HealthEquity, Inc. (HQY) Earnings

Management highlights

- **Account and Asset Growth**: Total HSA assets grew 14% year-over-year, with total HSAs increasing 8% and new HSAs from sales surging 24%, marking a Q2 record outside of open enrollment. Client retention remains strong, with renewals expected to exceed 90% for the year. - **Deepening Member Engagement**: Monthly active users on the app reached 1.4 million (up 62% YoY), with over 5 million total downloads. The Marketplace expanded to include categories such as metabolic health, skincare, and recovery, reaching more than 14,000 active members. Early data indicates that Marketplace purchasers are more likely to begin contributing to their HSAs. - **Investment Adoption**: A record 20% of HSA members now hold investing positions, with invested asset balances at 28%. The company launched 'Simply Invest,' a no-administrative-fee investment lineup, to make HSA investing more accessible. - **Technology and AI Efficiency**: AI-driven automation reduced human-handled calls by 25% YoY and card-related calls by 30%. AI resolved 85% of routine chat inquiries and contained 55% of card-related phone contacts. Fraud losses remain significantly below target. - **Strategic Platform Evolution**: Management is evolving into a 'healthcare financial operating system' integrating accounts, payments, investing, and marketplace capabilities. A next-generation app is planned to consolidate these services into a single experience, lowering cost-to-serve while enhancing personalization.

Guidance

- **Fiscal 2027 Revenue**: Raised to between $1.411 billion and $1.421 billion. - **GAAP Net Income**: Raised to between $242 million and $248 million ($2.88–$2.96 per diluted share). - **Non-GAAP Net Income**: Raised to between $392 million and $398 million ($4.66–$4.73 per diluted share). - **Adjusted EBITDA**: Raised to between $628 million and $636 million. - **HSA Cash Yield**: Expected average yield for fiscal 2027 is between 3.85% and 3.90%, based on locked forward contracts and projected deployments. - **Tax Rate**: Assumes a GAAP and Non-GAAP income tax rate of approximately 25%.

Segment performance

The company reported consolidated revenue growth of 8% year-over-year. Service revenue reached a record $124.4 million, up 6% year-over-year, driven by account growth and increased engagement in marketplace activities and invested HSA balances. Custodial revenue grew 10% to a record $175.9 million, supported by an annualized yield on HSA cash of 3.83%. Interchange revenue increased 5% to $50.4 million, reflecting higher member spending and transaction activity. Gross profit was a record $258 million, representing approximately 74% of total revenue compared to 71% in the prior year quarter.

Risks & headwinds

- **Interest Rate Volatility**: While hedging reduces volatility, future market conditions and changes in five-year treasury yields could impact custodial yields, although current hedges lock in rates through fiscal years 2027–2029. - **Competitive Pressure**: The market is highly competitive, with potential headline price erosion and competitors reducing service costs, requiring a balance between sharing savings with clients and maintaining margins. - **Macroeconomic Factors**: Healthcare affordability challenges persist, but reliance on employer adoption means performance is somewhat insulated from direct labor market weakness, though broader economic shifts could affect consumer behavior. - **Operational Execution**: Continued success depends on effective integration of the new app, successful scaling of the Marketplace, and sustained efficiency gains from AI implementation across client and back-office workflows.

Analyst Q&A

• Q: Analyst asked about the inflection in service revenue growth and early learnings from the Marketplace, noting it had been immaterial previously. /

  A: CEO attributed the rise to strategic focus on Marketplace and investing. Early learnings show strong subscriber and transaction growth, with 'Health Savings Days' driving record traffic. Non-metabolic categories now comprise one-third of Marketplace revenue, and feedback indicates members appreciate the connection to wellness. Conversion metrics are improving as they integrate with the upcoming app.

• Q: Analyst inquired about distribution strategy balance between partners and direct sales, and how analytics will be monetized. /

  A: CEO stated the hybrid model works well, leveraging hundreds of health plan partners and brokers alongside direct channels. Analytics are not being developed as a standalone product but are leveraged within 'strategic advisory services.' These insights help clients compare against peers and adopt high-deductible plans to lower costs, thereby driving greater adoption and retention rather than generating separate revenue lines.

• Q: Analyst questioned the runway for margin expansion given current AI efficiencies and the sustainability of HSA cash yields. /

  A: CEO noted that while significant progress has been made in member services via AI, the biggest remaining efficiencies lie in client services and back-office claims automation, suggesting further margin expansion is possible. CFO explained that the yield band is tight due to heavy hedging; however, they are innovating by hedging 'enhanced rate' repricings. They balance revenue share with clients against cost savings to manage margin amidst price erosion risks.

• Q: Analyst asked if healthcare affordability crises and employers exiting the market influence customer demand. /

  A: CEO and Founder confirmed affordability is a massive tailwind. Employers are actively seeking solutions to curb rising healthcare costs, leading to increased adoption of HSAs attached to high-deductible plans. In the individual market, new legislation making bronze/catastrophic plans HSA-qualified has boosted uptake. The company is expanding into ICRA and IFP channels to capture this demand, viewing the crisis as an opportunity to drive HSA funding.

• Q: Analyst asked about the rationale behind lower cash balance growth relative to account growth and Marketplace conversion rates. /

  A: CEO explained this is a deliberate strategy to drive lifetime value by encouraging members to invest or spend, which historically leads to higher contributions over time. Regarding Marketplace, they are focused on building a top-of-funnel engagement engine via the app. While still early, they are optimizing UX and inventory to improve conversion, leveraging their low cost of acquisition and partner delivery networks to maintain high margins distinct from traditional consumer marketplaces.