Business Overview and History
HealthEquity, Inc. (HQY) is a prominent player in the healthcare financial services industry, offering an integrated suite of products and services that empower consumers to make informed decisions about their healthcare savings and spending. With a strong focus on technology-enabled solutions, HealthEquity has established itself as a trusted partner for individuals, employers, and healthcare providers alike.
HealthEquity was incorporated in the state of Delaware on September 18, 2002, with the mission of revolutionizing the way people manage their healthcare finances. The company's core offerings center around health savings accounts (HSAs), which provide tax-advantaged savings and investment opportunities for individuals to cover their healthcare expenses. Over the years, HealthEquity has expanded its portfolio to include a range of complementary consumer-directed benefits (CDBs), such as flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs).
HealthEquity's growth trajectory has been remarkable, with the company increasing its share of the growing HSA market from 4% in December 2010 to 21% as of June 2024, measured by HSA Assets. According to Devenir, as of June 2024, HealthEquity was the largest HSA provider by both accounts and HSA Assets. The company also believes it is the largest provider of other CDBs.
HealthEquity's success can be attributed to its service-driven culture, product breadth, ecosystem connectivity, and proprietary technology. The company's ability to assist consumers is enhanced by its capacity to securely share data in both directions with others in the health, benefits, and retirement ecosystems.
Despite its achievements, HealthEquity has faced various challenges. In April 2021, WageWorks, Inc., a wholly owned subsidiary of HealthEquity, exercised its right to terminate a lease for office space in Mesa, Arizona that had not yet commenced, which was disputed by the landlord. This led to a lawsuit that was settled in November 2024, with HealthEquity and WageWorks jointly agreeing to pay $30 million to the landlord.
Furthermore, in early 2024, HealthEquity experienced a significant increase in outside fraudulent activity targeting member accounts. This resulted in financial losses for the company due to service costs from remediation and reimbursement to impacted members. The fraudulent activity also caused reputational damage that could potentially reduce the use and acceptance of the company's products and services.
Financial Performance and Metrics
HealthEquity's financial performance has been robust, with the company consistently delivering strong top-line growth and profitability. For the fiscal year ended January 31, 2024, the company reported revenue of $999.59 million, up from $861.75 million in the previous fiscal year, representing a year-over-year increase of 16.0%. During the same period, HealthEquity's net income grew from a loss of $26.14 million to a profit of $55.71 million, showcasing the company's ability to navigate market challenges and drive sustainable growth.
The company's financial metrics further highlight its operational efficiency and disciplined capital allocation. As of January 31, 2024, HealthEquity reported a current ratio of 4.76, indicating a strong liquidity position, and a debt-to-equity ratio of 0.46, demonstrating a prudent approach to leverage. The company's operating cash flow for the fiscal year 2024 stood at $242.83 million, with free cash flow reaching $196.75 million, providing ample resources for ongoing investments and strategic initiatives.
In the most recent quarter (Q3 FY 2025), HealthEquity reported revenue of $300.43 million, up 21% year-over-year. The increase was driven by 41% growth in custodial revenue, reflecting higher HSA cash balances and yields, as well as 15% growth in interchange revenue due to increased member usage of HealthEquity's payment cards. Net income for the quarter was $5.70 million.
HealthEquity's liquidity position remains strong, with $403.98 million in cash and cash equivalents as of FY 2024. The company has a $1 billion revolving credit facility, of which $486.9 million was outstanding as of Q3 FY 2025. The current ratio and quick ratio both stood at 4.76 as of FY 2024, further demonstrating the company's solid financial footing.
Product Segments and Market Position
HealthEquity operates in two primary product segments: Health Savings Accounts (HSAs) and Consumer-Directed Benefits (CDBs).
In the HSA segment, HealthEquity is the largest non-bank custodian and administrator of HSAs in the United States. As of October 31, 2024, the company administered 9.51 million HSAs with total HSA Assets of $29.99 billion. Revenue from HSAs is generated through three main sources: service revenue, custodial revenue, and interchange revenue.
Service revenue, earned from fees charged for administration services on HSAs, grew 4% year-over-year in the third quarter to $119.17 million. Custodial revenue, derived from interest paid by depository and insurance company partners on HSA cash balances, increased 41% year-over-year to $140.95 million. Interchange revenue, generated from fees paid by merchants when members use HealthEquity's payment cards, rose 15% year-over-year to $40.30 million.
In the CDB segment, HealthEquity offers a range of products including Flexible Spending Accounts (FSAs), Health Reimbursement Arrangements (HRAs), COBRA, and commuter benefits. As of October 31, 2024, the company administered 6.96 million CDBs alongside the 9.51 million HSAs, for a total of 16.46 million Total Accounts.
HealthEquity's integrated suite of HSA and CDB solutions provides a competitive advantage, allowing it to serve as a single partner for employers' healthcare savings and spending needs. This diversified product portfolio, combined with a growing customer base and a rising interest rate environment, has contributed to the company's strong financial performance.
Competitive Landscape and Market Opportunities
HealthEquity operates in a competitive industry that includes traditional financial institutions, healthcare providers, and specialized CDB administrators. However, the company's differentiated offering, technological prowess, and extensive partner network have enabled it to maintain a leading position in the market.
The growing demand for consumer-directed healthcare solutions, fueled by rising healthcare costs and the shift towards high-deductible health plans, presents a significant opportunity for HealthEquity. The company's ability to seamlessly integrate HSAs and CDBs, as well as its focus on leveraging data and technology to enhance the member experience, have been key drivers of its success.
Furthermore, HealthEquity is well-positioned to capitalize on legislative and regulatory changes that may expand access to HSAs and similar tax-advantaged healthcare accounts. The company's advocacy efforts and industry expertise position it as a trusted partner for policymakers and industry stakeholders seeking to improve healthcare affordability and accessibility.
The health savings account (HSA) market has been growing at a compound annual growth rate of around 15-20% in recent years, driven by increasing adoption of high-deductible health plans and the tax-advantaged nature of HSAs. As the largest HSA custodian, HealthEquity has been able to capitalize on this market growth effectively.
Guidance and Future Outlook
HealthEquity has demonstrated strong performance across key metrics in recent quarters. In Q3 FY 2025, the company delivered double-digit year-over-year growth in revenue (21%), adjusted EBITDA (24%), HSA assets (33%), and HSA members (15%). The company ended Q3 FY 2025 with 16.5 million total accounts, including 9.5 million HSAs holding $30 billion in HSA assets. Notably, HSA invested assets grew 58% to $13.6 billion.
For the full year FY 2025, HealthEquity has provided guidance projecting revenue between $1.185 billion and $1.195 billion, GAAP net income between $88 million and $96 million ($0.99 to $1.08 per share), and non-GAAP net income between $274 million and $281 million ($3.08 to $3.16 per share). Adjusted EBITDA is expected to range from $470 million to $480 million. The average yield on HSA cash is anticipated to be approximately 3.1% for FY 2025.
Looking ahead to FY 2026, HealthEquity has provided initial guidance forecasting revenue between $1.275 billion and $1.295 billion, with an adjusted EBITDA margin of 41.5% to 42.5% of revenue. The company expects the average HSA cash yield to be between 3.4% and 3.5% for FY 2026.
Risks and Challenges
While HealthEquity has demonstrated resilience and adaptability, the company faces a range of risks and challenges that require ongoing monitoring and mitigation strategies. These include regulatory changes, competition from well-established financial institutions, data security and privacy concerns, and the potential impact of macroeconomic conditions on consumer spending and healthcare utilization.
The company's ability to navigate these challenges and continue its growth trajectory will be crucial in maintaining its competitive edge and delivering long-term value to shareholders.
Conclusion
HealthEquity's innovative approach to healthcare financial solutions, coupled with its robust financial performance and market-leading position, make it a compelling investment opportunity. The company's focus on technology-driven innovation, strategic partnerships, and advocacy for legislative changes positions it well to capitalize on the growing demand for consumer-directed healthcare services. As HealthEquity continues to execute on its growth strategy and address emerging challenges, investors may find the company's long-term prospects highly attractive.