HealthEquity, Inc. (NASDAQ:HQY) Q4 2023 Earnings Call Transcript

HealthEquity, Inc. (NASDAQ:HQY) Q4 2023 Earnings Call Transcript March 21, 2023

Operator: Good afternoon and welcome to the HealthEquity Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Richard Putnam. Please go ahead.

Richard Putnam: Thank you, Gary, and happy first day — first full day of spring to everyone and welcome to HealthEquity’s fourth quarter and fiscal yearend 2023 earnings conference call. My name is Richard Putnam. I do Investor Relations for HealthEquity and joining me today I have Jon Kessler, who is our President and CEO, Dr. Steve Neeleman, our Vice Chair and Founder of the company, and Tyson Murdock, the company’s Executive Vice President and Chief Financial Officer. Before I turn the call over to Jon, I have two important reminders. First, a press release announcing our financial results for the fourth quarter and fiscal 2023 yearend was issued after the market close this afternoon. The financial results and the press release 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 the webcast can be found on our Investor Relations website, which is ir.healthequity.com. Second, our comments and responses to your question today reflect management’s view as of today, March 21, 2023, and will contain forward-looking statements as defined by the SEC, and that includes 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 here today.

These forward-looking statements are subject to risk and uncertainties that may cause the actual results to differ materially from statements made here today. We caution against placing undue reliance on these forward-looking statements, and 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 and they are found 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. At the conclusion of our prepared remarks, as Gary just mentioned, we’ll open up the call for Q&A and we’ll turn the time over to him to instruct us on how we do that.

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And then I have one final announcement before we hear from Jon; we plan to hold our next Investor Day on July 11, later this year. We hope that you’ll be able to make plans to join us and please stay tuned for more details as they come available. Jon, over to you.

Jon Kessler: That was fun. That last part. Good afternoon, everyone, and thank you for joining us. I am going to report on key metrics as always, and then discuss management’s view of fiscal ’24 in light of current conditions. Tyson similarly will touch on Q4 and fiscal ’23 before detailing our revised guidance for fiscal ’24 and of course, Steve is here for Q&A. For fiscal 2023, we are pleased to report double-digit year-over-year growth across revenue, which is plus 14% adjusted EBITDA, which is plus 15%, HSA members plus 11%, and HSA assets plus 13%. Total accounts grew 4% and muted by CDB underperformance and a change in methodology with no revenue impact. HealthEquity ended fiscal ’23 with nearly 15 million total accounts including eight million HSAs, more than $22 billion in HSA assets, nearly a million new HSA opened in the year, record numbers of clients and network partners, strong yearend service, thank you team and number one, market position and so as a result of all that, we are able today to raise our outlook for fiscal ’24, which Tyson will detail.

We expect revenue to again grow double digits, EBITDA growth to accelerate to around 20%, even faster growth in non-GAAP net income and a return to positive GAAP net income, which is good. Our outlook factors in health equities inherently strong visibility to future performance as well as our belief that the current crisis underscores the valuable stability of HSA balances combining as they do the stickiness of individual small balance accounts and individual tax advantaged accounts. While US commercial bank deposits fell 0.9% in the first two months of calendar ’23, for example, HealthEquity’s, HSA cash grew by 6% in that same period and that growth has continued through the banking crisis that began on March 08. Meanwhile, overall job creation continues its strong rebound from pandemic lows, which contributes to new HSA openings.

As Tyson will detail, our outlook does reflect current interest rate expectations and a more neutral rate of job creation going forward and of course, we’re closely monitoring the condition of bank and credit union participants in our basic rates program, insurers in our enhanced rates program, bank holders of client held CDV funds and of and holders of health equities operating cash to assure that all continue to meet our strength thresholds. With that, I will turn it over to Tyson to detail the results and guidance Mr. Murdock.

Tyson Murdock: Thank you, Jon. I will highlight our fourth quarter and fiscal year end GAAP and non-GAAP financial results, and there’s a reconciliation of GAAP measures to non-GAAP measures to be found in today’s press release. Fourth quarter revenue increased 15% year-over-year. Service revenue was $114.2 million, up 2% year-over-year. Custodial revenue grew 44% to $83.5 million in the fourth quarter. The annualized interest rate yield on HSA cash was 211 basis points during the fourth quarter of this year, which brought our full year average to 190 basis points. Interchange revenue grew 10% to $36.1 million. Gross margin was 57% in the fourth quarter this year versus 52% in the year ago period. Net loss for the fourth quarter was $0.2 million, which rounds to $0.00 per share on a GAAP EPS basis.

Our non-GAAP net income was $31.3 million for the fourth quarter this year and non-GAAP net income per share was $0.37 per share compared to $0.20 per share last year. While higher interest rates increased revenue, they also increased the rate of interest we pay on the remaining $341 million term loan A to a stated rate of 6.3%. Adjusted EBITDA for the quarter was $73.6 million and adjusted EBITDA margin was 31%. For the full year of fiscal ’23 revenue was $861.7 million, up 14%; GAAP net loss was $26.1 million or $0.31 per diluted share. Non-GAAP net income was $114.5 million or $1.36 per diluted share. And adjusted EBITDA was $272.3 million up 15% from the prior year, resulting in 32% adjusted EBITDA margin for the fiscal year. Turning to the balance sheet, as of January 31, 2023, we had $254 million of cash and cash equivalent with $925 million of debt outstanding net of issuance costs.

This includes the $341 million of variable rate debt I mentioned earlier. We have an undrawn $1 billion line of credit. So we have a strong balance sheet with reoccurring revenue model, and now we expect the following for fiscal ’24. We expect to generate revenue in a range between $960 and $975 million, and we expect GAAP net income to be in a range of $0 to $11 million. We expect non-GAAP net income to be between $152 million and $163 million, resulting in non-GAAP diluted net income between $1.74 and a $1.87 per share based upon an estimated 87 million shares outstanding for the year. We expect adjusted EBITDA to be between $320 million and 335 million. As a reminder, beginning in fiscal ’24, we are basing future interest rate assumptions embedded in guidance on forward-looking market indicators such as the secured overnight financing rate and mid-duration treasury forward curves and fed funds futures.

We now expect an average yield on HSA cash of approximately 230 basis points in fiscal ’24 up about 40 basis points from last year. We continue to assume that the average crediting rates our HSA members receive on HSA cash will increase by five basis points per quarter in fiscal ’24. And finally, our guidance reflects the expectation of higher average interest rates on HealthEquity and billable rate debt versus last year, consistent with the current forward-looking market indicators. We assume our projected statutory income tax rate of approximately 25% and a diluted share count of 87 million shares, which now includes common share equivalence as we anticipate positive GAAP net income this year. As we have — 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 not excluded. With that, we now know you have a number of questions. So let’s go right to the operator for Q&A.

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Q&A Session

Operator: We will now begin the question-and-answer session. Our first question is from Anne Samuel with JPMorgan. Please go ahead. Q – Anne Samuel Hey guys. Congrats on that terrific quarter and thanks for taking the question. My first one was, I was just hoping you could speak a little bit to the enhanced rates product. I don’t think I heard you say, what proportion of deposits are in it now. And just maybe, where is that expected to go over time? How are you thinking about that as maybe a potential tailwind for yields or maybe just a stabilizer? Thanks.

Jon Kessler: Yeah. Thank you for asking the question Anne, and it’s good to hear your voice. So we ended the year north of our goal of 20% of our HSA cash and enhanced rates. And I think just as importantly we ended the year with a growing set of partners in this space amongst large and highly rated insurers. And so we think that both the demand is there for this and then the supply, if you will, from our members is there for it. And so our expectation continues to be that this product is going to grow that it’s going to grow. I think we’ve said elsewhere something on the order of about 10% of our HSA cash a year, and that’ll depend a little bit on, factors like the underlying speed of the HSA cash growth and whatnot. But, I think that’s a good conservative estimate.

So, maybe, we’ll certainly be north of 30% by the end of this year. And further our expectation, based on what we’ve seen here is, as you said, that this is both a really nice — there is a net growth opportunity because the yields on enhanced rates as the name suggests are sort of always or almost always a little bit higher than they are on our basic rates product. But so that’s good for us and good for our members, but it’s also stabilizing and we’ve kind of seen that during this period where when there was a — when rates on the bank side were falling, the premium to this product was very high when rates were rising very rapidly, the premium was somewhat lower. But, all of that produces net stability in that underlying custodial yield, which is what we’re going for.

So, it’s kind of full steam ahead with this product. Q – Anne Samuel That’s really helpful, caller, thanks. And then I was just maybe hoping you could touch on how some of the recent banking volatility might impact your business. Realize you don’t have any de depositories that are impacted, but you often speak about the primary driver of yield being competition for deposits. So just wondering how this might impact that.

Jon Kessler: It’s interesting. You’ve got it exactly right. And what we saw during this period is the value, what we’ve seen during this period is the value of stable deposits and that value of being a good, in our case, a good customer of these depository institutions, right? Whereas, well reported you saw these banks and other institutions that were heavily dependent on corporate deposits, see big flows. That’s not what we saw. Our members were extremely steady for all the right reasons. These are long-term tax advantaged accounts. They’re small balance, they’re FDIC insured at the member level, etcetera, etcetera and there are real penalties and so forth to moving your money. And so people, what I think this crisis on the banking side has kind of showed is that all deposits aren’t equal and we offer a great source of funds for institutions that have real loan demand, not sort of created in money markets or the like.