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Is HealthEquity Set Up to Exceed Expectations in 2021?

By Brian Withers and Brian Feroldi - Apr 29, 2021 at 7:46AM

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Here's why it could be.

HealthEquity (HQY 3.62%) had a tough year with consumers cutting back on healthcare spending and interest rates dropping to near zero. It did post a 38% year-over-year top-line revenue gain for the year ending Jan. 31, 2021, but that's a far cry from the previous year's 85% boost. Management has estimated at least $750 million in revenue for the upcoming year, but that's a paltry 2% growth number. On a Fool Live episode recorded on April 14, Fool contributors Brian Feroldi and Brian Withers discuss this health savings account administrator's recent moves and if there's an opportunity to beat its revenue projection. 

Brian Feroldi: On to HealthEquity, ticker symbol HQY. This is the No. 1 company in the country. I'm pretty sure they now have that title for delivering HSA accounts, health savings accounts. They also do a whole bunch of other benefits. FSA accounts, commuter benefits, but HSAs are their bread and butter.

The big news out of this company recently is that they recently put down $500 million to buy out one of their competitors. This company is called Further and they have 550,000 HSA accounts, and they also have about $1.7 billion in assets under custody. For a sense of scale, HealthEquity after this deal goes through will have about 6 million customers. This is about 10% of their current size. This is a big acquisition for the company. Two years ago, they also made a big acquisition of a company called WageWorks, that they are still digesting to this day.

If you look at the company's financial results more recently, it has not been that impressive. Revenue was actually down at 6% in the most recent quarter to $188 million. Adjusted net income was up about 15% to $33 million. There were a number of factors last year that really hurt this company. Interest rates dropping to zero was a surprise. The company does make profit on the float that it carries for its customers, the benefits that are held in there. It does earn interest rate spread on that. That business obviously went to basically zero.

Company also makes money off of commuter benefits. So employees paying for their customers, tolls or cars or that kind of thing. Obviously, that business took a big hit. Then there was just overall healthcare spending in general that was down. The company makes money on interchange fees and service fees. A lot of headwinds for the company in 2020.

However, it did continue to pick up market share, it did continue to add new HSA accounts and this acquisition should set it up for continued long-term growth. But that's definitely going to be something for investors to watch.

Brian Withers: I love businesses that have predictable revenue streams and I would think that HealthEquity is one of those ones where after the sign-ups for the health insurance, members and who all signed up for health savings accounts and stuff, they would be pretty darn close at estimating their revenue for the year. Is there anything that could cause their annual revenue to potentially be higher than management's guidance as they go throughout 2021?

Feroldi: I like recurring revenue businesses, too, and it turns out this company actually has four sources of recurring revenue. Yes, their top line is in general pretty predictable except when interest rates all of a sudden dropped 200 basis points on them.

If you look at this company's management history here, every single time they give guidance, it's consistently like clockwork. Employees, yes, there is a sign-up season, but employees are also changing jobs constantly throughout the year. Every time that happens, there's new opportunities for HealthEquity to take on.

There is a selling season, but the company continues to add new HSA accounts over time. Moreover, they also make money as contributions are made to HSA accounts. If you're just an employee that is making regular payments to HSA accounts throughout the year, that's a revenue source for the company. Every time you use your HSA card, that's a revenue source for the company. So it's not just necessarily sign-ups, although that's obviously a key metric to watch.

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