HealthEquity (HQY) witnessed strong growth in Service, Custodial and Interchange segments in Q2.
HQY earnings call for the period ending July 31, 2020.
Highlights of the second quarter include: * Revenue of $176.0 million, an increase of 103% compared to $86.6 million in Q2 FY20. * Net loss of $0.1 million, with non-GAAP net income of $30.1 million, compared to net income of $19.4 million and non-GAAP net income of $28.8 million in Q2 FY20. * Net loss per diluted share of less than one half of one cent, with non-GAAP net income per diluted share of $0.42, compared to net income per diluted share of $0.30 and non-GAAP net income per diluted share of $0.44 in Q2 FY20. * Adjusted EBITDA of $60.0 million, an increase of 48% compared to $40.6 million in Q2 FY20. * 5.4 million HSAs, an increase of 29% compared to Q2 FY20. * $12.2 billion Total HSA Assets, an increase of 43% compared to Q2 FY20. * 12.5 million Total Accounts, including both HSAs and complementary CDB accounts, an increase of 158% compared to Q2 FY20. * The Company sold 5,290,000 shares of common stock, yielding net proceeds of $286.8 million.DRAPER, Utah, Sept. 08, 2020 (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, 2020, compared to its prior quarter ended July 31, 2019, which did not include the acquisition of WageWorks.“The HealthEquity team delivered strong results this quarter despite the pandemic. Adjusted EBITDA of $60 million, a sequential increase in adjusted EBITDA margin to 34%, and robust sales speak to the margin and growth opportunities of our business,” said Jon Kessler, President and CEO of HealthEquity. “Team Purple delivered for our members, clients and partners, growing HSA Assets sequentially by over $700 million, a second quarter record, and maintaining the high level of service HealthEquity is known for even as 97% of team members worked from home.”Second quarter financial resultsRevenue for the second quarter ended July 31, 2020 of $176.0 million grew 103% compared to $86.6 million for the second quarter ended July 31, 2019. Revenue this quarter included: service revenue of $103.8 million, custodial revenue of $46.9 million, and interchange revenue of $25.3 million.HealthEquity reported a net loss of $0.1 million, or less than one half of one cent per diluted share, and non-GAAP net income of $30.1 million, or $0.42 per diluted share, for the second quarter ended July 31, 2020. The Company reported net income of $19.4 million, or $0.30 per diluted share, and non-GAAP net income of $28.8 million, or $0.44 per diluted share, for the second quarter ended July 31, 2019.Adjusted EBITDA was $60.0 million for the second quarter ended July 31, 2020, an increase of 48% compared to $40.6 million for the second quarter ended July 31, 2019. Adjusted EBITDA was 34% of revenue compared to 47% for the second quarter ended July 31, 2019.Account and asset metricsHSAs as of July 31, 2020 were approximately 5.4 million, an increase of 29% year over year, including 284,000 HSAs with investments, an increase of 52% year over year. Total Accounts as of July 31, 2020 were 12.5 million, including 7.1 million consumer-directed benefit ("CDB") accounts.Total HSA Assets as of July 31, 2020 were $12.2 billion, an increase of 43% year over year. Total HSA Assets included $9.0 billion of HSA cash and $3.2 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, 2020.New HSA openings and HSA asset balancesHealthEquity reported sales of 108,000 new HSAs in the second quarter ended July 31, 2020, compared to 126,000 in the second quarter ended July 31, 2019. HSA members grew their cash balances by approximately $246.0 million during the quarter, while total member balances increased by approximately $707.0 million due primarily to decreased spending per HSA and appreciation of invested balances.WageWorks integration and increased synergy targetHealthEquity completed its acquisition of WageWorks on August 30, 2019. The Company accelerated its integration efforts and achieved its previously stated goal of $50 million in run rate synergies by the end of this second quarter, more than a year ahead of schedule. We also successfully migrated five legacy platforms and approximately $1 billion in HSA assets to our legacy HealthEquity HSA platform. In addition, we completed the return of all service calls to the United States.In light of this progress, the Company raised its net synergy target to $80 million, to be achieved over the next 18 months. Said Ted Bloomberg, Chief Operating Officer of HealthEquity, “Consolidating to a single platform for the delivery of our total solution will enable our members, clients and partners to better connect health and wealth, while increasing the efficiency and focus of our team.”Business outlookFor the fiscal year ending January 31, 2021, management expects revenues of $720 million to $730 million. Its outlook is for net loss between $13 million and $5 million, resulting in net loss per diluted share of $0.17 to $0.08. Its outlook for non-GAAP net income, calculated using the method described below, is between $111 million and $119 million, resulting in non-GAAP net income per diluted share of $1.48 to $1.58 (based on an estimated 75 million weighted-average shares outstanding). Management expects Adjusted EBITDA of $226 million to $236 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 callHealthEquity management will host a conference call at 4:30 pm (Eastern Time) on Tuesday, September 8, 2020 to discuss the second quarter 2021 financial results. The conference call will be accessible by dialing 844-791-6252, or 661-378-9636 for international callers, and referencing conference ID 5170518. 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 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 and acquisition-related costs, gains and losses on marketable equity securities, and other certain non-operating items. * Non-GAAP net income is calculated by adding back to net income before provision for income taxes the following items: amortization of acquired intangible assets, stock-based compensation expense, merger integration and acquisition-related costs, and gains and losses on marketable equity securities. * 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 HealthEquityHealthEquity administers Health Savings Accounts (HSAs) and other consumer-directed benefits for our more than 12 million members 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: * the impact of the ongoing COVID-19 pandemic on the Company, its operations and its financial results; * our ability to realize the anticipated financial and other benefits from combining the operations of WageWorks with our business in an efficient and effective manner; * our ability to compete effectively in a rapidly evolving healthcare and benefits administration industry; * our dependence on the continued availability and benefits of tax-advantaged health savings accounts and other consumer-directed benefits; * 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; * our reliance on the availability and performance of our technology and communications systems; * recent and 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 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 Annual Report on Form 10-K for the fiscal year ended January 31, 2020, our Quarterly Report on Form 10-Q for the quarter ended April 30, 2020, 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 801-727-1209 email@example.com HealthEquity, Inc. and its subsidiaries Condensed consolidated balance sheets (in thousands, except par value) July 31, 2020 January 31, 2020 (unaudited) Assets Current assets Cash and cash equivalents$268,910 $191,726 Accounts receivable, net of allowance for doubtful accounts of $1,954 and $1,216 as of July 31, 2020 and January 31, 2020, respectively70,235 70,863 Other current assets43,982 34,711 Total current assets383,127 297,300 Property and equipment, net34,528 33,486 Operating lease right-of-use assets95,095 83,178 Intangible assets, net783,106 783,279 Goodwill1,333,808 1,332,631 Deferred tax asset59 18 Other assets34,658 35,089 Total assets$2,664,381 $2,564,981 Liabilities and stockholders’ equity Current liabilities Accounts payable$11,708 $3,980 Accrued compensation36,435 50,121 Accrued liabilities37,424 46,372 Current portion of long-term debt54,688 39,063 Operating lease liabilities13,521 12,401 Total current liabilities153,776 151,937 Long-term liabilities Long-term debt, net of issuance costs952,898 1,181,615 Operating lease liabilities, non-current79,304 68,017 Other long-term liabilities8,210 2,625 Deferred tax liability129,857 130,492 Total long-term liabilities1,170,269 1,382,749 Total liabilities1,324,045 1,534,686 Commitments and contingencies Stockholders’ equity Preferred stock, $0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of July 31, 2020 and January 31, 2020, respectively— — Common stock, $0.0001 par value, 900,000 shares authorized, 76,872 and 71,051 shares issued and outstanding as of July 31, 2020 and January 31, 2020, respectively8 7 Additional paid-in capital1,127,136 818,774 Accumulated earnings213,192 211,514 Total stockholders’ equity1,340,336 1,030,295 Total liabilities and stockholders’ equity$2,664,381 $2,564,981 HealthEquity, Inc. and its 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) 2020 2019 2020 2019 Revenue Service revenue$103,805 $26,282 $215,076 $53,090 Custodial revenue46,909 43,614 93,808 85,566 Interchange revenue25,325 16,727 57,166 35,019 Total revenue176,039 86,623 366,050 173,675 Cost of revenue Service costs65,246 19,745 136,259 40,394 Custodial costs4,998 4,209 10,043 8,332 Interchange costs4,011 4,229 9,890 8,756 Total cost of revenue74,255 28,183 156,192 57,482 Gross profit101,784 58,440 209,858 116,193 Operating expenses Sales and marketing12,167 8,391 23,622 17,361 Technology and development30,654 11,645 61,732 22,550 General and administrative20,493 9,262 39,491 17,971 Amortization of acquired intangible assets19,077 1,494 37,779 2,985 Merger integration10,365 2,784 23,135 2,784 Total operating expenses92,756 33,576 185,759 63,651 Income from operations9,028 24,864 24,099 52,542 Other income (expense) Interest expense(8,895) (67) (21,158) (130) Other income (expense), net(824) (1,061) (1,588) 22,602 Total other income (expense)(9,719) (1,128) (22,746) 22,472 Income (loss) before income taxes(691) 23,736 1,353 75,014 Income tax provision (benefit)(543) 4,370 (325) 13,826 Net income (loss) and comprehensive income (loss)$(148) $19,366 $1,678 $61,188 Net income per share: Basic$0.00 $0.30 $0.02 $0.97 Diluted$0.00 $0.30 $0.02 $0.94 Weighted-average number of shares used in computing net income per share: Basic72,343 64,220 71,669 63,289 Diluted72,343 65,583 72,971 64,785 HealthEquity, Inc. and its subsidiaries Condensed consolidated statements of cash flows (unaudited) Six months ended July 31, (in thousands) 2020 2019 Cash flows from operating activities: Net income$1,678 $61,188 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization56,106 9,722 Stock-based compensation18,834 13,618 Amortization of debt issuance costs2,533 31 Gains on marketable equity securities— (27,285) Other non-cash items1,925 — Deferred taxes(568) 7,868 Changes in operating assets and liabilities: Accounts receivable(152) (1,689) Other assets(3,187) (4,962) Operating lease right-of-use assets5,563 1,286 Accounts payable6,047 (1,083) Accrued compensation(13,854) (5,926) Accrued liabilities and other current liabilities(6,017) 4,942 Operating lease liabilities, non-current(5,723) (1,210) Other long-term liabilities5,477 331 Net cash provided by operating activities68,662 56,831 Cash flows from investing activities: Purchases of property and equipment(8,987) (3,492) Purchases of software and capitalized software development costs(21,787) (9,518) Acquisition of intangible member assets(24,922) (1,736) Purchases of marketable securities— (53,845) Net cash used in investing activities(55,696) (68,591) Cash flows from financing activities: Proceeds from follow-on equity offering, net of payments for offering costs287,318 458,881 Principal payments on long-term debt(215,625) — Settlement of client-held funds obligation, net(10,292) — Proceeds from exercise of common stock options2,817 6,564 Net cash provided by financing activities64,218 465,445 Increase in cash and cash equivalents77,184 453,685 Beginning cash and cash equivalents191,726 361,475 Ending cash and cash equivalents$268,910 $815,160 HealthEquity, Inc. and its subsidiaries Condensed consolidated statements of cash flows (unaudited) (continued) Six months ended July 31, (in thousands) 2020 2019 Supplemental cash flow data: Interest expense paid in cash$17,659 $101 Income taxes paid in cash, net of refunds received798 9,119 Supplemental disclosures of non-cash investing and financing activities: Purchases of property and equipment included in accounts payable or accrued liabilities$1,104 $3 Purchases of software and capitalized software development costs included in accounts payable, accrued liabilities, or accrued compensation1,262 487 Purchases of intangible member assets58 6,500 Additions to goodwill due to measurement period adjustments1,177 — Exercise of common stock options receivable66 87 Follow-on equity offering costs accrued during the period540 386 Debt issuance costs accrued during the period— 345 Stock-based compensation expense (unaudited) Total stock-based compensation expense included in the condensed consolidated statements of operations and comprehensive income is as follows: Three months ended July 31, Six months ended July 31, (in thousands) 2020 2019 2020 2019 Cost of revenue$2,065 $1,010 $3,528 $1,869 Sales and marketing1,818 1,158 2,776 2,166 Technology and development2,493 1,930 5,410 3,429 General and administrative5,062 3,492 7,120 6,154 Total stock-based compensation expense$11,438 $7,590 $18,834 $13,618 Total Accounts (unaudited) (in thousands, except percentages)July 31, 2020 July 31, 2019 % Change January 31, 2020 HSAs5,384 4,163 29 % 5,344 New HSAs from Sales - Quarter-to-date108 126 (14)% 379 New HSAs from Sales - Year-to-date213 215 (1)% 724 New HSAs from Acquisitions - Year-to-date— — n/a 757 HSAs with investments284 187 52 % 220 CDBs7,090 680 943 % 7,437 Total Accounts12,474 4,843 158 % 12,781 Average Total Accounts - Quarter-to-date12,416 4,797 159 % 12,603 Average Total Accounts - Year-to-date12,602 4,739 166 % 8,013 HSA Assets (unaudited) (in millions, except percentages) July 31, 2020 July 31, 2019 % Change January 31, 2020 HSA cash with yield (1)$8,626 $6,460 34% $8,301 HSA cash without yield (2) 344 — n/a 383 Total HSA cash8,970 6,460 39% 8,684 HSA investments with yield (1)3,046 2,056 48% 2,495 HSA investments without yield (2)195 — n/a 362 Total HSA investments3,241 2,056 58% 2,857 Total HSA Assets12,211 8,516 43% 11,541 Average daily HSA cash with yield - Year-to-date8,332 6,404 30% 6,937 Average daily HSA cash with yield - Quarter-to-date$8,380 $6,402 31% $7,791 (1) HSA Assets that generate custodial revenue. (2) HSA Assets that do not generate custodial revenue. Client-held funds (unaudited) (in millions, except percentages) July 31, 2020 July 31, 2019 % Change January 31, 2020 Client-held funds (1)$840 $— n/a $779 Average daily Client-held funds - Year-to-date (1)861 — n/a 382 Average daily Client-held funds - Quarter-to-date (1)891 — n/a 727 (1) Client-held funds that generate custodial revenue. The Company did not have material Client-held funds prior to the WageWorks acquisition. Net income reconciliation to Adjusted EBITDA (unaudited) Three months ended July 31, Six months ended July 31, (in thousands) 2020 2019 2020 2019 Net income (loss)$(148) $19,366 $1,678 $61,188 Interest income(76) (1,884) (676) (3,227) Interest expense8,895 67 21,158 130 Income tax provision (benefit)(543) 4,370 (325) 13,826 Depreciation and amortization9,522 3,455 18,327 6,737 Amortization of acquired intangible assets19,077 1,494 37,779 2,985 Stock-based compensation expense11,438 7,590 18,834 13,618 Merger integration expenses10,365 2,784 23,135 2,784 Acquisition costs (gains)(28) 6,596 66 7,780 Gain on marketable equity securities— (3,774) — (27,285) Other (1)1,500 579 3,034 1,030 Adjusted EBITDA$60,002 $40,643 $123,010 $79,566 (1) For the three months ended July 31, 2020 and 2019, Other consisted of amortization of incremental costs to obtain a contract of $569 and $456, non-income-based taxes of $390 and $108, and other costs of $541 and $15, respectively. For the six months ended July 31, 2020 and 2019, Other consisted of amortization of incremental costs to obtain a contract of $834 and $900, non-income-based taxes of $832 and $121, and other costs of $1,368 and $9, respectively. Reconciliation of net loss outlook to Adjusted EBITDA outlook (unaudited) Outlook for the (in millions)year ending January 31, 2021 Net loss$(13) - (5) Interest income(2) Interest expense37 Income tax benefit(5) - (3) Depreciation and amortization38 Amortization of acquired intangible assets76 Stock-based compensation expense42 Merger integration expenses48 Other5 Adjusted EBITDA$226 - 236 Reconciliation of net income (loss) to non-GAAP net income (unaudited) Three months ended July 31, Six months ended July 31, Outlook for the (in millions, except per share data) 2020 2019 2020 2019 year ending January 31, 2021 Net income (loss)$0 $19 $2 $61 $(13) - (5) Income tax provision (benefit)(1) 5 (1) 14 (5) - (3) Income (loss) before income tax provision (benefit) - GAAP(1) 24 1 75 (18) - (8) Non-GAAP adjustments: Amortization of acquired intangible assets19 1 38 3 76 Stock-based compensation expense12 8 19 14 42 Merger integration expenses10 3 23 2 48 Acquisition costs— 7 — 8 — Gain on marketable equity securities— (4) — (27) — Total adjustments to GAAP income before income tax provision41 15 80 — 166 Income before income tax provision - Non-GAAP40 39 81 75 148 - 158 Income tax provision - Non-GAAP (1)10 10 20 19 37 - 39 Non-GAAP net income30 29 61 56 111 - 119 Diluted weighted-average shares72 66 73 65 75 Non-GAAP net income per diluted share (2)$0.42 $0.44 $0.83 $0.87 $1.48 - 1.58 (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 occur 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' deposits with our federally insured custodial depository partners and custodial cash deposits invested in an annuity contract with our insurance company partner. 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 and acquisition-related costs, gains and losses on marketable equity securities, and other certain non-operating items. Non-GAAP net income Calculated by adding back to net income before provision for income taxes the following items: amortization of acquired intangible assets, stock-based compensation expense, merger integration and acquisition-related costs, and gains and losses on marketable equity securities. Non-GAAP net income per diluted share Calculated by dividing non-GAAP net income by diluted weighted-average shares outstanding.