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

Alexander Draper: So I guess it’s going to try to be one question, but it’ll sort of wrap a couple of things together. When I just, when I look at the cash flow, you’re starting to see an improvement in your cash from operations. The capitalized software is moderating. You did step up a little bit on M&A, but if I think about your guidance, your net income and your EBITDA is up. If I look at the add back, some of the cash add backs, integration costs are going down. So it looks like net-net of all that is free cash flow and cash you have is, looks like it’s going to be pretty good and hopefully sustainable. So when I think about the M&A environment, what’s that like? But then also, I know Tyson indicated you’re at, I think he said 6.3 is the stated rate, maybe on the floating rate debt. How are you thinking about debt pay down versus M&A or any other internal investments and balancing those three things out. Thanks.

Jon Kessler: Awesome question? Thank you. Real, it really is. We were — this is actually — we probably spent a half hour in our prep just kind of thinking about how to answer this in such a way that like, it’s like sometimes you have things where you want to answer and you like, but you don’t want to like give them everything. This is one we’re like, I want give you everything because, it’s so, it’s such a fun, interesting and important capital allocation problem. But, and I’m going to resist doing that, because that’s what the team told me to do, but a couple thoughts. First of all the premise is right, that is to say that, if you look at fiscal ’23 we converted, EBITDA free cash flow at a rate pushing 60%, that rate’s coming up.

Well, why, because integration expenses are coming down, and that was a big add back, etcetera, etcetera. But as you say, one break on all of that is the interest on the relatively small, but nonetheless they’re variable portion of debt. So, you’ve got all of the right factors that we’re looking at in terms of where to deploy capital here. I think if I look at the M&A environment a couple of things really strike me. The first comment I’ve made elsewhere, which was, we are absolutely not in a rush to do anything from an M&A perspective material that is in the nature of let’s go horizontally expand to this, that, or whatever in the way of existing established markets. We’re not in a rush to do that, both because we think that our clients aren’t demanding that we do it, that valuations are plenty fulsome out there and that we can deliver more shareholder value at this point in time through the work that we’re doing on the organic side and with partners to kind of develop product that isn’t established out in the marketplace and, so our inclination is not to go out on the sort of horizontal side and deploy capital there.