HealthEquity, Inc. (HQY): A Comprehensive Analysis of a Leading Healthcare Savings and Spending Platform

HealthEquity, Inc. (HQY) is a leading provider of technology-enabled services that empower consumers to make healthcare saving and spending decisions. The company's innovative platform manages consumers' tax-advantaged health savings accounts (HSAs) and other consumer-directed benefits (CDBs) offered by employers, including flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs). HealthEquity also administers Consolidated Omnibus Budget Reconciliation Act (COBRA), commuter, and other benefits.

As of January 31, 2024, HealthEquity administered 9.1 million HSAs with balances totaling $27.3 billion, which the company refers to as HSA Assets, as well as 6.9 million complementary CDBs. The company's Total Accounts, which include both HSAs and other CDBs, reached 16.0 million as of the same date.

Business Overview

HealthEquity's business model is based on a B2B2C distribution strategy, where the company works with a network of benefits brokers, advisors, health plans, benefits administrators, and retirement plan recordkeepers, known as Network Partners, to reach consumers through their employers, or Clients. This approach has allowed HealthEquity to increase its share of the growing HSA market from 4% in December 2010 to 20% as of December 2023, making it the largest HSA provider by both accounts and HSA Assets.

The company generates revenue primarily from three sources: service revenue, custodial revenue, and interchange revenue. Service revenue is earned from fees charged to Network Partners, Clients, and members for the administration of HSAs and other CDBs. Custodial revenue is generated from the interest earned on HSA cash held by HealthEquity's Depository Partners and insurance company partners, as well as Client-held funds. Interchange revenue is earned from fees paid by merchants on payments made by HealthEquity members using the company's physical payment cards and virtual platforms.

Financials

For the fiscal year ended January 31, 2024, HealthEquity reported annual revenue of $999,587,000, net income of $55,712,000, and operating cash flow of $242,826,000. The company's free cash flow for the same period was $196,752,000.

In the first quarter of fiscal year 2025, HealthEquity delivered strong financial results, with revenue increasing 18% year-over-year to $287,597,000. The company's net income for the quarter was $28,813,000, and it generated $65,429,000 in operating cash flow. HealthEquity's free cash flow for the first quarter of fiscal 2025 was $51,602,000.

The company's performance in the first quarter was driven by robust growth across its key metrics. HSAs grew 13% year-over-year to 9.1 million, while Total Accounts increased 7% to 16.0 million. HSA Assets, which include both HSA cash and investments, rose 22% to $27.3 billion.

HealthEquity's service revenue increased 6% year-over-year to $118,214,000 in the first quarter, primarily due to the growth in HSAs and HSA investments. Custodial revenue, which is directly affected by average daily custodial balances for HSA Assets, grew 37% to $121,644,000, driven by an increase in the average annualized yield on HSA cash from 2.32% in the first quarter of fiscal 2024 to 2.93% in the current quarter. Interchange revenue also rose 6% to $47,739,000, reflecting the growth in Total Accounts.

The company's gross profit margin expanded to 65% in the first quarter of fiscal 2025, up from 61% in the same period of the prior year. This improvement was driven by the increase in custodial revenue, which has a higher margin than service and interchange revenue.

HealthEquity's operating expenses increased 16% year-over-year in the first quarter, primarily due to higher personnel-related costs to support the growth in Total Accounts, as well as increased stock-based compensation expense. The company's sales and marketing expenses rose 18%, while technology and development expenses increased 5%, and general and administrative expenses grew 50%.

Despite the increase in operating expenses, HealthEquity's adjusted EBITDA margin expanded to 41% in the first quarter, up from 35% in the same period of the prior year. This improvement was driven by the strong revenue growth and operational efficiencies.

Outlook

Looking ahead, HealthEquity provided guidance for fiscal year 2025, expecting revenue in the range of $1.16 billion to $1.18 billion, GAAP net income between $90 million and $105 million, and adjusted EBITDA between $454 million and $474 million. The company also raised its guidance for the average yield on HSA cash to be between 3% and 3.05% for the fiscal year, up from its previous guidance.

The company's guidance reflects the continued strength in its sales trajectory, higher expected custodial revenue, and operational efficiencies resulting from its technology investments. HealthEquity's recent acquisition of the BenefitWallet HSA portfolio, which added approximately 616,000 HSAs and $2.7 billion in HSA Assets, is also expected to contribute to the company's performance in fiscal 2025.

HealthEquity's long-term strategy, which the company refers to as the "3Ds," focuses on delivering a remarkable experience for its members, deepening partnerships across the ecosystem to drive sales growth, and driving member outcomes through new data-driven services. The company's investments in technology, including its ongoing modernization project and the rollout of its digital wallet capabilities, are expected to support these strategic initiatives and drive further operational efficiencies.

Despite the competitive nature of the healthcare savings and spending market, HealthEquity's strong market position, diversified distribution channels, and innovative product offerings position the company well for continued growth. The company's focus on enhancing the consumer experience, expanding its partner network, and leveraging data to drive better outcomes for its members are key differentiators that should help HealthEquity maintain its leadership in the industry.

Conclusion

Overall, HealthEquity's solid financial performance, robust growth in key metrics, and forward-looking strategy suggest the company is well-positioned to capitalize on the growing demand for healthcare savings and spending solutions. As the company continues to execute on its strategic initiatives and integrate recent acquisitions, investors may find HealthEquity's stock an attractive long-term investment opportunity in the healthcare technology sector.