HealthEquity, Inc. (NASDAQ:HQY) Q3 2024 Earnings Call Transcript
HealthEquity, Inc. (NASDAQ:HQY) Q3 2024 Earnings Call Transcript December 5, 2023
HealthEquity, Inc. beats earnings expectations. Reported EPS is $0.6, expectations were $0.49.
Operator: Hello and welcome to the HealthEquity's Third Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the call over to Richard Putnam.
Richard Putnam: Thanks MJ. Hello, everyone and welcome to HealthEquity's third quarter of fiscal year 2024 earnings conference call. My name is Richard Putnam. I do Investor Relations for HealthEquity. Joining me today is Jon Kessler, President and CEO; Dr. Steve Neeleman, Vice Chair and Founder of the company; and James Lucania, Executive Vice President and CFO. Before I turn the call over to Jon, I have two important reminders. First, a press release announcing the financial results for our third quarter of fiscal 2024 was issued after the market closed this afternoon. These financial results include the contributions from our wholly owned subsidiaries and accounts that they administer. The press release also includes definitions of certain non-GAAP financial measures that we will reference today.
A copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures and a recording of this webcast can be found on our Investor Relations website, which is ir.healthequity.com. Second, our comments and responses to your questions today reflect management's view as of today, December 5, 2023, and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates or other information that might be considered forward-looking. There are many important factors relating to our business, which could affect the forward-looking statements made today. These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from statements made here today.
We caution against placing undue reliance on these forward-looking statements. We also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock as detailed in our latest annual report on Form 10-K and subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information or future events. Now, over to Jon.
Jon Kessler: Thank you, Richard. Your emphasis on the word caution, maybe you feel like you know more than you let on, but I know you know a lot. So hello, everyone, and thank you for joining us and happy holidays. I will discuss performance against Q3 key metrics and management's view of current conditions, Richard doesn't know anything more than he's letting on, by the way. Jim will detail Q3 financial results, and then he will provide our raised guidance for fiscal 2024 and an initial outlook for fiscal 2025. And Steve, of course, is here for Q&A. In Q3, the team delivered double-digit year-over-year growth in revenue, which was plus 15%. Adjusted EBITDA grew double that at 30%. HSA assets grew 12% year-over-year and HSA members again also at fiscal quarter end grew 8%.
Total accounts grew 5%. HealthEquity ended Q3 with 8.3 million HSA members, $22.6 billion in HSA assets and 15.3 million total accounts. Turning to sales. The team added 163,000 new HSA members in the third quarter, which narrowed the year-on-year gap relative to last year to 4% as we begin to lap the [indiscernible] job growth and quit rates from Q1 and Q2. New logo growth driven by a strong performance of our team as well as our expanded network partner footprint helped HSA growth in Q3, just as it has throughout fiscal 2024 to date. HSA assets ended Q3 at 2 -- sorry -- they ended Q3 $2.4 billion higher than a year ago, reflecting not only account, but also balanced growth. Sequentially, invested asset invested HSA assets declined during the fiscal quarter by $0.6 billion due to negative market action and total assets, therefore, declined by the same amount.
Members continue to invest their HSA balances, however, partially offsetting market declines. Year-over-year, 12% more of our HSA members became investors, helping to drive up invested assets by 21%. In fact, invested assets now account for nearly 40% of HSA assets. As you know, we believe that our members, our mission and our long-term financial performance all benefit from the continued growth of investing in HSAs. We also continue to see more members choose enhanced rates for their HSA cash, leading to a higher or longer custodial yield and we believe, less cyclicality. While custodial fee growth drove Q3 revenue and margin performance, the team also delivered modest progress on the service line. Service costs actually declined year-over-year and sequentially despite higher volumes, of course, to help drive modest margin expansion.
Interchange revenue grew strongly year-over-year and on a sequential basis and is now following its pre-COVID seasonal pattern as we expected, with strength in Q1, followed by a softness in Q2 and especially in Q3. We expect sequential strengthening again in Q4. Our new CFO will detail our raised outlook for fiscal 2024 and preview fiscal 2025 in addition to providing more detail on Q3 results. Double-digit revenue growth and margin expansion is a pretty good first half. However, Jim would be quick to point out that HealthEquity's current trajectory is years in the making. The team raised the trajectory of HSA growth by adding CV capabilities at scale through WageWorks, it grew the value of each HSA by pioneering affordable and accessible HSA investing and creating the enhanced rates program for HSA cash.
It increased market responsiveness and resiliency by integrating with network, client and ecosystem partners at a return, and it enabled accretive allocation of your capital by uncovering HSA portfolio acquisitions, including BenefitWallet, which upon completion will be our largest such transaction ever. Today, the team is innovating the value drivers of tomorrow, applying cloud, API, data science and SAI technology to HealthEquity's mission to save and improve lives by empowering healthcare consumers. With that, I will turn it over to Jim. Jim?
James Lucania: Thank you, Jon. First, let me say, it's been a pleasure to join the HealthEquity team and have the opportunity to meet many of our investors over the past three months. The results we're reporting today are directly linked to the commitment our team makes every day to deliver Purple service to our clients and members. I'll highlight our third quarter GAAP and non-GAAP financial results. As always, we provide a reconciliation of GAAP measures to non-GAAP measures in today's press release. Third quarter revenue increased 15% year-over-year. Service revenue was $107.5 million, down 1% year-over-year. Custodial revenue grew 43% to $106.6 million in the third quarter. The annualized interest rate on HSA cash was 258 basis points for the quarter.
Interchange revenue grew 7% to $35.1 million. Gross profit as a percentage of revenue was 64% in the third quarter this year, up from 59% in the third quarter last year. Net income for the third quarter was $14.7 million or $0.17 per share on a GAAP EPS basis. Our non-GAAP net income was $52.2 million or $0.60 per share for the third quarter, up versus $0.38 per share last year. While higher interest rates, increased custodial yields and generated additional interest income, they also increased the rate of interest we pay on the remaining $287 million term loan A to approximately 6.7%. Adjusted EBITDA for the quarter was $95.6 million, and adjusted EBITDA as a percentage of revenue was 38%, more than 440 basis point improvement over the same quarter last year.
For the first nine months of fiscal 2024, revenue was $737.2 million, up 17% compared to the first nine months of last year. GAAP net income was $29.3 million or $0.34 per diluted share. Non-GAAP net income was $140.5 million or $1.62 per diluted share, up 69% compared to the same period last year. And adjusted EBITDA was $270.3 million, up 36% from the prior year, resulting in adjusted EBITDA as a percentage of revenue of 37% for the first nine months of this fiscal year. Turning to the balance sheet. As of October 31, 2023, cash on hand was $334 million, boosted by $57 million of cash flow generated from operations in Q3 and $166 million year-to-date. The company had $874 million of debt outstanding net of issuance costs. We continue to have a $1 billion undrawn line of credit available, and we anticipate using both cash and drawing on the line of credit in fiscal 2025 in connection with the closing of the BenefitWallet HSA acquisition.
These strong results, combined with expectations for our Q4 busy season, allow us to raise fiscal 2024 guidance as follows: revenue in a range between $985 million and $995 million; GAAP net income in the range of $34 million to $39 million or $0.39 to $0.45 per share. We expect non-GAAP net income to be between $181 million and $188 million, resulting in non-GAAP diluted net income between $2.08 and $2.16 per share based upon an estimated 87 million shares outstanding for the year. We expect adjusted EBITDA to be between $350 million and $360 million. Our fiscal 2024 revenue increase is primarily based on revised expectations for the average yield on HSA cash to approximately 245 basis points for fiscal 2024. As a reminder, we based custodial yield assumptions embedded in guidance on an analysis of forward-looking market indicators such as the secured overnight financing rate, mid duration treasury forward curves and the Fed funds futures.
These are, of course, subject to change. Our guidance also reflects the expectation of higher average interest rates on HealthEquity's variable rate debt versus last year, primarily offset by the reduced amount of variable rate debt outstanding. We assume a projected statutory non-GAAP income tax rate of approximately 25% and a diluted share count of $87 million, which now includes common share equivalents as we expect positive GAAP net income this year. As we have discussed, moving to positive GAAP net income impacts our GAAP tax rate strangely this year. Discrete tax items may also impact the calculated tax rate on a low level of pretax income. Based on our current full year guidance, we expect the GAAP tax rate for fiscal 2024 slightly below 40%.
As we have done in recent reporting periods, our full fiscal 2024 guidance includes a reconciliation of GAAP to the non-GAAP metrics provided in the earnings release and a definition of all such items is included at the end of the earnings release. In addition, while the amortization of acquired intangible assets is being excluded from non-GAAP net income, the revenue generated from those acquired intangible assets is included. We're also providing the following initial guidance for fiscal year 2025. We expect revenue to be between $1.14 billion and $1.16 billion. We expect margins will expand with adjusted EBITDA growing to approximately 38% to 39% of revenue in fiscal 2025. This initial guidance is based on an estimated average HSA cash yield of about 3%.
Based on our outlook of interest rate conditions, current forward yields for next year and the anticipated migration of the BenefitWallet HSAs in fiscal 2025. We expect BenefitWallet ramp-up costs will, in effect, extend our busy season further into the new fiscal year than usual with net positive impacts expected to begin by Q2. A reconciliation of our adjusted EBITDA outlook for the fiscal year ending January 31, 2025, to net income is most -- its most directly comparable GAAP measure is not included because our net income outlook for this future period is not available without unreasonable efforts as we're unable to predict the ultimate outcome of certain significant items excluded from this non-GAAP measure, such as depreciation and amortization, stock-based compensation expense and income tax provision or benefit.
Before we launch into Q&A, let me give another plug for our Investor Day scheduled for February 22 at our offices in Draper, Utah. We expect to share information about HealthEquity's multiyear strategic initiatives to deliver remarkable experience, deepen partner relationships and drive health and financial outcomes and the impacts we anticipate these initiatives may have on our business model and financial performance over the next several years. You will see product innovations being shared with our clients and partners as well as a deep dive into our plans to accelerate the transition to enhance rates. We're nearing capacity, so if you want to be there and you do want to be there. You will need to register quickly. Please see our IR website or contact Richard.
With that, we know you have a number of questions. So let's go right to our operator to kick off Q&A.
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