What happened

Despite its posting better-than-expected fiscal 2020 second-quarter results, shares of HealthEquity (NASDAQ:HQY), a leading provider of managed healthcare accounts, dropped as much as 12% in early-morning trading on Wednesday. The stock was down about 9% as of 10:55 a.m. EST.  

So what

The headline numbers from the company's fiscal second quarter looked quite good:

  • Revenue jumped 22% to $86.6 million. That was ahead of the $85 million in revenue that Wall Street had expected.
  • HSA membership grew 16% to 4.2 million.
  • Custodial assets under management grew 21% to $8.5 billion.
  • Gross margin jumped 200 basis points to 67.5%.
  • Net income reported under generally accepted accounting principles (GAAP) dropped 14% to $19.4 million, or $0.30 per share. 
  • Non-GAAP net income was $29.4 million, or $0.45 per share. That was much higher than the $0.35 that Wall Street had expected.
  • HealthEquity closed its acquisition of WageWorks on August 30th. The "new HealthEquity" is now the largest HSA administrator by accounts in the country. 
Businessmen shaking hands and exchanging money

Image source: Getty Images.

However, management also let investors know that its expenses were going to remain elevated as it works to integrated WageWorks and service the new $1.25 billion in debt it recently floated to pay for the acquisition. In response, here's the guidance being shared with investors for fiscal 2020:

  • Revenue is now expected to land between $341 million and $347 million. That's up from its prior guidance range of $333 million to $339 million. The midpoint of this range is also above the $343.3 million that Wall Street was expecting.
  • WageWorks is projected to contribute another $170 million to $175 million in total revenue.
  • Non-GAAP net income is now projected to land between $76 million and $80 million, or $1.10 to $1.16 per share. That's lower than its prior range of $83 million to $87 million, or $1.28 to $1.31 per share. The midpoint is also far below the $1.33 that market watchers were looking for.

Traders are selling off the stock today in response to the mixed guidance.

Now what

There are both positive and negative takeaways for investors in this report.

The good news is that HealthEquity's legacy business continues to grow rapidly in spite of distraction from the WageWorks acquisition. The focus on growing custodial revenue is also allowing its gross margin to rise.

The bad news is that management's decision to invest heavily in the WageWorks acquisition is going to take a near-term toll on profitability. The formerly pristine balance sheet is also now about to be saddled with $1.25 billion in debt. 

Acquisitions are notoriously tricky to pull off, and it can take a long time for the benefits to be realized, so it is understandable that Wall Street has knocked down HealthEquity's stock to a fresh 52-week low. After all, it wasn't all that long ago that HealthEquity was considered an ultra-high-growth business and traded at a significant premium to the market.

Only time will tell if management will be able to successfully integrate WageWorks and return the business to its days of turbocharged profit growth. Long-term shareholders have no choice but to remain patient and hope for the best.