9:57 am HealthEquity [HQY] trades up on OctQ earnings; provides good color on Trump impact to its business
HealthEquity (HQY) is trading a bit lower higher after the company reported Q3 (Oct) earnings results last night. In case you're not familiar, HealthEquity, which made its IPO debut in July 2014, is a major player in the integrated health care account administration area. It acts as an intermediary administrator between the bank, the health plan, the employer, and the employee.
The core of its ecosystem is the Health Savings Account, or HSA, a financial account through which consumers spend and save for healthcare on a tax-advantaged basis. HQY's platform allows consumers to access their HSAs, compare treatment options/pricing, pay healthcare bills, earn wellness incentives etc. HQY serves as a non-bank custodian for 2.4 million HSAs. HQY is a play on the greater use of HSAs and it's a play on the secular shift to greater consumer responsibility for healthcare decisions.
HQY makes money by charging monthly administration fees, primarily through multi-year contracts. In addition, HQY earns custodial fees, which are primarily interest earned on the cash assets under management. HQY also generates fees from mutual funds in which its members invest and it gets fees for investment advisory services. HQY also earns card fees, which are primarily interchange fees charged to merchants on payments made with HQY's cards via payment networks.
Recent Rally: The stock rallied on the surprise election results in early November. The Republicans have been pushing for greater use of HSAs as a way to fight higher healthcare costs. So the election is being seen as a positive for HQY.
Quickly turning to the OctQ results, GAAP EPS rose 43% YoY to $0.10 from $0.07 in the prior year period. Revenue rose 42% YoY to $43.4 mln. EPS came in above market expectations while revenue was in-line. The company also reaffirmed prior GAAP EPS guidance for FY17 at $0.38-0.42 and it reaffirmed revenue guidance of $174-178 mln.
Breaking down the revenue number a bit more: Service revenue was $18.8 mln, an increase of 24% YoY, custodial revenue was $15.0 mln, an increase of 64% and interchange revenue came in at $9.6 mln, an increase of 55% YoY. So all three revenue streams saw nice growth. In terms of operating metrics, HSA Members grew to 2.4 mln, an increase of 48% YoY; Total AUM (assets under management) grew to $4.3 bln, an increase of 59% YoY.
On the call last night, HQY gave some good color on how the recent Trump win would impact its business. HQT says that if the Clinton healthcare agenda would have been about shoring up what hasn't performed to expectations in ObamaCare, the Trump and Republican Congress' agenda is about encouraging what is working in workplace health benefits and in the states. And HSAs are working.
As such, HQY expects to see HSAs promoted in the executive branch and/or through legislation throughout the Trump administration. Plausible areas for action include the following:
- First, making more insurance plans HSA eligible, so that more Americans can open HSAs. For example, according to a survey, 9% of working Americans and their families or roughly 14 million people are in health reimbursement arrangements or HRA plans that are similar to, but less effective than, HSAs. This is because they are not portable, they are not investible, and they are not truly owned by consumers. Millions more, in fact over 70% of those with private coverage are in higher deductible PPO or HMO plans, that don't today meet the definition of HAS-qualified. Deductibles and other consumer out-of-pocket cost in these plans have all increased dramatically in recent years. So, enabling more consumers to open HSAs would both provide immediate relief to higher costs and align incentives among consumers and the broader healthcare system to fight higher costs longer term.
- Second, increasing the amount that can be contributed annually to an HSA, as Speaker Ryan has proposed, would allow HSAs to function more effectively as long-term self-funding for healthcare. Consumers could contribute more in years with lower health spend and enough every year to build up funds for retirement healthcare.
- Third, enabling consumers to spend HSA dollars on items such as dependent care or individual insurance premiums between jobs. HSA dollars can already be used for COBRA premiums, but COBRA is often far more expensive than individual insurance plans.
- Fourth, enabling HSA plans as an option under traditional medical care and/or Medicare Advantage, something which HQY believes, holds great promise to reduce entitlement costs while expanding choice for the millions of Americans on Medicare and the roughly 10,000 baby boomers who join Medicare every day.
- Fifth, removing obstacles that prevent consumers from opening or using HSAs as intended or make the transition to HSAs more challenging. For example, many Americans over 65 now remain in the workforce, yet those with HSA qualified insurance at work are unwillingly denied the same employer HSA dollars their younger co-workers get, and cannot contribute to HSAs themselves because they are also automatically enrolled in Medicare Part A. As another example, workers transitioning to HSA plans cannot receive employer dollars or make HSA contributions themselves during FSA or HRA rollover period.
Beyond these five points, broader health care policy changes espoused by the President-elect and Republican majority in Congress could also grow the HSA market. For example, ACA mandates on what insurance plans can be sold to small groups and in the individual marketplace, and the workings of premium subsidies have contributed to rising premiums and led some to buy a level insurance they didn't want.
Republican proposals would rollback federal mandates returning to the states the power to define what is or is not acceptable minimum coverage and re-purpose insurance subsidies tied to federal mandates as consumer tax credits in some proposals specific to opening HSAs. HQY believes that when consumers have more choice, they tend to choose HSA qualified plan.
In sum, there was some confusion with this report as HQY has switched to GAAP EPS from non-GAAP EPS so initially the report looked like a miss as most people compared the GAAP EPS number to the non-GAAP EPS consensus. However, when you compare GAAP to GAAP, it was actually a bit better than expected.
With that said, overall, this was another good quarter for HQY. This is not surprising considering that HQY's revenue is highly recurring in nature. In fact, HQY has approximately 90% visibility into the revenue of the subsequent fiscal year. HQY says that HSAs continue to grow in popularity and an outsized portion of that growth is coming to HealthEquity.
9:27 am IPO Radar: Polar Power [POLA] Prices Upsized IPO at Low End of Range
There is one IPO on the radar today -- Polar Power -- and it will begin trading on the Nasdaq under ticker symbol "POLA." The company priced its 2.4 million share IPO, which was upsized from 2 million shares, at $7.00 per share, the low end of the expected $7.00-8.00 range.
Polar Power is a manufacturer of DC power systems primarily used in telecom applications (90+% of revenue), but also used in other markets, including military, electric vehicle charging, cogeneration, distributed power etc. Within the telecom market, its DC power systems provide reliable and low-cost DC power to service applications that do not have access to the utility grid or have critical power needs and cannot be without power in the event of utility grid failure.
Within the telecom market, POLA offers three main configurations:
- DC base power systems: These systems integrate POLA's DC generator with automated controls that are programmed to efficiently charge various battery chemistries to provide back-up energy during a power failure. These systems are also used to provide prime power in off-grid and bad-grid locations to power DC loads in telecom towers.
- DC hybrid power systems: These systems combine POLA's DC base power systems with lithium-ion batteries to store energy from DC generator or grid systems to provide back-up power or prime power. Its DC hybrid power system replaces lead acid systems with a longer-life and higher efficiency lithium-ion batteries equipped with POLA's proprietary battery management system, which protects batteries from being over charged.
- DC solar hybrid power systems: In remote off-grid and bad-grid applications fuel cost of a generator is a significant part of the overall operation cost. POLA's DC solar hybrid power systems combine its DC hybrid power system with solar panels to produce and store lower cost energy generated by the solar panels into lithium-ion batteries, thereby reducing a DC generator's run time and operating costs.
The company's DC power systems are available in diesel, natural gas, liquid propane gas, gasoline and biofuel formats, with diesel, natural gas and liquid propane gas being the predominant formats, and are capable of being remotely monitored by POLA's global network management tool. This allows customers to collect performance data and update its products remotely.
POLA's largest customer is Verizon Wireless (VZ), which accounted for 88% of revenue for the nine months ended Sep 30. As such, there is definitely a risk here with very high customer concentration.
Turning to the financials, the company is profitable but it's quite small. Revenue for the nine months ending Sep 30 rose 255% YoY to $15.5 mln. The significant increase in revenue is a direct result of an increase in the number of DC power systems sold to Verizon Wireless. During this period, POLA focused a significant amount of effort on increasing production capacity. POLA concedes that its operating results fluctuate significantly from quarter-to-quarter, so we would not extrapolate that growth too far. In 2015, revenue grew 32% to $6.8 million.
This is a tiny offering at just 2.4 million shares and the company is quite small in general. Also, the vast majority of its revenue comes from one customer (Verizon Wireless), which represents a risk factor when considering an investment. With those risks in consideration, POLA is seen as a pure play on the increasing use of DC backup power systems.
8:38 am Dave & Buster's [PLAY] trading at new all-time highs following beat and raise/record results
Dave & Buster's (PLAY +12%) is trading at new all-time highs this morning after the company reported better than expected third quarter results and raised guidance for fiscal 2017.
D&B has exceeded quarterly estimates on the top and bottom line all nine quarters since the company went public just over two years ago.
PLAY is up ~238% since the company initially offered 5.9 million shares at $16/share in October of 2014.
Looking at third quarter results, EPS came in at $0.25 versus $0.11 last year; adjusted EBITDA (profit) rose 42% to $48.9 million. Sales rose 19% to $229 million while comparable store sales rose 5.9%. All of those metrics were above analyst estimates.
The +5.9% comp was especially impressive considered it was on top of 8.8% growth last year. Management said strength was broad-based as the company experienced strength across the country and throughout the quarter. Comparable store sales have now exceeded the competitive casual dining benchmark for 18 straight quarters .
For fiscal 2017 (ending January), D&B raised earnings guidance: EPS guidance to $2.00-2.05 from $1.85-1.97 and adjusted EBITDA to $265-268 million from $254-260 million. THe company also raised sales guidance: to $998 million to $1.03 billion from $893-995 million and comparable store sales growth to 3.1-3.6% from 2.25-3.25%.
D&B guided for low double digit growth in revenue, net income and adjusted EBITDA next year. The company is also projecting eleven to twelve new store openings next year, representing unit growth of 12% to 13%.
D&B's long-term target for annual unit growth is 10% or more and management continues to foresee a 200+ store opportunity in North America alone. D&B currently owns and operates 91 venues in North America when guests can 'Eat, Drink, Play and Watch".
With a $2.33 billion market cap (at $54/share premarket), the stock trades at 26.5x this year's earnings and 23.5x next year's earnings.
8:23 am Mastercard [MA] Boost Dividend and Share Buyback Plan
With interest rates rising, dividend-paying stocks have lost some of the unquestioned appeal they had just a short time ago. Nevertheless, it is almost always viewed as good news when a company raises its dividend. Enter Mastercard (MA 102.00), a leading technology company in the global payments industry, which made just such an announcement after Tuesday's close.
Specifically, Mastercard said its Board of Directors increased the quarterly cash dividend to $0.22 per share from the previous dividend of $0.19 per share. That's a hefty 16% raise for shareholders of record of the company's Class A and Class B common stock as of January 9, 2017. The cash dividend will be paid on February 9, 2017.
The size of the dividend increase is noteworthy, although the corresponding dividend yield of 0.86% is apt to be seen as somewhat minimal when pitted against the dividend yield of 2.0% for the S&P 500 and the 1.11% yield on the 2-year Treasury Note.
The dividend yield on Mastercard, therefore, may not be the tying factor to the stock for investors that it is for other stocks with higher dividend yields. The latter point notwithstanding, when a company raises its dividend, it is often construed as an encouraging affirmation of the company's earnings and cash-flow generating prospects.
Separately, Mastercard also announced that its Board of Directors approved a new $4 billion share repurchase program for its Class A common stock. That new program will become effective following the completion of a previously announced $4 billion share repurchase program, which currently has about $1.3 billion remaining under the program authorization.
At yesterday's closing price, Mastercard was up 4.8% for the year versus an 8.2% gain for the S&P 500.
7:56 am Western Digital [WDC] Bumps Up Q2 Expectations
Shares of Western Digital (WDC) are trading up nearly 5.0% in pre-market action following the company's news after Tuesday's close that it is raising its fiscal second quarter expectations.
The increased guidance, the company said, is the result of strong acceptance from customers of its data storage solutions, a favorable product mix, solid execution in a "favorable market environment," and the contribution of incremental intellectual property revenue it has enjoyed from a new cross license agreement with Samsung for the companies' semiconductor patent portfolios (the Samsung news was announced separately after Tuesday's close).
Taking these factors into account, Western Digital now expects fiscal second quarter revenue to be approximately $4.75 billion compared to its prior guidance of approximately flat with first quarter revenue of $4.70 billion. Its non-GAAP gross margin is forecast to be approximately 36% versus prior guidance of approximately 35%. Western Digital also sees a lower tax rate of approximately 13% versus a previously forecasted range of 14-16%.
This change in guidance is expected to produce non-GAAP earnings per share in the range of $2.10 to $2.15, which is up from its prior outlook of $1.85 to $1.95 per share. Analysts' average expectation fell at roughly the midpoint of the prior guidance range.
Entering today's session, WDC is up 6.3% year-to-date. The company will report its fiscal second quarter results in late January 2017.