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What's Behind HealthEquity's Disappointing Q1 Results

By Keith Speights – Jun 3, 2020 at 6:03AM

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The HSA administrator missed Wall Street's revenue and earnings estimates.

HealthEquity (HQY 0.34%) topped Wall Street estimates when it reported its fiscal 2020 fourth-quarter results in March. But I noted at the time that those results didn't matter much because the COVID-19 pandemic made the company's future prospects uncertain.

The health savings account (HSA) administrator announced its fiscal 2021 first-quarter results after the market closed on Tuesday. This time around, the results did matter. 

Wood blocks spelling HSA in front of a glass piggy bank with coins in it

Image source: Getty Images.

By the numbers

HealthEquity reported Q1 revenue of $190 million, a 118% jump from the $87.1 million reported in the same quarter of the previous year. However, the company's reported revenue came in lower than the average analysts' revenue estimate of $193.32 million.

The company delivered net income in the first quarter of $1.8 million, or $0.03 per share, based on generally accepted accounting principles (GAAP). This reflected a steep decline from HealthEquity's net income of $41.8 million, or $0.65 per share, generated in the prior-year period.

On a non-GAAP adjusted basis, HealthEquity's net income in the first quarter totaled $30.8 million, or $0.43 per share. This represented a 12.4% year-over-year increase, although the company's non-GAAP earnings per share remained flat compared to the prior-year period due to a higher share count. The adjusted earnings figure fell a little short of the consensus Wall Street estimate of $0.44 per share.

Behind the numbers

HealthEquity's revenue increased on all fronts in the first quarter. Service revenue soared to $111.3 million from $26.8 million in the prior-year period. Custodial revenue rose to $46.9 million from $42 million. Interchange revenue jumped to $31.8 million from $18.3 million. 

The acquisition of Wageworks, which closed in August 2019, was one key growth driver. Overall, HealthEquity generated solid growth in its HSA business, with its number of HSAs jumping 33% year over year to 5.4 million. As of April 30, 2020, the company had 12.7 million HSA accounts under management.

HealthEquity's GAAP earnings fell dramatically mainly due to a significant increase in operating expenses. However, its non-GAAP bottom line looked much better thanks mainly to adjustments for amortization of acquired intangible assets and merger integration and acquisition-related costs.

Looking ahead

Because of the uncertainties with the timing of businesses reopening during the COVID-19 pandemic, HealthEquity withdrew its full-year guidance. However, the company did provide its outlook for the second quarter. It expects Q2 revenue will be between $168 million and $173 million. HealthEquity anticipates a GAAP net loss in Q2 of between $20 million and $15 million, or $0.27 to $0.21 per diluted share. The company projects non-GAAP earnings of between $17 million and $22 million, or $0.23 to $0.30 per diluted share.

HealthEquity CEO Jon Kessler said, "We believe the COVID-19 pandemic's negative effect on our operating performance will fade as businesses gradually reopen, while the unprecedented economic fallout drives HSA growth and accelerates long-term trends favoring established market leaders like HealthEquity."

Assuming Kessler's prediction proves to be accurate, the healthcare stock could be a bargain right now. Shares dropped 8% in after-hours trading on Tuesday following the company's Q1 earnings announcement.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends HealthEquity. The Motley Fool has a disclosure policy.

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