Release Date: June 03, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- HealthEquity Inc (HQY, Financial) reported double-digit year-over-year growth across nearly all key metrics, including an 18% increase in revenue and a 36% increase in adjusted EBITDA.
- HSA members grew by 13%, driven by strong HSA sales and benefit wallet transitions, contributing to a 7% increase in total accounts.
- The company successfully transitioned two of the three tranches of benefit wallet in Q1, adding approximately 400,000 HSAs and $1.6 billion in HSA assets.
- HealthEquity Inc (HQY) raised its fiscal 2025 guidance, reflecting strong sales trajectory, higher expected custodial revenue, and operational efficiencies.
- The company launched more AI-driven service technologies and expanded claims automation for FSA members, contributing to a 400 basis point reduction in service costs as a percentage of revenue.
Negative Points
- There are concerns about the level of organic growth, with some attributing better results to acquisitions and favorable interest rates.
- Interchange revenue growth was only 6%, which was lower than expected, partly due to development costs related to transitioning to a new card processor.
- The company faces potential incremental attrition from the benefit wallet acquisition, which could impact account retention and assets.
- There were some challenges with the digital wallet rollout, including complexities with chip card integration and merchant-level logic issues.
- HealthEquity Inc (HQY) has a significant amount of variable rate debt outstanding, which could impact net interest expense and financial flexibility.
Q & A Highlights
Q: Based on the feedback we get and all the metrics that you reported were obviously up, but some push back and make the case that maybe the better results are more acquisition-driven or more rates-oriented. What's the message to investors concerned about the level of organic growth and the risk that rates come down later this year?
A: Jon Kessler, President, Chief Executive Officer, Director: We included the benefit wallet transaction in our prior guidance. The relevant question is the long-term custodial bandwidth from a growing corpus of accounts and assets. Evidence suggests that number is higher than previously thought. We haven't yet reached the current non-cyclical rate, much less the peak rate. Investors may need to gain a complete understanding of how this model works now.
Q: If we back out the benefit wallet tranches, you grew accounts 8.1% in the quarter. Can you talk about how quickly the market is growing as we turn the calendar to 2024 and any changes you're seeing this year versus last?
A: Jon Kessler, President, Chief Executive Officer, Director: The market for accounts is growing around 6% to 8%. We are doing a little better than that. There's a lot of energy around the U.S. accounts we get from new small groups and health plans. Stephen Neeleman, Vice Chairman of the Board, Founder: We have lots of opportunity with health plans, and the message of tax benefits and spending power is resonating more due to medical inflation.
Q: Your adjusted EBITDA margin improvement was ahead of expectations. Is there any seasonality that will flow through margins for the remaining three quarters?
A: James Lucania, Chief Financial Officer, Executive Vice President: Yes, there is seasonality. Interchange revenue is strong to start the year, and we had a catch-up accrual in service revenue that won't recur. We are seeing progress on costs, but some open roles will normalize the tech and dev line throughout the year.
Q: Can you talk about your progress on getting 80% of dollars from the benefit wallet acquisition into the enhanced rates product?
A: Jon Kessler, President, Chief Executive Officer, Director: We ended up around 85% on benefit wallet relative to the 80% target. This was enabled by articulating the program well and having a strong stable of partners.
Q: Are you seeing utilization in your HSA book of business as people increasingly buy stuff, which should finish up in the interchange revenue line?
A: Jon Kessler, President, Chief Executive Officer, Director: We are not seeing a huge impact on HSA spend from factors like GLP-1s. HSA spend was actually a bit lower than expected, while FSA and HRA spend was higher. The benefit wallet acquisition had a minimal impact on interchange revenue.
Q: Can you give us a sense of whether the digital wallet rollout had an impact on member adoption and client conversions?
A: Jon Kessler, President, Chief Executive Officer, Director: It's still early for digital wallet. The primary benefit is innovation that aids in new client sales and FSA conversions. Ultimately, it will help reduce expenses and improve member experience.
Q: Does the digital wallet alliance expand into lifestyle spending accounts?
A: Jon Kessler, President, Chief Executive Officer, Director: We have a lifestyle product that does fine and is stackable on the wallet. However, our focus is on empowering healthcare consumers, and the LSA category is not a huge focus for us.
Q: Can you talk about your take rate or yield by investment category?
A: James Lucania, Chief Financial Officer, Executive Vice President: The custodial line is a blend of HSA cash yield on enhanced and basic rates. We earn about 35 basis points on invested assets, which is in the service revenue line. As members save higher balances, they become investors, and we help them grow that balance.
Q: Can you expand on your comments around recent Blues partners and small/midsize momentum in new accounts?
A: Jon Kessler, President, Chief Executive Officer, Director: Our pipeline for new logos is at or ahead of where we were a year ago. Stephen Neeleman, Vice Chairman of the Board, Founder: We provide an integrated platform that allows Blues plans to compete effectively. It takes time and trust to create an integrated experience, but we are making great strides with our Blues partners.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
