HealthEquity, Inc. (NASDAQ:HQY) Q4 2024 Earnings Call Transcript

HealthEquity, Inc. (NASDAQ:HQY) Q4 2024 Earnings Call Transcript March 19, 2024

HealthEquity, Inc. beats earnings expectations. Reported EPS is $0.63, expectations were $0.56. HQY isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the HealthEquity Fourth Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the call to Richard Putnam. Please go ahead.

Richard Putnam: Thank you, MJ. Hello, everyone. Happy Vernal Equinox, and welcome to HealthEquity’s fourth quarter fiscal year-end and 2024 earnings conference call. My name is Richard Putnam, Investor Relations for HealthEquity, and joining me today is Jon Kessler, President and CEO; James Lucania, Executive Vice President and CFO; and Dr. Steve Neeleman, Vice Chair and Founder of the Company. Before I turn the call over to Jon, I have a couple of reminders. First, a press release announcing the financial results for our full year and fourth quarter of fiscal 2024 was issued after the market closed this afternoon. These financial results include the contributions from our wholly-owned subsidiaries and accounts they administer, but do not include any impact from BenefitWallet HSA portfolio acquisition.

The press release 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 this webcast can be found on our Investor Relations website, which is ir.healthequity.com. Second, our comments and responses to your questions today reflect management’s view as of today, March 19, 2024, and will contain forward-looking statements as defined by the SEC, including 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 today. These forward-looking statements are subject to risks 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 stocks as detailed in our latest annual report on Form 10-K and any 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. With that out of the way, let’s turn the call over to Jon Kessler. Jon?

Jon Kessler: Hi there. Thank you, Richard. Today is also a baseball’s major, in addition to being the vernal equinox, is also baseball’s opening day. Should be a national holiday. The good news is you do not need the permission of Major League Baseball to reproduce or account this call. You don’t need anyone’s permission. You can just do it. So with that, thank you for joining us. And since we just held our Investor Day Jim and I are going keep prepared remarks and of course, Steve is here for Q&A. In fiscal ’24, the team delivered double-digit year-over-year growth in revenue at 16% and reached the $1 billion in revenue milestone. Adjusted EBITDA grew more than twice as fast at 36% and in sales, as we previously reported, new logo growth and network partner production drove a record Q4 and a strong year overall.

Members and assets grew 9% and 14% respectively in fiscal ’24 and the team opened 949,000 new HSAs from sales. HealthEquity ended the fiscal year with 8.7 million HSA members in total. More than 30% of HSA cash is now in enhanced rates. Investing members and invested assets grew 13% and 28%, respectively. Total HSA assets reached $25.2 billion and total accounts grew 5%, including from organic CDB net growth for the first time since the pandemic began. Now, if you weren’t at our Investor Day or if you were dazzled by the mountain views, listen up. Management aims to continue strong top-line growth and competitive outperformance while doubling non-GAAP net income per share from fiscal 2024 levels over the next 3 years. To do this, we have focused capital investment on our proprietary health accounts platform and the ecosystem to which it connects us, leveraging foundations in the cloud, in data science, and in API technology to deliver remarkable experiences, to deepen partnerships, and to drive member outcomes.

We call those 3Ds. We further leverage our platform through opportunistic HSA portfolio acquisitions such as BenefitWallet, the transition of which we expect to complete in Q2. This 3-year strategy will, we believe, not only build shareholder value, but also advance HealthEquity’s mission, which is to save and improve lives by empowering healthcare consumers. It’s important stuff. Now to Jim to detail other important stuff, which is our Q4 and fiscal ’24 performance and enhanced guidance for fiscal 2025. Jim?

James Lucania: Thank you, Jon. First, I just want to thank all of you that joined us for our Investor Day last month hope you found it informative. I’ll briefly highlight fourth quarter fiscal year GAAP and non-GAAP financial results. As always, we provide a reconciliation of GAAP measures to non-GAAP measures in today’s press release. As a reminder, the results presented here reflect the reclassifications of our income statement we described in an 8-K filed on February 21, both for fiscal ’24 and the prior year for comparison. Fourth quarter revenue increased 12% year-over-year. Service revenue was $118.6 million, down 1% year over year, reflecting the final run off of National Emergency activity. Custodial revenue grew 35% to $105.4 million in the fourth quarter.

The annualized interest rate yield on HSA cash was 268 basis points for the quarter. Interchange revenue grew 6% to $38.4 million. Gross profit as a percentage of revenue was 62% in the fourth quarter this year, up from 58% in the fourth quarter last year. Net income for the fourth quarter was $26.4 million or $0.30 per share on a GAAP EPS basis. Our non-GAAP net income was $55 million or $0.63 per share versus $0.37 per share last year. Adjusted EBITDA for the quarter was $98.8 million and adjusted EBITDA as a percentage of revenue was 38%, a 620 basis point improvement over the same quarter last year. For the full fiscal year of 2024, revenue was $999.6 million which Jon generously rounded up to $1 billion, up 16% compared to last year. GAAP net income was $55.7 million or $0.64 per diluted share, and non-GAAP net income was $195.5 million or $2.25 per diluted share, up 71% and 65%, respectively, compared to last year.

Adjusted EBITDA was $369.2 million, up 36% from the prior year, resulting in adjusted EBITDA as a percentage of revenue of 37% for this fiscal year. Turning to the balance sheet. As of January 31, 2024, cash on hand was $404 million boosted by $243 million of cash flow from operations for the full fiscal year. The company had $875 million of debt outstanding net of issuance costs. We continue to have a $1 billion undrawn line of credit available. We anticipate using both cash and drawing on the line of credit over the next few months in connection with the closings of the BenefitWallet HSA portfolio acquisition. Today’s fiscal ’25 guidance reflects the carry forward of stronger than expected Q4 sales and efficiencies from the technology investments Jon mentioned, offset by slightly higher mix of investments versus cash in HSA assets.

We expect revenue in a range between $1.14 billion and $1.16 billion. GAAP net income in a range of $73 million to $88 million or $0.83 to $0.99 per share. We expect non-GAAP net income to be between $247 million and $262 million or $2.79 and $2.96 per share based upon an estimated 89 million shares outstanding for the year. This is a big deposit towards our goal of doubling non-GAAP net income per share to our $4.50 goal by fiscal 2027. Finally, we expect adjusted EBITDA to be between $438 million and $458 million. Our guidance reflects an expectation for an average yield on HSA cash of approximately 300 basis points for fiscal ’25. As a reminder, we base custodial yield assumptions embedded in guidance on an analysis of forward-looking market indicators such as the secured overnight financing rate and mid duration treasury forward curves.

These are, of course, subject to change and not perfect predictors of future market conditions. As Jon mentioned, we ended fiscal ’24 with about 30% of HSA cash in Enhance rates and expect that mix shift from basic rates to continue as over 80% of new deposits flow into enhance rates. Our guidance also includes the expected impacts of the BenefitWallet HSA portfolio acquisition anticipated to be completed in multiple tranches by the end of Q2. Cost impacts include interest expense due to an increase in the amount of variable rate debt outstanding and drawdown of corporate cash to fund the acquisition and on boarding costs beyond normal seasonal costs to serve in Q1 and Q2. We expect full run rate benefit in Q3 and beyond. We assume a non-GAAP income tax rate of approximately 25% and a diluted share count of 89 million including common share equivalents.

Based on our current full year guidance, we project a GAAP tax rate for fiscal 2025 at about 28%. As we’ve done in recent reporting periods, our full fiscal 2025 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 included. With that, we know you have a number of questions. So let’s go right to our operator for Q&A.

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Q&A Session

Operator: [Operator Instructions] Today’s first question comes from George Hill with Deutsche Bank.

George Hill: Jon, I might be in trouble here, because I think you guys called on me in the queue faster than I can type. When I look at the custodial rev in my model for the quarter, it looks like it was down a touch sequentially while a lot of the KPIs that underpin that. Again, I’m hoping I got a good fat finger on my model here. Could you just kind of like kind of break down what kind of like line metrics that drove the sequential decline in custodial revenue where given the company’s strong performance and also the KPI was I would have expected that to be up?

Jon Kessler: Yes. So let me give a partial response and then ask Jim to lay it along. I believe, George, that one of the things that will be important for everyone this quarter to remember is that, we have, as we outlined in an 8-K around our Investor Day and then discussed at Investor Day, we’ve made a few changes in how we in revenue classification within the three buckets of revenue on our income statement. And I believe that what you may be looking at is a little bit of an apples to oranges as a result of that, because one of the things that we’ve done is, I think appropriately so given its growth is we’re treating the revenue that we generate from the service of managing invested assets as what it is, which is a service.

And conversely, a benefit of doing that is that now the custodial line is more purely, 2 things. It’s revenue generated from yield on HSA cash and revenue generated from yield on client held funds. And so that’s a big piece of what you’re describing, I believe. Jim, do you want to elaborate on that or on any other factors?

James Lucania: Yes. No, that’s precisely what it’s going to be. And so you’ll and for the benefit of everyone on the call, the details of the shifting components in the prior periods will be outlined in a footnote in the 10-K, which we’ll hope to get on file as soon as possible in the next few days or so hopefully.

George Hill: Yes. And Jon, you got Jon and Jim, you guys detailed that, and I should have kind of remembered that as I was working my way through the model. And then I guess if I could just do a quick follow-up. The enhanced rates progress on the enhanced rates product, I guess would just love any comments that you have about like the selling season as you push forward and continued demand around that.

Jon Kessler: Yes. We well, actually, Jim, you want to comment on this?

James Lucania: Yes. Sorry, you broke up a little bit there, but the question was about progress of moving toward growing the enhanced rate mix.

George Hill: Yes, that was it.

James Lucania: Yes, yes. So that yes, I think what we’ve outlined, nothing has really changed in the strategy. We’ll get a little bit of a more of a step function bump up in that percentage because of the upcoming BenefitWallet placements. So getting a big slug of dollars that we can more than 80% place in enhanced rates is the expectation. And then the same, the organic growth in the business is also being contributed almost 80% plus into enhanced rates. So you’re going to see that number come up and we’ve shared our goal is in that same 3-year timeframe where we’re trying to double non-GAAP net income per share. We’re also trying to increase the percentage or the mix of cash, HSA cash and enhanced rates from 30% up to 60%. So will it be nice and even quarterly growth? No. But that’s the objective to get from 30% to 60% in the next 3 years.

Operator: The next question is from Stan Berenshteyn with Wells Fargo.

Stan Berenshteyn: Maybe sticking with the enhanced rates, it looks like annuities are holding up a bit better than 5-year treasury rates. Just curious what kind of spread are you seeing over 5-year treasuries as you’re locking in these enhanced rate products right now?

Jon Kessler: Jim?

James Lucania: Yes. Again, you also at Investor Day, we outlined our sort of average expected spread is 5-year T plus 75 basis points on average. So some a little higher, some a little lower, but these spreads don’t actually change, right? When we have a partner, we sort of negotiate the formula. And so we’re not shopping in the retail market each time we place these assets.

Stan Berenshteyn: And maybe for the follow-up. At the Investor Day, there was definitely some excitement over the chat-based communications that you’re pushing forward with members. I’m just curious, what percentage of inbound member comps are text based now and how has that changed over same time last year?

Jon Kessler: Yes. Let me first say that I think the long-term vision is that that chat is just one mechanism for this kind of stuff. And then by long-term, I don’t mean the Jetsons. I mean over our strategic horizon here. Although, I guess, now the Jetsons would be in the past. I don’t know. But, so I’m going to answer your question in terms of both chat and other automated forms of handling calls. And so that number is still relatively low, in terms of true automation ignoring just IVR type stuff. But low might be, we’re up to kind of 15 to 20%. And in addition, we’ve also, in the last couple of months here, rolled out a similar functionality for our client services center that that handles inbounds from, our clients as well as, many of our brokers that we deal with.