HEALTHEQUITY INC (HQY) SEC Filing 10-Q Quarterly report for the period ending Wednesday, October 31, 2018

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HealthEquity Reports Third Quarter Ended October 31, 2018 Financial Results
Highlights of the third quarter include:
Revenue of $70.5 million, an increase of 24% compared to Q3 FY18.
Net income of $15.7 million, an increase of 50% compared to Q3 FY18.
Net income per diluted share of $0.25 compared to $0.17 in Q3 FY18.
Non-GAAP net income per diluted share of $0.28 compared to $0.17 in Q3 FY18.
Adjusted EBITDA of $29.7 million, an increase of 40% compared to Q3 FY18.
HSA Members of 3.7 million, an increase of 22% compared to Q3 FY18.
Total Custodial Assets of $7.1 billion, an increase of 27% compared to Q3 FY18.
Draper, Utah – December 4, 2018 – HealthEquity, Inc. (NASDAQ: HQY) ("HealthEquity" or the "Company"), the nation's largest health savings account ("HSA") non-bank custodian, today announced financial results for its third quarter ended October 31, 2018.
“HealthEquity delivered robust third quarter results, strengthening our momentum going into the important fourth quarter and year end,” said Jon Kessler, President and CEO of HealthEquity. “By adding more than $1.5 billion in additional custodial assets since the end of our third quarter last year, our growth continues well ahead of the market, allowing us to raise guidance for fiscal year 2019. Importantly, with custodial investment assets growing by 53% over the third quarter end last year, we are delivering on our promise to help our HSA members connect health and wealth and put them on the fast track to retirement readiness.”  
Third quarter financial results
For the third quarter ended October 31, 2018, HealthEquity reported revenue of $70.5 million, an increase of 24% compared to $56.8 million for the third quarter ended October 31, 2017. Revenue consisted of:
Service revenue of $25.0 million, an increase of 9% compared to Q3 FY18.
Custodial revenue of $31.6 million, an increase of 43% compared to Q3 FY18.
Interchange revenue of $13.9 million, an increase of 18% compared to Q3 FY18.
Net income was $15.7 million for the third quarter ended October 31, 2018, compared to $10.5 million for the third quarter ended October 31, 2017.
Net income per diluted share was $0.25 for the third quarter ended October 31, 2018, compared to $0.17 for the third quarter ended October 31, 2017.
Non-GAAP net income per diluted share was $0.28 for the third quarter ended October 31, 2018, compared to $0.17 for the third quarter ended October 31, 2017.
Non-GAAP Adjusted EBITDA was $29.7 million for the third quarter ended October 31, 2018, an increase of 40% compared to $21.2 million for the third quarter ended October 31, 2017. Adjusted EBITDA was 42% of revenue for the third quarter ended October 31, 2018, compared to 37% for the third quarter ended October 31, 2017.
As of October 31, 2018, we had $330.3 million of cash, cash equivalents and marketable securities and no outstanding debt. This compares to $240.3 million in cash, cash equivalents and marketable securities and no outstanding debt as of January 31, 2018.
HSA Member and Custodial Asset metrics
The total number of HSAs for which we serve as a non-bank custodian ("HSA Members") as of October 31, 2018 was 3.7 million, an increase of 22% from 3.0 million as of October 31, 2017. Total Active HSA Members as of October 31, 2018 was 3.0 million, an increase of 17% from 2.5 million as of October 31, 2017. An Active HSA Member is an HSA Member that (i) is associated with a Health Plan and Administrator Partner or an Employer Partner, in each case as of the end of the applicable period; or (ii) has held a custodial balance at any point during the previous twelve month period.
Total Custodial Assets as of October 31, 2018 was $7.1 billion, an increase of 27% year over year, consisting of:
Custodial Cash Assets of $5.6 billion, an increase of 22% compared to October 31, 2017; and
Custodial Investment Assets of $1.5 billion, an increase of 53% compared to October 31, 2017.



The following information was filed by HEALTHEQUITY INC on Tuesday, December 4, 2018 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.

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  • 18487873_25
    Revenue - Product
    We earn custodial revenue, an increasing component of our overall revenue, from custodial cash assets deposited with our federally-insured custodial depository partners and with our insurance company partner, and recordkeeping fees we earn in respect of mutual funds in which our members invest.
  • 18487873_100
    Revenue - Product
    We earn custodial revenue, an increasing component of our overall revenue, from our custodial cash assets deposited with our FDIC-insured custodial depository bank partners and with our insurance company partner, and recordkeeping fees we earn in respect of mutual funds in which our members invest.
  • 18487873_170
    Financial - Expense
    Service costs per HSA Member decreased by 17% from the three months ended October 31, 2017 to the three months ended October 31, 2018 due to lower incremental expenses associated with fraud prevention measures.
  • 18487873_173
    Financial - Expense
    Service costs per HSA Member decreased by 10% from the nine months ended October 31, 2017 to the nine months ended October 31, 2018 due to the timing of hiring of personnel to implement and support new Network Partners and HSA Members and a decrease in incremental expenses associated with fraud prevention measures.
  • 18487873_159
    Revenue - Product
    The $9.5 million, or 43%, increase in custodial revenue from the three months ended October 31, 2017 to the three months ended October 31, 2018 was primarily due to an increase in the yield on average custodial cash assets from 1.85% for the three months ended October 31, 2017 to 2.14% and an increase in average daily custodial assets of $1.6 billion, or 29%.
  • 18487873_160
    Revenue - Product
    The $28.0 million, or 45%, increase in custodial revenue from the nine months ended October 31, 2017 to the nine months ended October 31, 2018 was primarily due to an increase in the yield on average custodial cash assets from 1.80% for the nine months ended October 31, 2017 to 2.10% and an increase in average daily custodial assets of $1.6 billion, or 31%.
  • 18487873_87
    Financial - Earnings
    The following table presents a reconciliation of net income, the most comparable GAAP financial measure, to Adjusted EBITDA for each of the periods indicated: (1) For the three months ended October 31, 2018 and 2017, Other consisted of non-income-based taxes of $114 and $113, other costs of $207 and $0, acquisition-related costs of $849 and $398, amortization of incremental costs to obtain a contract of $363 and $0, and loss on disposal of previously capitalized software development of $676 and $0, respectively.
  • 18487873_195
    Financial - Expense
    We expect our general and administrative expenses to increase for the foreseeable future due to the additional demands on our legal, compliance, accounting, insurance, and investor relations functions that we continue to incur as a public company, as well as other costs associated with continuing to grow our business.
  • 18487873_11
    Other - Other
    Our platform provides an ecosystem where consumers can access their tax-advantaged healthcare savings, compare treatment options and pricing, evaluate and pay healthcare bills, receive personalized benefit and clinical information, earn wellness incentives, and make educated investment choices to grow their tax-advantaged healthcare savings.
  • 18487873_161
    Revenue - Product
    Custodial revenue per HSA Member increased by approximately 17% from the three and nine months ended October 31, 2017 to each of the three and nine months ended October 31, 2018 primarily due to the increase in the balances of and yield on average daily custodial cash assets.
  • 18487873_90
    Financial - Income
    The increase in Adjusted EBITDA was driven by the overall growth of our business, including a $5.4 million, or 40%, increase in income from operations.
  • 18487873_92
    Financial - Income
    The increase in Adjusted EBITDA was driven by the overall growth of our business, including a $15.1 million, or 33%, increase in income from operations.
  • 18487873_217
    Revenue - Product
    Unless otherwise specified in a prospectus supplement accompanying the base prospectus, we would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes, including, but not limited to, working capital, sales and marketing activities, general and administrative matters and capital expenditures, and if opportunities arise, for the acquisition of, or investment in, assets, technologies, solutions or businesses that complement our business.
  • 18487873_89
    Other - Other
    The following table further sets forth our Adjusted EBITDA: Our Adjusted EBITDA increased by $8.4 million, or 40%, from $21.2 million for the three months ended October 31, 2017 to $29.7 million for the three months ended October 31, 2018.
  • 18487873_237
    Financial - Expense
    The Company will be responsible for payment of taxes and operating expenses, in addition to rent increases of approximately $35.5 million over the lease term.
  • 18487873_149
    Other - Other
    However, we have recorded a valuation allowance of $0.1 million as of October 31, 2018 with respect to unrealized capital losses for which we do not expect to generate taxable capital gains in order to utilize the capital losses in the future.
  • 18487873_227
    Financial - Expense
    Costs to improve the architecture of our proprietary system include computer hardware, personnel and related costs for software engineering and outsourced software engineering services.
  • 18487873_183
    Revenue - Product
    As a result, we capitalize sales commissions and amortize these costs over the average economic life of an HSA Member, to sales and marketing expense in the condensed consolidated statement of operations.
  • 18487873_202
    Financial - Income
    Our effective income tax rate for the three and nine months ended October 31, 2018 was a provision of 10.0% and a benefit of 2.2%, compared to a provision of 20.4% and 8.8% for the three and nine months ended October 31, 2017.
  • 18487873_7
    Other - Other
    Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk factors" included in our Annual Report on Form 10-K for the year ended January 31, 2018, as updated by this Quarterly Report on Form 10-Q, and in our other reports filed with the SEC.
  • 18487873_162
    Other - Other
    The increase in average daily custodial cash balances is due to the increase in HSA Members.
  • 18487873_32
    Financial - Expense
    In particular, we believe that continued growth in healthcare costs, and related factors will spur HDHP and HSA growth; however, the timing and impact of these and other developments in the healthcare industry are difficult to predict, and changes in U.S. healthcare policy could adversely affect our business.
  • 18487873_36
    Revenue - Product
    We believe that innovations incorporated in our technology that enable consumers to make healthcare saving and spending decisions differentiate us from our competitors and drive our growth in revenue, HSA Members, Network Partners and custodial assets.
  • 18487873_120
    Financial - Expense
    Interchange costs are comprised of costs we incur in connection with processing payment transactions initiated by our members.
  • 18487873_174
    Financial - Expense
    The $0.8 million, or 28%, increase in custodial costs from the three months ended October 31, 2017 to the three months ended October 31, 2018 was due to an increase in average daily custodial cash assets, which increased from $4.6 billion for the three months ended October 31, 2017 to $5.6 billion for the three months ended October 31, 2018.
  • 18487873_1
    Other - Other
    The following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements.
  • 18487873_60
    Other - Other
    Our Health Plan and Administrator Partners may also choose to offer technology-based healthcare services directly, as some health plans have done.
  • 18487873_143
    Financial - Income
    We use the asset and liability method to account for income taxes, under which current tax liabilities and assets are recognized for the estimated taxes payable or refundable on the tax returns for the current fiscal year.
  • 18487873_176
    Financial - Expense
    The $2.1 million, or 25%, increase in custodial costs from the nine months ended October 31, 2017 to the nine months ended October 31, 2018 was due to an increase in average daily custodial cash assets, which increased from $4.5 billion for the nine months ended October 31, 2017 to $5.5 billion for the nine months ended October 31, 2018, partially offset by a decrease in custodial costs on average custodial cash assets from 0.25% for the nine months ended October 31, 2017 to 0.24% for the nine months ended October 31, 2018.
  • 18487873_22
    Financial - Expense
    In 2017, we began to offer ERISA plan administration and investment services (with partnered advisors and record keepers) that can help reduce the cost, risk, and work of managing a 401(k) or similar retirement plan.
  • 18487873_188
    Financial - Expense
    The $1.8 million, or 26%, increase in technology and development expense from the three months ended October 31, 2017 to the three months ended October 31, 2018 was due to increased personnel-related expense of $0.9 million, increases in technology-related expenses, increases in amortization, depreciation and stock-based compensation of $1.0 million, and other increases of $0.1 million, which were partially offset by decreases in professional fees and capitalized development of $0.2 million.
  • 18487873_208
    Financial - Expense
    These expenses begin to ramp up during our third fiscal quarter with the majority of expenses incurred in our fourth fiscal quarter.
  • 18487873_101
    Other - Other
    As a non-bank custodian, we deposit our custodial cash with our various bank partners pursuant to contracts that (i) have terms up to five years, (ii) provide for a fixed or variable interest rate payable on the average daily cash balances deposited with the relevant bank partner, and (iii) have minimum and maximum required deposit balances.
  • 18487873_207
    Financial - Expense
    These costs of services relate to activating accounts and hiring additional staff, including seasonal help to support our member support center.
  • 18487873_190
    Financial - Expense
    We expect our technology and development expenses to increase for the foreseeable future as we continue to invest in the development of our proprietary system.
  • 18487873_91
    Other - Other
    Our Adjusted EBITDA increased by $23.5 million, or 35%, from $67.6 million for the nine months ended October 31, 2017 to $91.1 million for the nine months ended October 31, 2018.
  • 18487873_189
    Financial - Expense
    The $5.2 million, or 26%, increase in technology and development expense from the nine months ended October 31, 2017 to the nine months ended October 31, 2018 was due to increased personnel-related expense of $2.9 million, increases in amortization, depreciation and stock-based compensation of $2.3 million, and higher technology-related expenses of $0.6 million, which were partially offset by decreases in other expenses of $0.6 million.
  • 18487873_48
    Revenue - Product
    A sustained decline in prevailing interest rates may negatively affect our business by reducing the size of the interest rate yield, or yield, available to us and thus the amount of the custodial revenue we can realize.
  • 18487873_110
    Financial - Expense
    Expenditures include personnel-related costs, depreciation, amortization, stock-based compensation, common expense allocations (such as office rent, supplies, and other overhead expenses), new member and participant supplies, and other operating costs related to servicing our members.
  • 18487873_163
    Revenue - Product
    The $2.2 million, or 18%, increase in interchange revenue from the three months ended October 31, 2017 to the three months ended October 31, 2018 was primarily due to an overall increase in the number of our HSA Members resulting in an overall increase in the volume of payment activity.
  • 18487873_164
    Revenue - Product
    The $7.8 million, or 21%, increase in interchange revenue from the nine months ended October 31, 2017 to the nine months ended October 31, 2018 was primarily due to an overall increase in the number of our HSA Members resulting in an overall increase in the volume of payment activity.
  • 18487873_218
    Other - Other
    Pending such uses, we may invest the net proceeds in interest-bearing securities.
  • 18487873_135
    MA - Other
    Amortization of acquired intangible assets results primarily from our acquisition of intangible member assets.
  • 18487873_86
    Financial - Earnings
    We believe that Adjusted EBITDA provides useful information to investors and analysts in understanding and evaluating our operating results in the same manner as our management and our board of directors because it reflects operating profitability before consideration of non-operating expenses and non-cash expenses, and serves as a basis for comparison against other companies in our industry.
  • 18487873_83
    Other - Other
    Our total custodial assets increased by $1.5 billion, or 27%, from October 31, 2017 to October 31, 2018, primarily driven by additional custodial assets from our existing HSA Members and new custodial assets from our new HSA Members.
  • 18487873_204
    Revenue - Product
    Seasonal concentration of our growth combined with our recurring revenue model create seasonal variation in our results of operations.
  • 18487873_138
    MA - Other
    We also acquired other intangible assets, which are 401(k) customer relationships, in connection with an acquisition of a business.
  • 18487873_50
    Revenue - Product
    An increase in our yield would increase our custodial revenue as a percentage of total revenue.
  • 18487873_228
    Other - Other
    In addition, we plan to devote further resources to leasehold improvements and furniture and fixtures for our office space.
  • 18487873_27
    Other - Other
    We believe that our performance and future success are driven by a number of factors, including those identified below.
  • 18487873_231
    Other - Other
    In the event that additional financing is required, we may not be able to raise it on favorable terms, if at all.
  • 18487873_59
    Other - Other
    In addition, numerous indirect competitors, including benefits administration technology and service providers, partner with banks and other HSA custodians to compete with us.
  • 18487873_205
    Other - Other
    A significant number of new and existing Network Partners bring us new HSA Members beginning in January of each year concurrent with the start of many employers? benefit plan years.
  • 18487873_79
    Other - Other
    We define an Active HSA Member as an HSA Member that (i) is associated with a Health Plan and Administrator Partner or an Employer Partner, in each case as of the end of the applicable period; or (ii) has held a custodial balance at any point during the previous twelve month period.
  • 18487873_201
    Financial - Income
    The change for the three and nine months ended October 31, 2018 compared to the three and nine months ended October 31, 2017 was primarily the result of the reduction in the US federal corporate income tax rate from 35% to 21% as a result of legislative changes effective January 1, 2018 and an increase in federal and state research and development tax credits over prior periods.
  • 18487873_134
    MA - Other
    Amortization of acquired intangible assets.
  • 18487873_12
    Other - Other
    The core of our ecosystem is the health savings account, or HSA, a financial account through which consumers spend and save long-term for healthcare on a tax-advantaged basis.
  • 18487873_84
    Other - Other
    Importantly, our custodial investment assets increased by $520 million, or 53%, from October 31, 2017 to October 31, 2018, reflecting our strategy to help our HSA Members build wealth and invest for retirement.
  • 18487873_165
    Revenue - Product
    Interchange revenue per HSA Member decreased by approximately 3% and 2% from the three and nine months ended October 31, 2017 to the three and nine months ended October 31, 2018, primarily due to a decrease in payment activity per HSA Member.
  • 18487873_157
    Other - Other
    Our service fee tier structure incentivizes our Network Partners to add HSA Members by charging a lower rate for more HSA Members.
  • 18487873_125
    Financial - Earnings
    We expect our annual gross margin to increase somewhat over the near term as our custodial revenue increases as a percentage of total revenue, although our gross margin could fluctuate from period to period depending on the interplay of these factors.
  • 18487873_200
    Financial - Income
    Income tax provision for the three months ended October 31, 2018 was $1.7 million and income tax benefit for the nine months ended October 31, 2018 was $1.3 million as compared to an income tax provision of $2.7 million and $4.0 million for the three and nine months ended October 31, 2017, respectively.

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  • Form Type: Quarterly
  • Number of times amended: 0
  • Accession Number: 0001428336-18-000036
  • Submitted to the SEC: Thursday, December 6, 2018 4:09:13 PM EST
  • Accepted by the SEC: Thursday, December 6, 2018
  • Period ending: October 2018
  • Industry: Unclassified Business