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HealthEquity Reports Third Quarter Ended October 31, 2017 Financial Results

Highlights of the third quarter include:

  • Revenue of $56.8 million, an increase of 31% compared to Q3 FY17.
  • Net income of $10.5 million, an increase of 74% compared to Q3 FY17.
  • Net income per diluted share of $0.17 compared to $0.10 in Q3 FY17.
  • Adjusted EBITDA of $21.2 million, an increase of 46% compared to Q3 FY17.

DRAPER, Utah, Dec. 05, 2017 (GLOBE NEWSWIRE) -- HealthEquity, Inc. (HQY) ("HealthEquity" or the "Company"), the nation's largest health savings account ("HSA") non-bank custodian, today announced financial results for its third quarter ended October 31, 2017.

"HealthEquity has added more than 740,000 new HSAs and $1.3 billion in custodial assets since the end of the third quarter last year as we added more than 123,000 HSAs in this year’s third quarter, including 14,000 from First Interstate Bank,” said Jon Kessler, President and CEO of HealthEquity. “The 27% third quarter growth in HSAs helped us surpass 3 million total HSAs and drive our custodial assets up 30% to $5.6 billion. Our fully integrated investment platform continues to lead the industry with 73% custodial investment growth in the third quarter and total invested custodial assets at $1 billion at quarter end. With another strong quarterly performance and record year-to-date results, we are narrowing our guidance for fiscal 2018 financial expectations around a higher revenue forecast and confirming our adjusted EBITDA outlook."

Third quarter financial results

For the third quarter ended October 31, 2017, HealthEquity reported revenue of $56.8 million, an increase of 31% compared to $43.4 million for the third quarter ended October 31, 2016. Revenue consisted of:

  • Service revenue of $23.0 million, an increase of 22% compared to Q3 FY17.
  • Custodial revenue of $22.1 million, an increase of 48% compared to Q3 FY17. 
  • Interchange revenue of $11.7 million, an increase of 22% compared to Q3 FY17.

Net income was $10.5 million for the third quarter ended October 31, 2017, compared to $6.0 million for the third quarter ended October 31, 2016.

Net income per diluted share was $0.17 for the third quarter ended October 31, 2017, compared to $0.10 for the third quarter ended October 31, 2016.

Adjusted EBITDA was $21.2 million for the third quarter ended October 31, 2017, an increase of 46% compared to $14.5 million for the third quarter ended October 31, 2016.

HSA Member and Custodial Asset metrics

The total number of HSAs for which we serve as a non-bank custodian ("HSA Members") as of October 31, 2017 was 3.0 million, an increase of 27% from 2.4 million as of October 31, 2016.

Total Custodial Assets as of October 31, 2017 was $5.6 billion, an increase of 30% year over year, consisting of:

  • Custodial Cash Assets of $4.6 billion, an increase of 24% compared to Q3 FY17; and
  • Custodial Investment Assets of $1.0 billion, an increase of 73% compared to Q3 FY17.

Business outlook

We are increasing our business outlook for the year ended January 31, 2018. We are narrowing our revenue outlook from a range between $223.0 million and $228.0 million to a range between $225.0 million and $228.0 million, our net income from a range between $41.0 million and $45.0 million to a range between $43.0 million and $45.0 million, our Adjusted EBITDA from a range between $79.0 million and $84.0 million to a range between $80.0 million and $83.0 million. We also expect our non-GAAP net income to be in a range between $39.0 million and $41.0 million, narrowed from our prior range between $39.0 million and $43.0 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 38%, 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 $0.64 and $0.66 (based on an estimated 62.0 million diluted weighted-average shares outstanding), narrowed from our prior range between $0.64 and $0.68.

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 5:00 pm (Eastern Time) on Tuesday, December 5, 2017 to discuss the fiscal year 2018 third quarter results. The conference call will be accessible by dialing 844-791-6252, or 661-378-9636 for international callers, and referencing conference ID 2796618. 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, non-GAAP net income and non-GAAP net income per diluted share, which are non-GAAP financial measures. 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 of 38%, 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 the Company’s industry, business strategy, plans, goals and expectations concerning our market position, product expansion, future operations, revenue, margins, business outlook, profitability, future efficiencies, 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. Forward-looking statements are subject to a number of risks and uncertainties, many of which involve factors or circumstances that are beyond the control of the Company. The Company’s actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to, the continued availability of tax-advantaged, consumer-directed benefits to employers and employees, the Company’s ability to acquire and retain new network partners and to cross-sell its products to existing network partners and members, the Company’s ability to successfully identify, acquire and integrate portfolio purchases or acquisition targets, the Company’s ability to raise awareness among employers and employees about the advantages of adopting and participating in consumer-directed benefits programs, and the Company’s ability to identify and execute on network partner opportunities. For a detailed discussion of these and other risk factors, please refer to the risks detailed in the Company’s 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. The Company undertakes 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 the Company’s views as of any date subsequent to the date of this press release.

 
HealthEquity, Inc. and its subsidiaries
Consolidated balance sheets (unaudited)
 
(in thousands, except par value) October 31, 2017
    January 31, 2017
 
Assets      
Current assets      
Cash and cash equivalents $ 184,367     $ 139,954  
Marketable securities, at fair value 40,711     40,405  
Total cash, cash equivalents and marketable securities 225,078     180,359  
Accounts receivable, net of allowance for doubtful accounts as of October 31, 2017 and January 31, 2017 were $100 and $75, respectively 21,458     17,001  
Inventories 169     592  
Other current assets 6,106     2,867  
Total current assets 252,811     200,819  
Property and equipment, net 6,789     5,170  
Intangible assets, net 85,450     65,020  
Goodwill 4,651     4,651  
Deferred tax asset 4,656     1,615  
Other assets 1,760     1,861  
Total assets $ 356,117     $ 279,136  
Liabilities and stockholders’ equity      
Current liabilities      
Accounts payable $ 3,295     $ 3,221  
Accrued compensation 6,503     8,722  
Accrued liabilities 9,680     3,760  
Total current liabilities 19,478     15,703  
Long-term liabilities      
Other long-term liabilities 2,226     1,456  
Deferred tax liability     37  
Total long-term liabilities 2,226     1,493  
Total liabilities 21,704     17,196  
Commitments and contingencies      
Stockholders’ equity      
Preferred stock, $0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of October 31, 2017 and January 31, 2017, respectively      
Common stock, $0.0001 par value, 900,000 shares authorized, 60,652 and 59,538 shares issued and outstanding as of October 31, 2017 and January 31, 2017, respectively 6     6  
Additional paid-in capital 255,245     232,114  
Accumulated other comprehensive loss (188 )   (165 )
Accumulated earnings 79,350     29,985  
Total stockholders’ equity 334,413     261,940  
Total liabilities and stockholders’ equity $ 356,117     $ 279,136  
               


 
HealthEquity, Inc. and its subsidiaries
Consolidated statements of operations and comprehensive income (unaudited)
       
(in thousands, except per share data) Three months ended October 31,
    Nine months ended October 31,
 
2017
    2016
    2017
    2016
 
Revenue:              
Service revenue $ 22,962     $ 18,781     $ 68,258     $ 56,610  
Custodial revenue 22,105     14,967     62,709     43,557  
Interchange revenue 11,722     9,610     38,122     31,389  
Total revenue 56,789     43,358     169,089     131,556  
Cost of revenue:              
Service costs 17,251     12,675     47,824     34,471  
Custodial costs 2,784     2,461     8,370     7,211  
Interchange costs 3,027     2,331     9,625     7,748  
Total cost of revenue 23,062     17,467     65,819     49,430  
Gross profit 33,727     25,891     103,270     82,126  
Operating expenses:              
Sales and marketing 5,892     4,391     15,707     12,764  
Technology and development 6,866     6,209     19,905     15,827  
General and administrative 6,252     5,166     18,354     15,290  
Amortization of acquired intangible assets 1,155     1,083     3,320     3,214  
Total operating expenses 20,165     16,849     57,286     47,095  
Income from operations 13,562     9,042     45,984     35,031  
Other expense:              
Other expense, net (395 )   (256 )   (523 )   (934 )
Total other expense (395 )   (256 )   (523 )   (934 )
Income before income taxes 13,167     8,786     45,461     34,097  
Income tax provision 2,685     2,778     4,004     11,783  
Net income $ 10,482     $ 6,008     $ 41,457     $ 22,314  
Net income per share:              
Basic $ 0.17     $ 0.10     $ 0.69     $ 0.38  
Diluted $ 0.17     $ 0.10     $ 0.67     $ 0.37  
Weighted-average number of shares used in computing net income per share:              
Basic 60,562     58,938     60,160     58,338  
Diluted 61,868     60,073     61,703     59,693  
Comprehensive income:              
Net income $ 10,482     $ 6,008     $ 41,457     $ 22,314  
Other comprehensive gain (loss):              
Unrealized gain (loss) on available-for-sale marketable securities, net of tax 7     (23 )   (23 )   (36 )
Comprehensive income $ 10,489     $ 5,985     $ 41,434     $ 22,278  
                               


 
HealthEquity, Inc. and its subsidiaries
Statement of Cash flows (unaudited)
   
  Nine months ended October 31,
 
(in thousands) 2017
    2016
 
Cash flows from operating activities:      
Net income $ 41,457     $ 22,314  
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization 11,142     9,543  
Amortization of deferred financing costs and other 97     53  
Deferred taxes 5,093     (1,880 )
Stock-based compensation 10,468     6,399  
Changes in operating assets and liabilities:      
Accounts receivable (4,482 )   244  
Inventories 423     (324 )
Other assets (3,027 )   (3,955 )
Accounts payable (425 )   (973 )
Accrued compensation (2,219 )   (3,117 )
Accrued liabilities 2,586     1,666  
Other long-term liabilities 770     1,059  
Net cash provided by operating activities 61,883     31,029  
Cash flows from investing activities:      
Purchases of intangible member assets (15,529 )    
Acquisition of a business (2,882 )    
Purchases of marketable securities (343 )   (275 )
Purchase of property and equipment (3,382 )   (2,705 )
Purchase of software and capitalized software development costs (7,654 )   (6,799 )
Net cash used in investing activities (29,790 )   (9,779 )
Cash flows from financing activities:      
Proceeds from exercise of common stock options 12,320     4,546  
Tax benefit from exercise of common stock options     15,909  
Net cash provided by financing activities 12,320     20,455  
Increase in cash and cash equivalents 44,413     41,705  
Beginning cash and cash equivalents 139,954     83,641  
Ending cash and cash equivalents $ 184,367     $ 125,346  
Supplemental disclosures of non-cash investing and financing activities:      
Purchases of property and equipment included in accounts payable or accrued liabilities at period end $ 238     $ 569  
Purchases of software and capitalized software development costs included in accounts payable or accrued liabilities at period end 501     185  
Purchases of intangible member assets accrued at period end 3,429      
           


 
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 October 31,   Nine months ended October 31,
(in thousands)   2017   2016   2017   2016
Cost of revenue   $ 720   $ 462   $ 1,903   $ 1,258
Sales and marketing   561   364   1,403   930
Technology and development   831   487   2,365   1,290
General and administrative   1,553   755   4,797   2,921
Total stock-based compensation expense   $ 3,665   $ 2,068   $ 10,468   $ 6,399
                         


 
HSA Members (unaudited)
                 
    October 31, 2017   October 31, 2016   % Change   January 31, 2017
HSA Members   3,012,968   2,378,353   27%   2,746,132
Average HSA Members - Year-to-date   2,872,744   2,278,994   26%   2,339,091
Average HSA Members - Quarter-to-date   2,977,367   2,354,227   26%   2,519,382
HSA Members with investments   98,257   58,226   69%   65,906
                 


                 
Custodial assets (unaudited)
                 
(in thousands, except percentages)   October 31, 2017   October 31, 2016   % Change   January 31, 2017
Custodial cash   $ 4,592,658   $ 3,713,290   24%   $ 4,380,487
Custodial investments   987,050   570,553   73%   658,580
Total custodial assets   $ 5,579,708   $ 4,283,843   30%   $ 5,039,067
Average daily custodial cash - Year-to-date   $ 4,469,641   $ 3,596,571   24%   $ 3,661,058
Average daily custodial cash - Quarter-to-date   $ 4,550,327   $ 3,669,480   24%   $ 3,854,518
                       


 
Net income reconciliation to Adjusted EBITDA (unaudited)
         
    Three months ended October 31,
    Nine months ended October 31,
 
(in thousands)   2017
    2016
    2017
    2016
 
Net income   $ 10,482     $ 6,008     $ 41,457     $ 22,314  
Interest income   (185 )   (137 )   (521 )   (385 )
Interest expense   69     69     205     206  
Income tax provision   2,685     2,778     4,004     11,783  
Depreciation and amortization   2,851     2,335     7,822     6,329  
Amortization of acquired intangible assets   1,155     1,083     3,320     3,214  
Stock-based compensation expense   3,665     2,068     10,468     6,399  
Other (1)   511     323     839     1,113  
Adjusted EBITDA   $ 21,233     $ 14,527     $ 67,594     $ 50,973  
                                 

(1) For the three months ended October 31, 2017 and 2016, Other consisted of non-income-based taxes of $113 and $86, acquisition-related costs of $398 and $10, and other costs of $0 and $237, respectively. For the nine months ended October 31, 2017 and 2016, Other consisted of non-income based taxes of $303 and $260, acquisition-related costs of $482 and $595, and other costs of $54 and $258, respectively.

   
Reconciliation of Adjusted EBITDA outlook (unaudited)
   
  Outlook for the year ending
(in millions) January 31, 2018
Net income $43 - $45
Income tax provision 5 - 6
Depreciation and amortization ~ 11
Amortization of acquired intangible assets ~ 4
Stock-based compensation expense ~ 14
Other ~ 3
Adjusted EBITDA $80 - $83
   


       
Reconciliation of non-GAAP net income per diluted share (unaudited)
       
  Three months ended
  Nine months ended
  Outlook for the year ending
(in millions, except per share data) October 31, 2017
  October 31, 2017
  January 31, 2018
Net income $10   $41   $43 - $45
Stock compensation, net of tax (1)  2    6   ~ 9
Excess tax benefit due to adoption of ASU 2016-09  (2 )  (12 ) ~  (13)
Non-GAAP net income $10   $35   $39 - $41
           
Diluted weighted-average shares used in computing GAAP and Non-GAAP per share amounts  62    62   62
Non-GAAP net income per diluted share (2) $0.17   $0.57   $0.64 - $0.66
           

(1) The Company used an estimated statutory tax rate of 38% to calculate the net impact stock-based compensation expense.
(2) Non-GAAP net income per diluted share does not calculate due to rounding.

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