HealthEquity, Inc. is the nation's largest health savings account (HSA) custodian, providing innovative technology-enabled services that empower consumers to make informed healthcare savings and spending decisions. With a focus on delivering remarkable experiences, deepening partnerships, and driving member outcomes, HealthEquity has established itself as a leading player in the rapidly evolving consumer-directed healthcare landscape.
Company History and Growth
Founded in 2002, HealthEquity has witnessed a remarkable journey of growth and transformation. The company was incorporated in the state of Delaware on September 18, 2002, with the primary goal of providing technology-enabled services to empower consumers in making healthcare saving and spending decisions. HealthEquity's core offering has been the health savings account (HSA), a financial account that allows consumers to spend and save long-term for healthcare expenses on a tax-advantaged basis.
In its early years, HealthEquity focused on building its HSA custodian and administrator capabilities, developing proprietary technology platforms, and establishing relationships with employers, health plans, and other partners to grow its member base. By 2010, the company had already captured 4% of the growing HSA market, measured by HSA assets.
The company's growth trajectory continued over the next decade through both organic expansion and strategic acquisitions. In 2014, HealthEquity acquired Subimo, LLC, a provider of online healthcare cost and quality comparison tools, which enhanced its ability to provide personalized healthcare spending guidance to members. A significant milestone was reached in 2019 with the acquisition of WageWorks, Inc., a leading provider of consumer-directed benefits, which substantially expanded HealthEquity's suite of tax-advantaged healthcare account offerings beyond HSAs.
Throughout its history, HealthEquity has demonstrated resilience in the face of industry and regulatory challenges. In 2018, the company successfully navigated a data privacy incident that resulted in regulatory scrutiny and litigation, addressing the issue while maintaining the trust of its members, clients, and partners. HealthEquity has also adapted to significant changes in healthcare policy, such as the Affordable Care Act, which have impacted the market for HSA-qualified health plans.
Market Position
As of July 31, 2024, HealthEquity has solidified its position as the largest HSA custodian in the United States, administering over 9.38 million HSAs with $29.47 billion in assets. The company has also become a leader in the broader consumer-directed benefits market, offering a comprehensive suite of tax-advantaged healthcare savings and spending accounts to its expanding base of members, employers, and partners.
Product Segments
HealthEquity operates in two key product segments:
Health Savings Accounts (HSAs): As the leader in administering HSAs, HealthEquity empowers consumers to save and spend on healthcare expenses through these tax-advantaged financial accounts. The company's HSA Assets, totaling $29.47 billion as of July 31, 2024, are held by HealthEquity's Depository Partners (federally insured banks and credit unions) and insurance company partners, generating custodial revenue based on the interest rates offered.
Consumer-Directed Benefits (CDBs): In addition to HSAs, HealthEquity administers a range of complementary consumer-directed benefits for its clients, including flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), COBRA, and commuter benefits. As of July 31, 2024, the company administered 6.90 million CDBs, bringing the total number of accounts to 16.28 million when combined with HSAs.
Revenue Sources
HealthEquity generates revenue through three main channels:
1. Service revenue: Fees charged to network partners, clients, and members for administration of HSAs and CDBs. 2. Custodial revenue: Interest earned on HSA cash and client-held funds. 3. Interchange revenue: Fees earned when members use HealthEquity's payment cards or virtual platforms for purchases.
Financials
HealthEquity's financial performance has been consistently strong, with the company reporting revenue of $999.59 million and net income of $55.71 million in the fiscal year ended January 31, 2024. The company's assets under management, a key driver of its custodial revenue, have grown significantly, reaching $25.21 billion as of January 31, 2024, up from $23.20 billion a year earlier.
For the most recent quarter (Q2 FY 2025) ended July 31, 2024, HealthEquity reported revenue of $299.93 million, representing a 23% year-over-year increase. This growth was driven by a 50% increase in custodial revenue, a 14% increase in interchange revenue, and a 4% increase in service revenue. The substantial rise in custodial revenue was primarily attributed to an increase in the average annualized yield on HSA cash from 2.37% to 3.10% and a 17% increase in the average daily balance of HSA cash.
Net income for Q2 FY 2025 was $35.82 million, with operating cash flow of $108.13 million and free cash flow of -$100.95 million. The negative free cash flow was likely due to significant investments or one-time expenses during the quarter.
Liquidity
HealthEquity's robust financial position is further evidenced by its healthy liquidity and solvency metrics. As of July 31, 2024, the company had $326.89 million in cash and cash equivalents, with a current ratio of 4.10 and a debt-to-equity ratio of 0.52, indicating a strong ability to meet its short-term obligations and a manageable debt burden.
On August 23, 2024, HealthEquity entered into a new $1 billion revolving credit facility, replacing its prior credit agreement. As of that date, $511.90 million was outstanding under the new revolving credit facility, providing the company with additional financial flexibility for future growth initiatives.
Growth Strategy
The company's growth strategy is centered around three key pillars: delivering remarkable experiences, deepening partnerships, and driving member outcomes. HealthEquity's ongoing digital transformation initiatives, such as the rollout of a new mobile app and the implementation of claims AI, have enabled the company to streamline its service delivery and enhance the overall member experience.
HealthEquity's focus on deepening partnerships has also been a crucial driver of its success. The company's relationships with benefits brokers, health plans, and retirement plan recordkeepers have allowed it to expand its distribution channels and gain access to a broader customer base. The recent completion of the BenefitWallet HSA portfolio acquisition is a testament to HealthEquity's ability to identify and integrate strategic opportunities that strengthen its market position.
Moreover, HealthEquity's commitment to driving member outcomes has been a differentiating factor in the industry. The company's efforts to personalize member engagement, promote healthy financial behaviors, and expand its product offerings, such as the launch of Health Payment Accounts (HPAs), are designed to empower consumers and foster long-term loyalty.
Outlook and Challenges
Despite the challenges posed by macroeconomic headwinds and a competitive landscape, HealthEquity has demonstrated resilience and adaptability. The company's robust sales pipeline, evidenced by its strong HSA sales growth and CDB cross-selling opportunities, suggests continued momentum in the upcoming fiscal year.
For fiscal year 2025, HealthEquity has provided guidance reflecting its optimistic outlook:
- Revenue is expected to range between $1.165 billion and $1.185 billion. - GAAP net income is projected to be between $94 million and $109 million, or $1.05 to $1.22 per share. - Non-GAAP net income is anticipated to be between $265 million and $280 million, or $2.98 to $3.14 per share. - Adjusted EBITDA is forecasted to be in the range of $458 million to $478 million.
This guidance includes the expected impacts from the completed acquisition of the BenefitWallet HSA portfolio, which is anticipated to contribute to higher revenue and earnings, as well as increased net interest expense. Additionally, HealthEquity expects the average yield on HSA cash to be approximately 3.05% for fiscal 2025.
The company has also announced a $300 million share repurchase authorization and plans to commence share repurchases in the remaining two quarters of fiscal 2025, demonstrating confidence in its financial position and commitment to delivering shareholder value.
Conclusion
In conclusion, HealthEquity's comprehensive suite of consumer-directed healthcare services, strong financial performance, and innovative growth strategies make it a compelling investment opportunity in the rapidly evolving healthcare technology sector. As the company continues to enhance its digital capabilities, deepen its ecosystem partnerships, and drive tangible outcomes for its members, HealthEquity is well-positioned to capitalize on the growing demand for personalized, technology-enabled healthcare solutions.
The company's recent financial results, including double-digit year-over-year growth across most key metrics in Q2 2025, underscore the effectiveness of its "3Ds strategy" outlined at its Investor Day. With a solid foundation in place and a clear vision for future growth, HealthEquity remains at the forefront of the consumer-directed healthcare revolution, poised to deliver value to both its members and shareholders in the years to come.