HealthEquity Ends 2018 Strong, but Predicts a Slowdown Ahead

Brian Feroldi, The Motley Fool

HealthEquity (NASDAQ: HQY), a financial company focused on health savings accounts (HSAs), reported its fiscal 2019 fourth-quarter and full year results on Monday.

Investors got a sneak peek of the company's year-end results in February when management pre-announced its fiscal 2019 sales metrics. Those numbers suggested that management was going to have no problems delivering on its guidance. The actual results showed that the company was able to drive 25% growth on the top-line and a triple-digit gain on the bottom line.

HealthEquity fiscal 2019 Q4 results: The raw numbers

Metric Q4 2019 Q4 2018 Change (YOY)
Revenue $75.8 million $60.4 million 25%
GAAP Net income $13.1 million $5.9 million 122%
GAAP Earnings per share $0.21 $0.09 133%

GAAP = Generally Accepted Accounting Principles. Data source: HealthEquity. 

What happened with HealthEquity this quarter?

  • HSA membership grew 17% to 4 million. 
  • Custodial assets under management, which is the total amount of money that is held in member's accounts, grew 19% to $8.1 billion.
  • The 25% sales growth was primarily driven by a 45% increase in custodial revenue, which is earned from assets held under management. Service revenue and interchange revenue grew by 10% and 15%, respectively.
  • Gross margin expanded 700 basis points to 59%.
  • Adjusted earnings, which exclude stock-based compensation, grew 153% to $17 million, or $0.27 per share. This figure surpassed the $0.22 in adjusted earning per share Wall Street expected.
  • The company remains debt free and had a cash balance of $361 million at the end of the quarter. 
Piggybank with the letters HSA written on the side

Image source: Getty Image.

Here's an overview of the key numbers from the full fiscal year 2019:

  • Revenue jumped 25% to $287.2 million, exceeding the high end of management's guidance range by more than $2 million.
  • Gross margin expanded 400 basis points to 63%.
  • Operating margin expanded 300 basis points to 27%.
  • Non-GAAP net income came in at $75.6 million, or $1.19 per share. This represents EPS growth of 75% year-over-year, and came in ahead of management's guidance range.

What management had to say

CEO Jon Kessler noted that the company's strong growth continues to show it's winning more than its fair share of new business:

"We continue to outpace the market and gain market share as we edged up to 4 million HSA Members and eclipsed $8 billion of custodial assets. We are well positioned to have another great year for fiscal 2020 helping our members to connect health and wealth as we broaden our proprietary platform and deepen our relationships with our Network and Employer Partners."

On the conference call with investors, HealthEquity's founder and Vice Chair Dr. Steven Neeleman stated the company plans to ramp up it's spending to ensure that its platform remains built for long-term growth:

"Over the next several years, we will be investing in our proprietary code base and the security of our platform. The goals of these investments are to achieve continuous to plan and capability, which increases speed to market and enterprise class security. This is not only prudent planning for continued fast growth. It's also a power move versus subscale competitors who will not or perhaps cannot deploy technology capital effectively. Their return on these investments is long term, sustainable and profitable growth."

Looking ahead

Management expects that fiscal 2020 will be another year of strong top-line growth for the business. However, the company's decision to ramp up spending on its platform is expected to take its toll on net income growth. In response, here's a look at the guidance that is being shared for full-year fiscal 2020:

  • Revenue is expected to land between $333 million and $339 million. This midpoint of this range represents 17% growth. 
  • Non-GAAP net income is projected to land between $80 million and $84 million. This represents growth of 8% at the midpoint.
  • Non-GAAP net income per share is expected to land between $1.23 and $1.29. This represents growth of 6% at the midpoint. 

For context, Wall Street was expecting the company to guide for $336.6 million in revenue and $1.31 in adjusted earnings per share for the fiscal year, so this forecast is a bit worse than market-watchers were hoping for.

The good news for investors is that HealthEquity's management team tends to share conservative guidance up front, and then beat its own targets. For example, management initially predicted that fiscal 2019 sales would land between $276 million and $282 million while adjusted EPS would land between $0.98 and $1.04. Both of these targets were raised consistently throughout the year and the actual numbers came in at $287.2 million and $1.19, respectively. In other words, investors can probably view its initial targets for fiscal 2020 as the floor, not the ceiling.

The most important takeaway from this earnings report is that HealthEquity is performing well on nearly every metric that matters. The company continues to gain share in the growing HSA market. New members and a growing asset base are fueling strong top-line growth. The sales gains are allowing margins to rise across the board and are translating into outsized growth on the bottom line. Finally, management is making investments in the business that should allow it to continue to grab market share and open up new opportunities down the road. 

Overall, this report suggests that the bull case for HealthEquity remains firmly on track. With plenty of room left for future expansion, this is a great stock for growth-focused investors to get to know.

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Brian Feroldi owns shares of HealthEquity. The Motley Fool owns shares of and recommends HealthEquity. The Motley Fool has a disclosure policy.