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HealthEquity Reports Second Quarter Ended July 31, 2023 Financial Results

Delivers Record HSA Asset Growth, Margin Expansion

Highlights of the second quarter include:

  • Revenue of $243.5 million, an increase of 18% compared to $206.1 million in Q2 FY23.
  • Net income of $10.6 million, compared to net loss of $10.7 million in Q2 FY23, with non-GAAP net income of $45.6 million, an increase of 62% compared to $28.1 million in Q2 FY23.
  • Net income per diluted share of $0.12, compared to net loss per diluted share of $0.13 in Q2 FY23, with non-GAAP net income per diluted share of $0.53, compared to $0.33 in Q2 FY23.
  • Adjusted EBITDA of $88.1 million, an increase of 31% compared to $67.0 million in Q2 FY23.
  • 8.2 million HSAs, an increase of 9% compared to Q2 FY23.
  • Total HSA Assets of $23.2 billion, an increase of 13% compared to Q2 FY23.
  • 15.0 million Total Accounts, including both HSAs and complementary CDBs, an increase of 3% compared to Q2 FY23.

DRAPER, Utah, Sept. 05, 2023 (GLOBE NEWSWIRE) -- HealthEquity, Inc. (NASDAQ: HQY) ("HealthEquity" or the "Company"), the nation's largest health savings account ("HSA") custodian, today announced financial results for its second quarter ended July 31, 2023.

"HealthEquity’s 8.2 million HSA Members grew their health savings by $883 million, including strong contributions from the 156,000 new HSA Members Team Purple welcomed during the quarter," said Jon Kessler, President and CEO of HealthEquity. "Strong member and balance growth, improving custodial yields, and an ongoing service technology rollout all contributed to 360bps of year-over-year expansion of adjusted EBITDA as a percentage of revenue and record operating cash flow."

Second quarter financial results

Revenue for the second quarter ended July 31, 2023 was $243.5 million, an increase of 18% compared to $206.1 million for the second quarter ended July 31, 2022. Revenue this quarter included: service revenue of $105.7 million, custodial revenue of $98.9 million, and interchange revenue of $38.9 million.

HealthEquity reported net income of $10.6 million, or $0.12 per diluted share, and non-GAAP net income of $45.6 million, or $0.53 per diluted share, for the second quarter ended July 31, 2023. The Company reported a net loss of $10.7 million, or $0.13 per diluted share, and non-GAAP net income of $28.1 million, or $0.33 per diluted share, for the second quarter ended July 31, 2022.

Adjusted EBITDA was $88.1 million for the second quarter ended July 31, 2023, an increase of 31% compared to the second quarter ended July 31, 2022. Adjusted EBITDA was 36% of revenue, compared to 33% for the second quarter ended July 31, 2022.

Account and asset metrics

HSAs as of July 31, 2023 were 8.2 million, an increase of 9% year over year, including 574,000 HSAs with investments, an increase of 11% year over year. Total Accounts as of July 31, 2023 were 15.0 million, including 6.8 million other consumer-directed benefits ("CDBs").

Total HSA Assets as of July 31, 2023 were $23.2 billion, an increase of 13% year over year. Total HSA Assets included $14.0 billion of HSA cash and $9.2 billion of HSA investments. Client-held funds, which are deposits held on behalf of our Clients to facilitate administration of our CDBs, and from which we generate custodial revenue, were $0.8 billion as of July 31, 2023.

Business outlook

For the fiscal year ending January 31, 2024, management expects revenue of $980 million to $990 million. Its outlook for net income is between $19 million and $24 million, resulting in net income of $0.21 to $0.27 per diluted share. Its outlook for non-GAAP net income, calculated using the method described below, is between $171 million and $179 million, resulting in non-GAAP net income per diluted share of $1.97 to $2.06 (based on an estimated 87 million diluted weighted-average shares outstanding). Management expects Adjusted EBITDA of $338 million to $348 million.

See "Non-GAAP financial information" below for definitions of our Adjusted EBITDA and non-GAAP net income. A reconciliation of the non-GAAP financial measures used throughout 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 4:30 pm (Eastern Time) on Tuesday, September 5, 2023 to discuss the fiscal 2024 second quarter financial results. The conference call will be accessible by dialing 1-833-630-1956, or 1-412-317-1837 for international callers, and referencing conference ID "HealthEquity, Inc. call." A live audio webcast of the call will 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 non-GAAP financial measures, including Adjusted EBITDA, non-GAAP net income, and non-GAAP net income per diluted share.

  • Adjusted EBITDA is adjusted earnings before interest, taxes, depreciation and amortization, amortization of acquired intangible assets, stock-based compensation expense, merger integration expenses, acquisition costs, gains and losses on equity securities, amortization of incremental costs to obtain a contract, costs associated with unused office space, and certain other non-operating items.
  • Non-GAAP net income is calculated by adding back to GAAP net income (loss) before income taxes the following items: amortization of acquired intangible assets, stock-based compensation expense, merger integration expenses, acquisition costs, gains and losses on equity securities, costs associated with unused office space, and losses on extinguishment of debt, and subtracting a non-GAAP tax provision using a normalized non-GAAP tax rate.
  • 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. We believe that these non-GAAP financial measures provide useful information to management and investors regarding certain financial and business trends relating to the Company's financial condition and results of operations. 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. In addition, while amortization of acquired intangible assets is being excluded from non-GAAP net income, the revenue generated from those acquired intangible assets is not excluded. 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.

About HealthEquity

HealthEquity and its subsidiaries administer HSAs and other consumer-directed benefits for our 15 million accounts in partnership with employers, benefits advisors, and health and retirement plan providers who share our mission to connect health and wealth and value our culture of remarkable "Purple" service. For more information, visit www.healthequity.com.

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, acquisition synergies, 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," "aims," "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 dependence on the continued availability and benefits of tax-advantaged HSAs and other CDBs;
  • our ability to adequately place and safeguard our custodial assets, or the failure of any of our depository or insurance company partners;
  • the impact from a decline in interest rate levels on our financial results;
  • our ability to realize the anticipated financial and other benefits from combining the operations of recent and future acquisitions with our business successfully;
  • our ability to compete effectively in a rapidly evolving healthcare and benefits administration industry;
  • our ability to successfully identify, acquire and integrate additional portfolio purchases or acquisition targets;
  • the significant competition we face and may face in the future, including from those with greater resources than us;
  • the impact of societal and economic changes arising out of the COVID-19 pandemic on the Company, our operations and our financial results;
  • our reliance on the availability and performance of our technology and communications systems;
  • potential future cybersecurity breaches of our technology and communications systems 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, ERISA, investment adviser and other laws applicable to our business;
  • our reliance on partners and third-party vendors for distribution and important services;
  • our ability to develop and implement updated features for our technology and communications systems; 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 Annual Report on Form 10-K for the fiscal year ended January 31, 2023 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. Forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this press release.

Investor Relations Contact
Richard Putnam
801-231-0697
rputnam@healthequity.com

HealthEquity, Inc. and subsidiaries
Condensed consolidated balance sheets

(in thousands, except par value) July 31, 2023   January 31, 2023
  (unaudited)    
Assets      
Current assets      
Cash and cash equivalents $ 290,345   $ 254,266
Accounts receivable, net of allowance for doubtful accounts of $4,639 and $4,989 as of July 31, 2023 and January 31, 2023, respectively   92,581     96,835
Other current assets   39,631     31,792
Total current assets   422,557     382,893
Property and equipment, net   9,145     12,862
Operating lease right-of-use assets   51,976     56,461
Intangible assets, net   881,937     936,359
Goodwill   1,648,145     1,648,145
Other assets   52,696     52,180
Total assets $ 3,066,456   $ 3,088,900
Liabilities and stockholders’ equity      
Current liabilities      
Accounts payable $ 12,543   $ 13,899
Accrued compensation   31,421     45,835
Accrued liabilities   49,281     43,668
Current portion of long-term debt       17,500
Operating lease liabilities   10,026     10,159
Total current liabilities   103,271     131,061
Long-term liabilities      
Long-term debt, net of issuance costs   873,581     907,838
Operating lease liabilities, non-current   52,371     58,988
Other long-term liabilities   13,092     12,708
Deferred tax liability   74,527     82,665
Total long-term liabilities   1,013,571     1,062,199
Total liabilities   1,116,842     1,193,260
Commitments and contingencies      
Stockholders’ equity      
Preferred stock, $0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of July 31, 2023 and January 31, 2023, respectively      
Common stock, $0.0001 par value, 900,000 shares authorized, 85,612 and 84,758 shares issued and outstanding as of July 31, 2023 and January 31, 2023, respectively   9     8
Additional paid-in capital   1,785,014     1,745,716
Accumulated earnings   164,591     149,916
Total stockholders’ equity   1,949,614     1,895,640
Total liabilities and stockholders’ equity $ 3,066,456   $ 3,088,900

HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of operations and comprehensive income (loss) (unaudited)

  Three months ended July 31,   Six months ended July 31,
(in thousands, except per share data)   2023       2022       2023       2022  
Revenue              
Service revenue $ 105,719     $ 103,034     $ 210,831     $ 207,382  
Custodial revenue   98,917       65,599       193,358       124,964  
Interchange revenue   38,913       37,509       83,792       79,475  
Total revenue   243,549       206,142       487,981       411,821  
Cost of revenue              
Service costs   76,543       74,914       157,098       155,788  
Custodial costs   9,133       7,090       18,133       13,731  
Interchange costs   6,943       6,326       13,994       13,317  
Total cost of revenue   92,619       88,330       189,225       182,836  
Gross profit   150,930       117,812       298,756       228,985  
Operating expenses              
Sales and marketing   19,123       15,843       39,058       32,403  
Technology and development   54,767       46,580       107,959       91,763  
General and administrative   27,090       25,937       51,984       49,664  
Amortization of acquired intangible assets   23,166       24,181       46,332       47,879  
Merger integration   2,044       7,683       5,502       16,977  
Total operating expenses   126,190       120,224       250,835       238,686  
Income (loss) from operations   24,740       (2,412 )     47,921       (9,701 )
Other expense              
Interest expense   (13,272 )     (11,493 )     (28,269 )     (21,954 )
Other income (expense), net   2,756       32       4,584       (269 )
Total other expense   (10,516 )     (11,461 )     (23,685 )     (22,223 )
Income (loss) before income taxes   14,224       (13,873 )     24,236       (31,924 )
Income tax provision (benefit)   3,643       (3,219 )     9,561       (7,631 )
Net income (loss) and comprehensive income (loss) $ 10,581     $ (10,654 )   $ 14,675     $ (24,293 )
Net income (loss) per share:              
Basic $ 0.12     $ (0.13 )   $ 0.17     $ (0.29 )
Diluted $ 0.12     $ (0.13 )   $ 0.17     $ (0.29 )
Weighted-average number of shares used in computing net income (loss) per share:              
Basic   85,533       84,443       85,286       84,236  
Diluted   86,341       84,443       86,356       84,236  

HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of cash flows (unaudited)

  Six months ended July 31,
(in thousands)   2023       2022  
Cash flows from operating activities:      
Net income (loss) $ 14,675     $ (24,293 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:      
Depreciation and amortization   77,387       80,226  
Stock-based compensation   38,277       32,140  
Amortization of debt discount and issuance costs   1,461       1,639  
Loss on extinguishment of debt   1,157        
Other non-cash items         269  
Deferred taxes   (8,138 )     (7,558 )
Changes in operating assets and liabilities:      
Accounts receivable, net   4,254       (3,161 )
Other assets   (8,526 )     (1,546 )
Operating lease right-of-use assets   6,594       4,117  
Accrued compensation   (14,675 )     (4,973 )
Accounts payable, accrued liabilities, and other current liabilities   3,970       (25,586 )
Operating lease liabilities, non-current   (8,175 )     (3,594 )
Other long-term liabilities   384       (454 )
Net cash provided by operating activities   108,645       47,226  
Cash flows from investing activities:      
Purchases of software and capitalized software development costs   (18,794 )     (24,215 )
Purchases of property and equipment   (590 )     (2,384 )
Acquisitions of HSA portfolios         (68,725 )
Net cash used in investing activities   (19,384 )     (95,324 )
Cash flows from financing activities:      
Principal payments on long-term debt   (54,375 )     (4,375 )
Settlement of client-held funds obligation, net   (161 )     (991 )
Proceeds from exercise of common stock options   1,354       4,936  
Net cash used in financing activities   (53,182 )     (430 )
Increase (decrease) in cash and cash equivalents   36,079       (48,528 )
Beginning cash and cash equivalents   254,266       225,414  
Ending cash and cash equivalents $ 290,345     $ 176,886  

HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of cash flows (unaudited) (continued)

  Six months ended July 31,
(in thousands)   2023     2022
Supplemental cash flow data:      
Interest expense paid in cash $ 23,504   $ 19,450
Income tax payments, net   15,113     573
Supplemental disclosures of non-cash investing and financing activities:      
Purchases of software and capitalized software development costs included in accounts payable, accrued liabilities, or accrued compensation   3,228     5,040
Purchases of property and equipment included in accounts payable or accrued liabilities   300     356
Acquisitions of HSA portfolios included in accounts payable or accrued liabilities       1,849
Exercise of common stock options receivable   50     8
Increase in goodwill due to measurement period adjustments, net       163

Stock-based compensation expense (unaudited)

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

  Three months ended July 31,   Six months ended July 31,
(in thousands)   2023     2022     2023     2022
Cost of revenue $ 4,714   $ 3,998   $ 8,549   $ 7,005
Sales and marketing   3,478     2,553     6,257     4,567
Technology and development   4,283     2,963     9,175     6,343
General and administrative   7,598     8,640     14,296     14,225
Total stock-based compensation expense $ 20,073   $ 18,154   $ 38,277   $ 32,140

Total Accounts (unaudited)

(in thousands, except percentages)   July 31, 2023     July 31, 2022     % Change   January 31, 2023
HSAs   8,164     7,523     9 %   7,984
New HSAs from sales - Quarter-to-date   156     196     (20) %   445
New HSAs from sales - Year-to-date   290     355     (18) %   971
New HSAs from acquisitions - Year-to-date       90     (100) %   90
HSAs with investments   574     516     11 %   541
CDBs   6,831     7,023     (3) %   6,933
Total Accounts   14,995     14,546     3 %   14,917
Average Total Accounts - Quarter-to-date   14,954     14,497     3 %   14,677
Average Total Accounts - Year-to-date   14,967     14,462     3 %   14,531

HSA Assets (unaudited)

(in millions, except percentages) July 31, 2023   July 31, 2022   % Change   January 31, 2023
HSA cash $ 14,021   $ 13,097   7 %   $ 14,199
HSA investments   9,181     7,441   23 %     7,947
Total HSA Assets   23,202     20,538   13 %     22,146
Average daily HSA cash - Year-to-date   14,048     12,924   9 %     13,049
Average daily HSA cash - Quarter-to-date   14,001     12,941   8 %     13,375

Client-held funds (unaudited)

(in millions, except percentages) July 31, 2023   July 31, 2022   % Change   January 31, 2023
Client-held funds $ 811   $ 801   1 %   $ 901
Average daily Client-held funds - Year-to-date   896     852   5 %     827
Average daily Client-held funds - Quarter-to-date   891     839   6 %     809

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

  Three months ended July 31,   Six months ended July 31,
(in thousands)   2023       2022       2023       2022  
Net income (loss) $ 10,581     $ (10,654 )   $ 14,675     $ (24,293 )
Interest income   (2,484 )     (89 )     (4,082 )     (141 )
Interest expense   13,272       11,493       28,269       21,954  
Income tax provision (benefit)   3,643       (3,219 )     9,561       (7,631 )
Depreciation and amortization   15,180       16,559       31,055       32,347  
Amortization of acquired intangible assets   23,166       24,181       46,332       47,879  
Stock-based compensation expense   20,073       18,154       38,277       32,140  
Merger integration expenses   2,044       7,683       5,502       16,977  
Acquisition costs         47             53  
Amortization of incremental costs to obtain a contract   1,350       1,074       2,654       2,142  
Costs associated with unused office space   1,286       1,313       2,302       2,607  
Other         501       153       1,345  
Adjusted EBITDA $ 88,111     $ 67,043     $ 174,698     $ 125,379  

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

  Outlook for the year ending
(in millions) January 31, 2024
Net income $19 - 24
Interest income (11)
Interest expense 55
Income tax provision 18 - 23
Depreciation and amortization 60
Amortization of acquired intangible assets 93
Stock-based compensation expense 79
Merger integration expenses 15
Amortization of incremental costs to obtain a contract 5
Costs associated with unused office space 4
Other expense 1
Adjusted EBITDA $338 - 348

Reconciliation of net income (loss) to non-GAAP net income (unaudited)

  Three months ended July 31,   Six months ended July 31,
(in thousands, except per share data)   2023     2022       2023     2022  
Net income (loss) $ 10,581   $ (10,654 )   $ 14,675   $ (24,293 )
Income tax provision (benefit)   3,643     (3,219 )     9,561     (7,631 )
Income (loss) before income taxes - GAAP   14,224     (13,873 )     24,236     (31,924 )
Non-GAAP adjustments:              
Amortization of acquired intangible assets   23,166     24,181       46,332     47,879  
Stock-based compensation expense   20,073     18,154       38,277     32,140  
Merger integration expenses   2,044     7,683       5,502     16,977  
Acquisition costs       47           53  
Costs associated with unused office space   1,286     1,313       2,302     2,607  
Loss on extinguishment of debt             1,157      
Total adjustments to income (loss) before income taxes - GAAP   46,569     51,378       93,570     99,656  
Income before income taxes - Non-GAAP   60,793     37,505       117,806     67,732  
Income tax provision - Non-GAAP (1)   15,199     9,376       29,452     16,933  
Non-GAAP net income   45,594     28,129       88,354     50,799  
               
Diluted weighted-average shares   86,341     84,443       86,356     84,236  
Non-GAAP net income per diluted share $ 0.53   $ 0.33     $ 1.02   $ 0.60  

(1) The Company utilizes a normalized non-GAAP tax rate to provide better consistency across the interim reporting periods within a given fiscal year by eliminating the effects of non-recurring and period-specific items, which can vary in size and frequency, and which are not necessarily reflective of the Company’s longer-term operations. The normalized non-GAAP tax rate applied to each period presented was 25%. The Company may adjust its non-GAAP tax rate as additional information becomes available and in conjunction with any other significant events occurring that may materially affect this rate, such as merger and acquisition activity, changes in business outlook, or other changes in expectations regarding tax regulations.

Reconciliation of net income outlook to non-GAAP net income outlook (unaudited)

  Outlook for the year ending
(in millions, except per share data) January 31, 2024
Net income $19 - 24
Income tax provision 18 - 23
Income before income taxes - GAAP 37 - 47
Non-GAAP adjustments:  
Amortization of acquired intangible assets 93
Stock-based compensation expense 79
Merger integration expenses 15
Costs associated with unused office space 4
Total adjustments to income before income taxes - GAAP 191
Income before income taxes - Non-GAAP 228 - 238
Income tax provision - Non-GAAP (1) 57 - 59
Non-GAAP net income $171 - 179
   
Diluted weighted-average shares 87
Non-GAAP net income per diluted share (2) $1.97 - 2.06

(1) The Company utilizes a normalized non-GAAP tax rate to provide better consistency across the interim reporting periods within a given fiscal year by eliminating the effects of non-recurring and period-specific items, which can vary in size and frequency, and which are not necessarily reflective of the Company’s longer-term operations. The normalized non-GAAP tax rate applied to each period presented was 25%. The Company may adjust its non-GAAP tax rate as additional information becomes available and in conjunction with any other significant events occurring that may materially affect this rate, such as merger and acquisition activity, changes in business outlook, or other changes in expectations regarding tax regulations.

(2) Non-GAAP net income per diluted share may not calculate due to rounding of non-GAAP net income and diluted weighted-average shares.

Certain terms

Term Definition
HSA A financial account through which consumers spend and save long-term for healthcare on a tax-advantaged basis.
CDB Consumer-directed benefits offered by employers, including flexible spending and health reimbursement arrangements ("FSAs" and "HRAs"), Consolidated Omnibus Budget Reconciliation Act ("COBRA") administration, commuter and other benefits.
HSA member Consumers with HSAs that we serve.
Total HSA Assets HSA members’ custodial cash assets held by our federally insured depository partners and our insurance company partners. Total HSA Assets also includes HSA members' investments in mutual funds through our custodial investment fund partner.
Client Our employer clients.
Total Accounts The sum of HSAs and CDBs on our platforms.
Client-held funds Deposits held on behalf of our Clients to facilitate administration of our CDBs.
Network Partner Our health plan partners, benefits administrators, and retirement plan recordkeepers.
Adjusted EBITDA Adjusted earnings before interest, taxes, depreciation and amortization, amortization of acquired intangible assets, stock-based compensation expense, merger integration expenses, acquisition costs, gains and losses on equity securities, amortization of incremental costs to obtain a contract, costs associated with unused office space, and certain other non-operating items.
Non-GAAP net income Calculated by adding back to GAAP net income (loss) before income taxes the following items: amortization of acquired intangible assets, stock-based compensation expense, merger integration expenses, acquisition costs, gains and losses on equity securities, costs associated with unused office space, and losses on extinguishment of debt, and subtracting a non-GAAP tax provision using a normalized non-GAAP tax rate.
Non-GAAP net income per diluted share Calculated by dividing non-GAAP net income by diluted weighted-average shares outstanding.

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