares outstanding).

A reconciliation of the non-GAAP financial measures used in this release to the most comparable GAAP financial measures is included with the financial tables at the end of this release.

Conference call

HealthEquity management will host a conference call at 5:00 pm (Eastern Time) on Tuesday, September 4, 2018 to discuss the fiscal year 2019 second quarter financial results. The conference call will be accessible by dialing 844-791-6252, or 661-378-9636 for international callers, and referencing conference ID 8588717. A live audio webcast of the call will also be available on the investor relations section of our website at http://ir.healthequity.com.

Non-GAAP financial Information

To supplement our financial information presented on a GAAP basis, we disclose Adjusted EBITDA, which is a non-GAAP financial measure. We define Adjusted EBITDA as adjusted earnings before interest, taxes, depreciation and amortization, stock-based compensation expense, and other certain non-operating items. Non-GAAP net income is calculated by adding back to net income all non-cash stock-based compensation expense, net of an estimated statutory tax rate, and the impact of excess tax benefits due to the adoption of ASU 2016-09. Non-GAAP net income per diluted share is calculated by dividing non-GAAP net income by diluted weighted-average shares outstanding.

Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP results. The Company cautions investors that non-GAAP financial information, by its nature, departs from GAAP; accordingly, its use can make it difficult to compare current results with results from other reporting periods and with the results of other companies. Whenever we use these non-GAAP financial measures, we provide a reconciliation of the applicable non-GAAP financial measure to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of the non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed in the tables below.

Forward-looking statements

This press release contains "forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements regarding our industry, business strategy, plans, goals and expectations concerning our markets and market position, product expansion, future operations, expenses and other results of operations, revenue, margins, profitability, future efficiencies, tax rates, capital expenditures, liquidity and capital resources and other financial and operating information. When used in this discussion, the words "may," "believes," "intends," "seeks," "anticipates," "plans," "estimates," "expects," "should," "assumes," "continues," "could," "will," "future" and the negative of these or similar terms and phrases are intended to identify forward-looking statements in this press release.

Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Although we believe the expectations reflected in the forward-looking statements are reasonable, we can give you no assurance these expectations will prove to be correct. Some of these expectations may be based upon assumptions, data or judgments that prove to be incorrect. Actual events, results and outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include, among others, risks related to the following:

  • our ability to compete effectively in a rapidly evolving healthcare industry;
  • our dependence on the continued availability and benefits of tax-advantaged health savings accounts;
  • the significant competition we face and may face in the future, including from those with greater resources than us;
  • cybersecurity breaches of our platform and other data interruptions, including resulting costs and liabilities, reputational damage and loss of business;
  • the current uncertain healthcare environment, including changes in healthcare programs and expenditures and related regulations;
  • our ability to comply with current and future privacy, healthcare, tax, investment advisor and other laws applicable to our business;
  • our reliance on partners and third party vendors for distribution and important services;
  • our ability to successfully identify, acquire and integrate additional portfolio purchases or acquisition targets;
  • our ability to develop and implement updated features for our platform and successfully manage our growth;
  • our ability to protect our brand and other intellectual property rights; and
  • our reliance on our management team and key team members.

For a detailed discussion of these and other risk factors, please refer to the risks detailed in our filings with the Securities and Exchange Commission, including, without limitation, our most recent Annual Report on Form 10-K and subsequent periodic and current reports. Past performance is not necessarily indicative of future results. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this press release.

 
 
HealthEquity, Inc. and its subsidiaries
Condensed consolidated balance sheets (unaudited)
(in thousands, except par value) July 31, 2018
    January 31, 2018
 
Assets      
Current assets      
Cash and cash equivalents $ 261,808     $ 199,472  
Marketable securities, at fair value 41,109     40,797  
Total cash, cash equivalents and marketable securities 302,917     240,269  
Accounts receivable, net of allowance for doubtful accounts as of July 31, 2018 and January 31, 2018 of $288 and $208, respectively 24,906     21,602  
Inventories 163     215  
Other current assets 11,727     3,310  
Total current assets 339,713     265,396  
Property and equipment, net 8,869     7,836  
Intangible assets, net 82,277     83,635  
Goodwill 4,651     4,651  
Deferred tax asset 1,038     5,461  
Other assets 18,054     2,180  
Total assets $ 454,602     $ 369,159  
Liabilities and stockholders' equity      
Current liabilities      
Accounts payable $ 1,769     $ 2,420  
Accrued compensation 9,723     12,549  
Accrued liabilities 5,577     5,521  
Total current liabilities 17,069     20,490  
Long-term liabilities      
Other long-term liabilities 2,693     2,395  
Deferred tax liability 2,221      
Total long-term liabilities 4,914     2,395  
Total liabilities 21,983     22,885  
Commitments and contingencies      
Stockholders' equity      
Preferred stock, $0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of July 31, 2018 and January 31, 2018, respectively      
Common stock, $0.0001 par value, 900,000 shares authorized, 62,251 and 60,825 shares issued and outstanding as of July 31, 2018 and January 31, 2018, respectively 6     6  
Additional paid-in capital 289,568     261,237  
Accumulated other comprehensive loss     (269 )
Accumulated earnings 143,045     85,300  
Total stockholders' equity 432,619     346,274  
Total liabilities and stockholders' equity $ 454,602     $ 369,159  
               
               
HealthEquity, Inc. and its subsidiaries
Condensed consolidated statements of operations and comprehensive income (unaudited)
 
(in thousands, except per share data) Three months ended July 31,
    Six months ended July 31,
 
2018
    2017
    2018
    2017
 
Revenue:              
Service revenue $ 24,935     $ 22,809     $ 49,756     $ 45,296  
Custodial revenue 30,715     21,285     59,149     40,604  
Interchange revenue 15,417     12,785     32,066     26,400  
Total revenue 71,067     56,879     140,971     112,300  
Cost of revenue:              
Service costs 17,199     14,998     35,246     30,573  
Custodial costs 3,502     2,785     6,941     5,586  
Interchange costs 3,791     3,294     7,853     6,598  
Total cost of revenue 24,492     21,077     50,040     42,757  
Gross profit 46,575     35,802     90,931     69,543  
Operating expenses:              
Sales and marketing 7,243     5,194     14,103     9,815  
Technology and development 8,398     6,797     16,377     13,039  
General and administrative 7,893     6,234     15,400     12,102  
Amortization of acquired intangible assets 1,478     1,082     2,948     2,165  
Total operating expenses 25,012     19,307     48,828     37,121  
Income from operations 21,563     16,495     42,103     32,422  
Other expense:              
Other expense, net (75 )   (38 )   (76 )   (128 )
Total other expense (75 )   (38 )   (76 )   (128 )
Income before income taxes 21,488     16,457     42,027     32,294  
Income tax provision (benefit) (1,029 )   (489 )   (3,067 )   1,319  
Net income $ 22,517     $ 16,946     $ 45,094     $ 30,975  
Net income per share:              
Basic $ 0.36     $ 0.28     $ 0.73     $ 0.52  
Diluted $ 0.36     $ 0.27     $ 0.72     $ 0.50  
Weighted-average number of shares used in computing net income per share:              
Basic 61,880     60,173     61,531     59,955  
Diluted 63,397     61,765     63,060     61,604  
Comprehensive income:              
Net income $ 22,517     $ 16,946     $ 45,094     $ 30,975  
Other comprehensive loss:              
Unrealized loss on available-for-sale marketable securities, net of tax     (4 )       (30 )
Comprehensive income $ 22,517     $ 16,942     $ 45,094     $ 30,945  
                               
                               
HealthEquity, Inc. and its subsidiaries
Condensed consolidated statements of cash flows (unaudited)
 
  Six months ended July 31,
 
(in thousands) 2018
    2017
 
Cash flows from operating activities:      
Net income $ 45,094     $ 30,975  
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization 8,916     7,136  
Unrealized losses on marketable securities and other 86     27  
Deferred taxes 2,351     4,699  
Stock-based compensation 9,727     6,803  
Changes in operating assets and liabilities:      
Accounts receivable (3,304 )   (3,873 )
Inventories 52     253  
Other assets (6,973 )   (4,073 )
Accounts payable (837 )   (1,495 )
Accrued compensation (2,826 )   (2,202 )
Accrued liabilities 56     900  
Other long-term liabilities 298     611  
Net cash provided by operating activities 52,640     39,761  
Cash flows from investing activities:      
Purchases of intangible member assets (1,014 )   (6,515 )
Acquisition of a business     (3,000 )
Purchases of marketable securities (368 )   (224 )
Purchases of property and equipment (2,690 )   (2,161 )
Purchases of software and capitalized software development costs (4,701 )   (5,166 )
Net cash used in investing activities (8,773 )   (17,066 )
Cash flows from financing activities:      
Proceeds from exercise of common stock options 18,469     7,072  
Net cash provided by financing activities 18,469     7,072  
Increase in cash and cash equivalents 62,336     29,767  
Beginning cash and cash equivalents 199,472     139,954  
Ending cash and cash equivalents $ 261,808     $ 169,721  
Supplemental disclosures of non-cash investing and financing activities:      
Purchases of property and equipment included in accounts payable or accrued liabilities at period end $ 14     $ 53  
Purchases of software and capitalized software development costs included in accounts payable or accrued liabilities at period end 175     69  
Purchases of intangible member assets accrued during the period 181     270  
Exercise of common stock options receivable 135     1,017  
           
           

Stock-based compensation expense (unaudited)

Total stock-based compensation expense included in the consolidated statements of operations and comprehensive income is as follows:

    Three months ended July 31,
    Six months ended July 31,
 
(in thousands)   2018
    2017
    2018
    2017
 
Cost of revenue   $ 807     $ 692     $ 1,220     $ 1,183  
Sales and marketing   891     526     1,596     842  
Technology and development   1,300     862     2,291     1,534  
General and administrative   2,490     1,714     4,620     3,244  
Total stock-based compensation expense   $ 5,488     $ 3,794     $ 9,727     $ 6,803  
                                 

HSA Members (unaudited)

(in thousands, except percentages)   July 31, 2018     July 31, 2017     % Change     January 31, 2018  
HSA Members   3,574     2,900     23%     3,403  
Average HSA Members - Year-to-date   3,488     2,820     24%     2,952  
Average HSA Members - Quarter-to-date   3,533     2,858     24%     3,189  
New HSA Members - Year-to-date   219     196     12%     723  
New HSA Members - Quarter-to-date   121     119     2%     404  
Active HSA Members   2,933     2,461     19%     2,863  
HSA Members with investments   143     87     64%     122  
                         

Custodial assets (unaudited)

(in millions, except percentages)   July 31, 2018
    July 31, 2017
    % Change     January 31, 2018
 
Custodial cash   $ 5,537     $ 4,503     23%     $ 5,489  
Custodial investments   1,494     871     72%     1,289  
Total custodial assets   $ 7,031     $ 5,374     31%     $ 6,778  
Average daily custodial cash - Year-to-date   $ 5,478     $ 4,429     24%     $ 4,571  
Average daily custodial cash - Quarter-to-date   $ 5,489     $ 4,448     23%     $ 4,876  
                               

Net income reconciliation to Adjusted EBITDA (unaudited)

    Three months ended July 31,
    Six months ended July 31,
 
(in thousands)   2018
    2017
    2018
    2017
 
Net income   $ 22,517     $ 16,946     $ 45,094     $ 30,975  
Interest income   (303 )   (179 )   (561 )   (336 )
Interest expense   69     69     136     136  
Income tax provision (benefit)   (1,029 )   (489 )   (3,067 )   1,319  
Depreciation and amortization   2,918     2,573     5,968     4,971  
Amortization of acquired intangible assets   1,478     1,082     2,948     2,165  
Stock-based compensation expense   5,488     3,793     9,727     6,803  
Other (1)   663     148     1,183     328  
Adjusted EBITDA   $ 31,801     $ 23,943     $ 61,428     $ 46,361  

(1) For the three months ended July 31, 2018 and 2017, Other consisted of non-income-based taxes of $116 and $102, other costs of $(32) and $0, acquisition-related costs of $224 and $46, and amortization of incremental costs to obtain a contract of $355 and $0, respectively. For the six months ended July 31, 2018 and 2017, Other consisted of non-income-based taxes of $220 and $190, other costs of $56 and $54, acquisition-related costs of $225 and $84, and amortization of incremental costs to obtain a contract of $682 and $0, respectively.

Reconciliation of net income outlook to Adjusted EBITDA outlook (unaudited)

  Outlook for the year ending
(in millions) January 31, 2019
Net income $63 - $67
Income tax provision ~ 3
Depreciation and amortization ~ 13
Amortization of acquired intangible assets ~ 6
Stock-based compensation expense ~ 21
Other ~ 2
Adjusted EBITDA $108 - $112
   

Reconciliation of non-GAAP net income per diluted share (unaudited)

  Three months ended
  Six months ended
  Outlook for the
year ending
(in millions, except per share data) July 31, 2018
  July 31, 2017
  July 31, 2018
  July 31, 2017
  January 31, 2019
Net income $ 22   $ 17   $ 45   $ 31   $63 - $67
Stock compensation, net of tax (1)   4     2     7     4   ~ 16
Excess tax benefit due to adoption of ASU 2016-09   (5 )   (6 )   (12 )   (10 ) ~  (12)
Non-GAAP net income $ 21   $ 13   $ 40   $ 25   $67 - $71
                             
Diluted weighted-average shares used in computing GAAP and Non-GAAP per share amounts   63     62     63     62   64
Non-GAAP net income per diluted share (2) $ 0.34   $ 0.21   $ 0.64   $ 0.40   $1.05 - $1.11

(1) For the three and six months ended July 31, 2018, the Company used an estimated statutory tax rate of 24%, to calculate the net impact of stock-based compensation expense and 28% for the three and six months ended July 31, 2017.
(2) Non-GAAP net income per diluted share does not calculate due to rounding.

Certain terms

Term Definition
HSA A financial account through which consumers spend and save long-term for healthcare on a tax-advantaged basis.
HSA Member An HSA for which we serve as custodian.
Active HSA Member An HSA Member that (i) is associated with a Health Plan and Administrator Partner or an Employer Partner, in each case as of the end of the applicable period; or (ii) has held a custodial balance at any point during the previous twelve month period.
Custodial cash assets Deposits with our federally-insured custodial depository partners and custodial cash deposits invested in an annuity contract with our insurance company partner.
Custodial investments HSA Members' investments in mutual funds through our custodial investment fund partner.
Employer Partner Our employer clients.
Health Plan and Administrator Partner Our Health Plan and Administrator clients.
Adjusted EBITDA Adjusted earnings before interest, taxes, depreciation and amortization, stock-based compensation expense, and other certain non-operating items.
Non-GAAP net income Calculated by adding back to net income all non-cash stock-based compensation expense, net of an estimated statutory tax rate, and the impact of excess tax benefits due to the adoption of ASU 2016-09.
Non-GAAP net income per diluted share Calculated by dividing non-GAAP net income by diluted weighted-average shares outstanding.
   

Investor Relations Contact
Richard Putnam
801-727-1209
rputnam@healthequity.com

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