HealthEquity, Inc. (HQY) Earnings

Management highlights

- Core Business Growth * Total HSA assets grew 19% year over year, with 172 thousand new HSAs added (15% growth in new HSA sales), and total HSA account growth of 8% outpacing the industry's 6% market growth reported by Devenir. Client retention remains strong, and the enterprise sales pipeline is the largest it has been in years, with higher win rates for new large client logos. * HSA investor accounts grew 18% year over year, and invested assets grew 38% year over year. Only 10% of HSAs industry-wide fully utilize available tax benefits of investing, representing a large long-term growth opportunity. - Digital and AI-Driven Efficiency * Mobile monthly active usage increased 90% year over year, with over two-thirds of marketplace transactions occurring through the mobile app. AI is used as an operational amplifier to improve member experience and lower costs. * AI-driven tools reduced manual handling of member/client service emails by 25%, and reduced manual effort for targeted workflows (card servicing, claims inquiries) by over 90% while cutting processing times by up to 50%. AI automation reduced card-related service center contacts by more than 50 thousand, and fraud costs declined nearly 90% year over year, with fraud remaining below target and card acceptance rates improving. - Mark Marketplace Development * The company's curated member health marketplace, Mark, now serves over 10 thousand members, with recent expansion into diagnostics and men's health adding to existing offerings including metabolic weight management, women's health, and wearables. Week-on-week member adoption remains strong even without external marketing, as offerings are exposed to existing engaged mobile users. * Metabolic/GLP weight management is the most active program to date, with per-member administrative fees of $90-$100 per month for participating members, while newly launched men's TRT has already seen rapid early adoption with per-member fees above $50 per month.

Guidance

- Management raised full-year fiscal 27 guidance to reflect stronger than expected first quarter performance, favorable yield locking, and improved efficiency trajectories. - Full fiscal 27 revenue is now expected between $1.41 billion and $1.42 billion. - GAAP net income is projected between $242 million and $248 million, equal to $2.88 to $2.95 per diluted share. - Non-GAAP net income is projected between $392 million and $398 million, equal to $4.66 to $4.73 per diluted share, based on an estimated 84 million diluted shares outstanding. - Adjusted EBITDA is expected between $625 million and $633 million, with the 46% adjusted EBITDA margin achieved in Q1 expected to be sustained for the full year. - The average expected yield on HSA cash for fiscal 27 is now 3.85%, supported by the company's forward rate lock program that has locked in 5-year treasury rates of ~3.9% net of costs on $3.5 billion of maturities between FY27 and FY29, reducing yield volatility. - The board increased the company's share repurchase authorization by $1 billion, and management expects to remain an active repurchaser of undervalued shares while maintaining ample capacity for attractive tuck-in acquisitions.

Segment performance

HealthEquity reports revenue across three core revenue segments for Q1 FY27: 1. Service revenue: $123 million, up 3% year over year, contributing 34.3% of total Q1 revenue. This segment includes revenue from the company's Mark marketplace. 2. Custodial revenue: $174 million, up 11% year over year, contributing 48.5% of total Q1 revenue. The annualized yield on HSA cash was 3.84%, including a one-time breakage fee from an exiting depository partner; excluding this fee, the yield was 3.78%. 3. Interchange revenue: $57.4 million, up 5% year over year, contributing 16.0% of total Q1 revenue, driven by higher member spend and transaction volume. In aggregate, total Q1 revenue increased 7% year over year, with gross profit reaching a record $250 million (72% of revenue, up from 68% in the year-ago quarter). GAAP net income was $69.4 million ($0.82 per diluted share), while non-GAAP net income was $105 million ($1.24 per diluted share). Adjusted EBITDA was $165 million, up 17% year over year, with an adjusted EBITDA margin of 46% (up from 42% year over year).

Risks & headwinds

- Forward looking yield and financial projections are based on current market indicators (SOFR, forward Treasury curves) that are subject to change, and actual results may differ from guidance. - HSA cash yields are exposed to interest rate volatility, though the company's forward hedging program narrows the range of potential outcomes from benchmark rate movements. - Lower than expected overall U.S. healthcare utilization could slow interchange revenue growth, though management has already incorporated conservative interchange assumptions into current guidance; lower utilization also increases HSA balances, which benefits custodial and investment revenue. - The recent low internal employee medical claim utilization that contributed $2 million of Q1 cost improvement is viewed as seasonal, and management expects this cost to rebound to projected levels over the rest of the fiscal year. - Vertical integration of competitors via acquisition could create market shifts, though management views this as a potential net positive opportunity to win over displaced clients. Macro economic pressure and healthcare affordability trends could also create unpredictable shifts in employer adoption of high-deductible HSA-eligible health plans.

Analyst Q&A

• Q: What is the gating function for accelerating sales and marketing investment to grow the Mark marketplace? /

  A: Management states there is no traditional gating function for external marketing spend, as Mark leverages HealthEquity's existing captive base of engaged mobile members. Growth is driven first by increasing monthly active mobile users, then exposing existing users to relevant marketplace offerings. The company has now scaled foundational infrastructure, added new product categories (TRT, diagnostics), and sees strong organic uptake from new category additions without external marketing. Early adoption trends give management confidence in the long-term trajectory of the marketplace.

• Q: How does the competitive landscape change following the acquisition of major competitor Allegis by UnitedHealth, and have you seen changes to pipeline activity? /

  A: Management confirms they are referring to the Allegis acquisition, noting that Allegis operates primarily as a white-label software provider, while HealthEquity sells directly to clients. They will monitor for existing Allegis clients that may view the vertical integration as a conflict of interest related to data sharing, which could create new business opportunities for HealthEquity. Overall, management views the acquisition as a net positive for HealthEquity's market position. /

• Q: How do app users compare economically to non-app users, in terms of both revenue and cost impacts? /

  A: Management states app users deliver both cost and revenue benefits. App users can access AI-powered self-service for common requests (card activation, balance checks, claims inquiries), which reduces service center contacts and lowers cost to serve. Higher app engagement also drives the flywheel effect: two-thirds of marketplace transactions occur on mobile, and app-based enrollment has driven strong growth in HSA investor accounts, increasing lifetime member value. App use also exposes members to additional marketplace offerings, further boosting engagement. /

• Q: What is driving the lower-than-expected Q1 service costs, and how sustainable is this improvement for the rest of FY27? /

  A: Management confirms that approximately $2 million of the year-over-year service cost improvement came from much lower than expected internal employee medical claim utilization, a trend seen across the entire market that management views as seasonal. This cost improvement was pushed out to later quarters in the updated forecast, as management expects utilization to revert to expected actuarial levels. The remaining ~$6 million of year-over-year cost improvement is attributed to permanent AI-driven efficiency gains and improved fraud reduction, which are expected to be sustained for the full year. /

• Q: Has macroeconomic weakness or lower healthcare utilization reduced demand for HSAs, or changed contribution trends for lower balance accounts? /

  A: Management notes that healthcare affordability is the core driver of HSA adoption, and economic pressure actually increases employer interest in high-deductible HSA-eligible plans to reduce healthcare costs. HealthEquity has consistently grown HSA contributions faster than the broader industry, with digital engagement driving higher contribution levels. Industry founder Steve Neeleman adds that HSAs are countercyclical: when employers look to cut costs, they increasingly turn to HSAs, which also improve consumer health security by helping families cover out-of-pocket costs, reducing delayed care that increases overall system costs.