HealthEquity (HQY) is trading higher today (+5%) after the company reported Q4 (Jan) earnings results last night. In case you're not familiar, HealthEquity, which made its IPO debut in July 2014, is a major player in the integrated health care account administration area. It acts as an intermediary administrator between the bank, the health plan, the employer, and the employee.
The core of its ecosystem is the Health Savings Account, or HSA, a financial account through which consumers spend and save for healthcare on a tax-advantaged basis. HQY's platform allows consumers to access their HSAs, compare treatment options/pricing, pay healthcare bills, earn wellness incentives etc. HQY serves as a non-bank custodian for 2.7 million HSAs. HQY is a play on the greater use of HSAs and it's a play on the secular shift to greater consumer responsibility for healthcare decisions.
HQY makes money by charging monthly administration fees, primarily through multi-year contracts. In addition, HQY earns custodial fees, which are primarily interest earned on the cash assets under management. HQY also generates fees from mutual funds in which its members invest and it gets fees for investment advisory services. HQY also earns card fees, which are primarily interchange fees charged to merchants on payments made with HQY's cards via payment networks.
The company says that HSAs are rapidly becoming the new normal as consumers work to control healthcare costs. While HSA plans do have significant deductibles and there is much work to be done to help consumers make smart healthcare spending and savings decisions, HQY believes that HSAs are actually the antidote for rising healthcare costs and says the data continues to bear this out.
HQY has said in the past that it expects to see HSAs promoted in the Trump administration and the current Congress. Plausible areas for action include: 1) making more insurance plans HSA eligible; 2) increasing the amount that can be contributed annually to an HSA, as Speaker Ryan has proposed; 3) enabling consumers to spend HSA dollars on items such as dependent care or individual insurance premiums between jobs; 4) enabling HSA plans as an option under traditional medical care and/or Medicare Advantage, something which HQY believes, holds great promise to reduce entitlement costs; and 5) removing obstacles that prevent consumers from opening or using HSAs as intended.
Turning to the JanQ results, GAAP EPS rose 40% YoY to $0.07 from $0.05 in the prior year period. Revenue rose 30.4% YoY to $46.8 mln. Both EPS and revenue came in above market expectations. HQY also issued guidance for FY18, they expect EPS of $0.50-0.55 and revenue of $220-225 mln.
Breaking down the revenue number a bit more: Service revenue was $20.6 mln, an increase of 21% YoY, custodial revenue was $16.0 mln, an increase of 44% and interchange revenue came in at $10.1 mln, an increase of 33% YoY. So all three revenue streams saw nice growth. In terms of operating metrics, HSA Members grew to 2.7 mln, an increase of 28% YoY.
In sum, this was another good quarter for HQY. This is not surprising considering that HQY's revenue is highly recurring in nature. In fact, HQY has approximately 90% visibility into the revenue of the subsequent fiscal year. HQY says that HSAs continue to grow in popularity and an outsized portion of that growth is coming to HealthEquity.