HealthEquity, Inc. HQY reported adjusted earnings per share (EPS) of 86 cents for second-quarter fiscal 2025, surpassing the Zacks Consensus Estimate by 22.9%. The bottom line improved 62.2% on a year-over-year basis.
GAAP EPS in the fiscal second quarter was 40 cents, up 233% from the year-ago quarter’s EPS of 12 cents.
Shares of HQY were up 0.2% in after-market trading following the earnings call.
HealthEquity Revenues in Detail
In the fiscal second quarter, the company generated revenues of $299.93 million, which beat the Zacks Consensus Estimate by 5.4%. The top line improved 23.2% from the prior-year quarter.
HSA Details of HQY
As of July 31,2024, the total number of Health Savings Accounts (HSA) for which HealthEquity served as a non-bank custodian was 9.4 million, up 15% year over year.
HealthEquity reported 711,000 HSAs with investments as of July 31,2024, up 24% year over year. Total accounts, as of July 31,2024, were 16.3 million, up 9% year over year. This uptick included total HSAs and 6.9 million Consumer Direct Benefits (CDBs), up 1% year over year.
Total HSA assets were $29.5 billion at the end of July 31, 2024, up 27% year over year. This included $16.4 billion of HSA cash (up 17% year over year) and $13.1 billion of HSA investments (up 43% year over year).
This figure compares to our fiscal second-quarter HSA cash and HSA investments projection of $16.4 billion and $9.8 billion, respectively. We had projected total HSA assets of $26.2 billion for the fiscal second quarter.
Client-held funds, which are deposits held on behalf of HealthEquity’s clients to facilitate the administration of its CDBs and from which the company generates custodial revenues, were $820 million (up 1% year over year) as of July 31, 2024.
Revenue Sources of HealthEquity
HealthEquity derives revenues from three sources: Service revenues, Custodial revenues, and Interchange revenues.
Service revenues totaled $116.7 million in the quarter, up 4.2% year over year. This reflected a higher number of HSAs and invested HSA Assets, partially offset by the runoff of National Emergency CDB activity. This figure compares favorably with our second-quarter projection of $114.3 million.
Custodial revenues totaled $138.7 million, up 49.6% from the year-ago period. Our projection for fiscal second-quarter Custodial revenues was $123.2 million.
Interchange revenues totaled $44.5 million, up 14.4% year over year. This figure compares favorably with our fiscal second-quarter projection of $43.7 million.
HQY Margin Details
In the quarter under review, HealthEquity’s gross profit rose 34.5% to $204.1 million. The gross margin expanded 576 basis points (bps) to 68.03%. We had projected the gross margin to be 65.3% in the fiscal second quarter.
Sales and marketing expenses rose 12.6% to $21.5 million year over year, whereas technology and development expenses climbed 7% to $58.6 million. General and administrative expenses also increased 16.2% year over year to $32.3 million. Adjusted operating expenses of $145.1 million increased 14.3%.
Operating profit totaled $58.9 million, improving 138.4% from the prior-year quarter. Operating margin in the quarter expanded by 949 bps to 19.6%.
Financial Position of HQY
The company exited the second quarter of fiscal 2025 with cash and cash equivalents of $326.9 million compared with $404 million at the end of the first quarter of fiscal 2025. Total debt (net of issuance costs) at the end of second-quarter fiscal 2025 was $1.1 billion compared with $875 million at the end of first quarter fiscal 2025.
Net cash provided by operating activities at the end of second-quarter fiscal 2025 totaled $173.6 million compared with $108.6 million a year ago.
HealthEquity FY25 Guidance
HealthEquity has upped its revenue and EPS projections for fiscal 2025.
For fiscal 2025, revenues are now projected to be between $1.17 billion and $1.19 billion, up from the previous outlook of $1.16 billion to $1.18 billion. The Zacks Consensus Estimate is currently pegged at $1.17 billion.
Adjusted EPS is now expected to be in the range of $2.98-$3.14, up from the earlier guidance of $2.93-$3.10. The Zacks Consensus Estimate currently stands at $3.00.
Our Take on HQY
HealthEquity exited second-quarter fiscal 2025 with better-than-expected results. The company witnessed solid top-line and bottom-line performances in the reported quarter. Solid growth in HSAs also drove the top line. The solid uptick in total HSA assets in the reported quarter is promising. The expansion of both margins also bodes well.
Despite inflationary challenges, HealthEquity has experienced solid growth in HSA balances, driven by a significant increase in invested assets, which now represent a larger portion of total HSA assets. The growing number of members choosing to invest in HSAs reflects a positive trend. Additionally, more members are selecting enhanced rates on HSA cash, leading to improved and more consistent custodial yields.
The company's ongoing improvements in service technology, which have boosted the use of chat and automated responses, are contributing to greater efficiency. While the effects of COVID-19 may diminish in the second half, the positive results of the first two quarters indicate strong future service revenues and margins.
With improved profit margins and a solid financial position, HealthEquity has raised its revenue and earnings guidance for fiscal 2025, signaling confidence in its ongoing growth trajectory.
The rise in CDBs and client-held funds in the reported quarter is also promising
HealthEquity, Inc. Price, Consensus and EPS Surprise
HealthEquity, Inc. price-consensus-eps-surprise-chart | HealthEquity, Inc. Quote
Zacks Rank & Key Picks
Currently, HealthEquity carries a Zacks Rank #3 (Hold).
Some top-ranked stocks in the broader medical space are Universal Health Service UHS, Quest Diagnostics DGX and ABM Industries ABM. While Universal Health Service sports a Zacks Rank #1 (Strong Buy), Quest Diagnostics and ABM Industries carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.
Universal Health Services has an estimated long-term growth rate of 19%. UHS’ earnings surpassed estimates in each of the trailing four quarters, with the average being 14.58%.
Universal Health Service has gained 41.1% compared with the industry's 34.8% rise so far this year.
Quest Diagnostics has an estimated long-term growth rate of 6.20%. DGX’s earnings surpassed estimates in each of the trailing four quarters, with the average surprise being 3.31%.
Quest Diagnostics shares have gained 3.7% so far this year compared with the industry’s 10.2% rise.
ABM Industries’ earnings surpassed estimates in each of the trailing four quarters, delivering an average surprise of 7.34%.
ABM's shares have risen 24.1% so far this year compared with the industry’s 11.9% increase.
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