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HealthEquity, Inc. $50.17($.57)(1.12%)

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 HealthEquity Reports Fourth Quarter and Year Ended January 31, 2017 Financial Results
   Tuesday, March 21, 2017 4:07:08 PM ET

Highlights of the fiscal year include:

-- Revenue of $178.4 million, an increase of 41% compared to FY16.

-- Net income of $26.4 million, an increase of 59% compared to FY16.

-- Net income per diluted share of $0.44 compared to $0.28 in FY16.

-- Adjusted EBITDA of $62.8 million, an increase of 55% compared to FY16.

-- HSA Members of 2.7 million, an increase of 28% compared to FY16.

-- Total Custodial Assets of $5.0 billion, an increase of 37% compared to FY16.

Highlights of the fourth quarter include:

-- Revenue of $46.8 million, an increase of 30% compared to Q4 FY16.

-- Net income of $4.1 million, an increase of 30% compared to Q4 FY16.

-- Net income per diluted share of $0.07 compared to $0.05 in Q4 FY16.

-- Adjusted EBITDA of $11.8 million, an increase of 33% compared to Q4 FY16.

HealthEquity, Inc. (HQY ) ("HealthEquity" or the "Company"), the nation’s largest health savings account ("HSA") non-bank custodian, today announced financial results for its fourth quarter and year ended January 31, 2017.

"HealthEquity had another record setting year in fiscal year 2017 surpassing $5 billion in custodial assets and opening a record 668,000 new HSAs," said Jon Kessler, President and CEO of HealthEquity. "Our 37% growth of custodial assets and 28% growth of HSAs led to greater market share and generated year-over-year revenue growth of 41% and Adjusted EBITDA growth of 55%. Adjusted EBITDA margins reached a record 35% of revenue as we continue to scale our proprietary platform and unique healthcare ecosystem. Building on our successful fiscal 2017, we are poised for another strong growth year in fiscal 2018."

Dr. Steve Neeleman, Vice Chairman and Founder of HealthEquity, added, "With our commitment to remarkable ’purple’ service combined with favorable tailwinds politically, and economically, and general market tides favoring HSAs, we are well-positioned to continue our efforts to outpace the market in helping build health savings for our members and driving down healthcare cost growth for our Network Partners."

Full year financial results

For the year ended January 31, 2017, HealthEquity reported revenue of $178.4 million, an increase of 41% compared to $126.8 million for the year ended January 31, 2016. Revenue consisted of:

-- Service revenue of $77.3 million, an increase of 25% compared to FY16.

-- Custodial revenue of $59.6 million, an increase of 58% compared to FY16.

-- Interchange revenue of $41.5 million, an increase of 51% compared to FY16.

Net income was $26.4 million for the year ended January 31, 2017, compared to $16.6 million for the year ended January 31, 2016.

Net income per diluted share was $0.44 for the year ended January 31, 2017, compared to $0.28 for the year ended January 31, 2016.

Non-GAAP Adjusted EBITDA was $62.8 million for the year ended January 31, 2017, an increase of 55% compared to $40.6 million for the year ended January 31, 2016. Adjusted EBITDA was 35% of revenue for the year ended January 31, 2017, compared to 32% for the year ended January 31, 2016.

As of January 31, 2017, we had $180.4 million of cash, cash equivalents and marketable securities and no outstanding debt. This compares to $123.8 million in cash, cash equivalents and marketable securities and no outstanding debt as of January 31, 2016.

Fourth quarter financial results

For the fourth quarter ended January 31, 2017, HealthEquity reported revenue of $46.8 million, an increase of 30% compared to $35.9 million for the fourth quarter ended January 31, 2016. Revenue consisted of:

-- Service revenue of $20.6 million, an increase of 21% compared to Q4 FY16.

-- Custodial revenue of $16.0 million, an increase of 44% compared to Q4 FY16.

-- Interchange revenue of $10.1 million, an increase of 33% compared to Q4 FY16.

Net income was $4.1 million for the fourth quarter ended January 31, 2017, compared to $3.1 million for the fourth quarter ended January 31, 2016.

Net income per diluted share was $0.07 for the fourth quarter ended January 31, 2017, compared to $0.05 for the fourth quarter ended January 31, 2016.

Non-GAAP Adjusted EBITDA was $11.8 million for the fourth quarter ended January 31, 2017, an increase of 33% compared to $8.9 million for the fourth quarter ended January 31, 2016.

HSA Member and Custodial asset metrics

The total number of HSAs for which we serve as a non-bank custodian ("HSA Members") as of January 31, 2017 was 2.7 million, an increase of 28% from 2.1 million as of January 31, 2016.

Total Custodial Assets as of January 31, 2017 was $5.0 billion, an increase of 37% year over year, consisting of:

-- Custodial Cash Assets of $4.4 billion, an increase of 34% compared to Q4 FY16; and

-- Custodial Investment Assets of $658.6 million, an increase of 62% compared to Q4 FY16.

Business outlook

For the year ended January 31, 2018, we expect our revenue to be between $220.0 million and $225.0 million. Our outlook for net income is a range of $30.0 million to $34.0 million, resulting in a net income per diluted share range of $0.50 to $0.55 (based on an estimated 61.5 million weighted-average shares outstanding). Our Adjusted EBITDA outlook is a range of $77.0 million to $82.0 million. The business outlook for the year ended January 31, 2018 assumes a projected effective income tax rate of approximately 37%.

A reconciliation of the non-GAAP financial measure used throughout this release to the most comparable GAAP financial measure is included with the financial tables at the end of this release.

Conference call

HealthEquity management will host a conference call at 5:00 pm (Eastern Time) on Tuesday, March 21, 2017 to discuss the fiscal year 2017 fourth quarter and full year financial results. The conference call will be accessible by dialing 884-791-6252, or 661-378-9636 for international callers, and referencing conference ID 79091036. A live audio webcast of the call will also be available on the investor relations section of our website at http://ir.healthequity.com .

Non-GAAP financial Information

To supplement our financial information presented on a GAAP basis, we disclose Adjusted EBITDA, which is a non-GAAP financial measure. We define Adjusted EBITDA as adjusted earnings before interest, taxes, depreciation and amortization, stock-based compensation expense, and other certain non-operating items.

Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP results. The Company cautions investors that non-GAAP financial information, by its nature, departs from GAAP; accordingly, its use can make it difficult to compare current results with results from other reporting periods and with the results of other companies. Whenever we use these non-GAAP financial measures, we provide a reconciliation of the applicable non-GAAP financial measure to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of the non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed in the tables below.

Forward-Looking Statements

This press release contains "forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements regarding the company’s industry, business strategy, plans, goals and expectations concerning our market position, product expansion, future operations, revenue, margins, profitability, future efficiencies, capital expenditures, liquidity and capital resources and other financial and operating information. When used in this discussion, the words "may," "believes," "intends," "seeks," "anticipates," "plans," "estimates," "expects," "should," "assumes," "continues," "could," "will," "future" and the negative of these or similar terms and phrases are intended to identify forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which involve factors or circumstances that are beyond the control of the company. The company’s actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to, the continued availability of tax-advantaged consumer-directed benefits to employers and employees, the company’s ability to acquire and retain new network partners and to cross-sell its products to existing network partners and members, the company’s ability to successfully identify, acquire and integrate portfolio purchases or acquisition targets, the company’s ability to raise awareness among employers and employees about the advantages of adopting and participating in consumer-directed benefits programs, and the company’s ability to identify and execute on network partner opportunities. For a detailed discussion of these and other risk factors, please refer to the risks detailed in the company’s filings with the Securities and Exchange Commission, including, without limitation, our most recent Annual Report on Form 10-K and subsequent periodic and current reports. Past performance is not necessarily indicative of future results. The company undertakes no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. These forward-looking statements should not be relied upon as representing the company’s views as of any date subsequent to the date of this press release.

HealthEquity, Inc. and its subsidiaries
Consolidated balance sheets (unaudited)
(in thousands, except par value)                                                                                                                          January 31, 2017        January 31, 2016
Assets
Current assets
Cash and cash equivalents                                                                                                                                 $        139,954        $        83,641
Marketable securities, at fair value                                                                                                                      40,405                  40,134
Total cash, cash equivalents and marketable securities                                                                                                    180,359                 123,775
Accounts receivable, net of allowance for doubtful accounts of $75 and $40 as of January 31, 2017 and 2016, respectively                                  17,001                  14,308
Inventories                                                                                                                                               592                     620
Current deferred tax asset                                                                                                                                --                      2,642
Other current assets                                                                                                                                      2,867                   1,703
Total current assets                                                                                                                                      200,819                 143,048
Property and equipment, net                                                                                                                               5,170                   3,506
Intangible assets, net                                                                                                                                    65,020                  66,840
Goodwill                                                                                                                                                  4,651                   4,651
Deferred tax asset                                                                                                                                        1,615                   --
Other assets                                                                                                                                              1,861                   1,750
Total assets                                                                                                                                              $        279,136        $        219,795
Liabilities and stockholders’ equity
Current liabilities
Accounts payable                                                                                                                                          $        3,221          $        2,431
Accrued compensation                                                                                                                                      8,722                   7,776
Accrued liabilities                                                                                                                                       3,760                   1,899
Total current liabilities                                                                                                                                 15,703                  12,106
Long-term liabilities
Other long-term liabilities                                                                                                                               1,456                   236
Deferred tax liability                                                                                                                                    37                      3,996
Total long-term liabilities                                                                                                                               1,493                   4,232
Total liabilities                                                                                                                                         17,196                  16,338
Commitments and contingencies
Stockholders’ equity
Preferred stock, $0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of January 31, 2017 and 2016                           --                      --
Common stock, $0.0001 par value, 900,000 shares authorized, 59,538 and 57,726 shares issued and outstanding as of January 31, 2017 and 2016, respectively 6                       6
Additional paid-in capital                                                                                                                                232,114                 199,940
Accumulated other comprehensive loss, net                                                                                                                 (165              )     (98               )
Accumulated earnings                                                                                                                                      29,985                  3,609
Total stockholders’ equity                                                                                                                                261,940                 203,457
Total liabilities and stockholders’ equity                                                                                                                $        279,136        $        219,795
HealthEquity, Inc. and its subsidiaries
Consolidated statements of operations and comprehensive income (unaudited)
                                                                                                              Three months ended January 31,       Year ended January 31,
(in thousands, except per share data)                                                                         2017            2016                 2017              2016
Revenue
Service revenue                                                                                               $     20,644    $     17,101         $    77,254       $    61,608
Custodial revenue                                                                                             16,036          11,163               59,593            37,755
Interchange revenue                                                                                           10,134          7,622                41,523            27,423
Total revenue                                                                                                 46,814          35,886               178,370           126,786
Cost of revenue
Service costs                                                                                                 17,397          13,256               51,868            39,418
Custodial costs                                                                                               2,556           2,051                9,767             6,522
Interchange costs                                                                                             2,632           2,148                10,380            8,248
Total cost of revenue                                                                                         22,585          17,455               72,015            54,188
Gross profit                                                                                                  24,229          18,431               106,355           72,598
Operating expenses
Sales and marketing                                                                                           5,556           4,665                18,320            13,302
Technology and development                                                                                    6,548           4,891                22,375            16,832
General and administrative                                                                                    4,861           3,535                20,151            14,113
Amortization of acquired intangible assets                                                                    1,083           981                  4,297             2,208
Total operating expenses                                                                                      18,048          14,072               65,143            46,455
Income from operations                                                                                        6,181           4,359                41,212            26,143
Other expense
Other expense, net                                                                                            (158         )  (63            )     (1,092      )     (589        )
Total other expense                                                                                           (158         )  (63            )     (1,092      )     (589        )
Income before income taxes                                                                                    6,023           4,296                40,120            25,554
Income tax provision                                                                                          1,961           1,168                13,744            8,941
Net income                                                                                                    $     4,062     $     3,128          $    26,376       $    16,613
Net income attributable to common stockholders:
Basic                                                                                                         $     4,062     $     3,128          $    26,376       $    16,613
Diluted                                                                                                       $     4,062     $     3,128          $    26,376       $    16,613
Net income per share attributable to common stockholders:
Basic                                                                                                         $     0.07      $     0.05           $    0.45         $    0.29
Diluted                                                                                                       $     0.07      $     0.05           $    0.44         $    0.28
Weighted-average number of shares used in computing net income per share attributable to common stockholders:
Basic                                                                                                         59,438          57,673               58,615            56,719
Diluted                                                                                                       60,645          59,420               59,894            58,863
Comprehensive income:
Net income                                                                                                    4,062           3,128                26,376            16,613
Other comprehensive loss:
Unrealized loss on available-for-sale marketable securities, net of tax                                       (31          )  (64            )     (67         )     (98         )
Comprehensive income                                                                                          $     4,031     $     3,064          $    26,309       $    16,515
HealthEquity, Inc. and its subsidiaries
Consolidated statements of redeemable convertible preferred stock and stockholders’ equity (deficit) (unaudited)
                                                                                                                      Stockholders’ equity (deficit)
                                                                                           Redeemable                 Convertible              Common stock     Common         Additional        Accumu-      Accumu-          Total
                                                                                           convertible                preferred stock                                                            lated        lated            stock-
                                                                                           preferred stock                                                                                       compre-                       holders’
(in thousands, except exercise prices)                                                     Shares      Amount         Shares     Amount        Shares  Amount   stock          paid-in           hensive      earnings         equity
                                                                                                                                                                warrants       capital           loss         (deficit)        (deficit)
Balance as of January 31, 2014                                                             17,349      $   46,714     6,156      $   8,129     7,038   $   1    $    2,334     $     --          $   --       $    (23,170 )   $    (12,706 )
Issuance of series D-3 redeemable convertible preferred stock cash dividend                --          --             --         --            --      --       --             (347          )   --           --               (347         )
Issuance of common stock cash dividend                                                     --          --             --         --            --      --       --             (50,000       )   --           --               (50,000      )
Issuance of common stock:                                                                                                                                                                                                      --
Exercise of 2,972 warrants at $0.8008 per share                                            --          --             --         --            2,972   --       (2,334     )   4,714             --           --               2,380
Exercise of 1,841 options at $1.3204 per share                                             --          --             --         --            1,841   --       --             2,430             --           --               2,430
Conversion of preferred stock to common stock upon initial public offering                 (17,349 )   (42,693    )   (6,156 )   (8,129    )   32,486  3        --             50,819            --           --               42,693
Issuance of common stock                                                                   --          --             --         --            10,465  1        --             132,586           --           --               132,587
Stock-based compensation                                                                   --          --             --         --            --      --       --             2,525             --           --               2,525
Tax benefit on stock options exercised                                                     --          --             --         --            --      --       --             3,429             --           --               3,429
Redeemable convertible preferred stock accretion                                           --          (4,021     )   --         --            --      --       --             4,021             --           --               4,021
Reclassification of series D-3 redeemable convertible preferred stock derivative liability --          --             --         --            --      --       --             6,917             --           --               6,917
Net income                                                                                 --          --             --         --            --      --       --             --                --           10,166           10,166
Balance as of January 31, 2015                                                             --          $   --         --         $   --        54,802  $   5    $    --        $     157,094     $   --       $    (13,004 )   $    144,095
Issuance of common stock:
Exercise of 1,951 options at $0.98 per share                                               --          --             --         --            1,951   1        --             1,914             --           --               1,915
Issuance of common stock                                                                   --          --             --         --            973     --       --             23,492            --           --               23,492
Stock-based compensation                                                                   --          --             --         --            --      --       --             5,883             --           --               5,883
Tax benefit on stock options exercised                                                     --          --             --         --            --      --       --             11,557            --           --               11,557
Other comprehensive loss, net of tax                                                       --          --             --         --            --      --       --             --                (98      )   --               (98          )
Net income                                                                                 --          --             --         --            --      --       --             --                --           16,613           16,613
Balance as of January 31, 2016                                                             --          $   --         --         $   --        57,726  $   6    $    --        $     199,940     $   (98  )   $    3,609       $    203,457
Issuance of common stock:
Issuance of common stock upon exercise of options, and for restricted stock units          --          --             --         --            1,812   --       --             7,142             --           --               7,142
Stock-based compensation                                                                   --          --             --         --            --      --       --             8,398             --           --               8,398
Tax benefit on stock options exercised                                                     --          --             --         --            --      --       --             16,634            --           --               16,634
Other comprehensive loss, net of tax                                                       --          --             --         --            --      --       --             --                (67      )   --               (67          )
Net income                                                                                 --          --             --         --            --      --       --             --                --           26,376           26,376
Balance as of January 31, 2017                                                             --          $   --         --         $   --        59,538  $   6    $    --        $     232,114     $   (165 )   $    29,985      $    261,940
HealthEquity, Inc. and its subsidiaries
Consolidated statements of cash flows (unaudited)
                                                                                  Year ended January 31,
(in thousands)                                                                    2017               2016              2015
Cash flows from operating activities:
Net income                                                                        $    26,376        $    16,613       $    10,166
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization                                                     13,186             8,601             5,890
Deferred taxes                                                                    (2,891       )     (2,178      )     1,593
Stock-based compensation                                                          8,398              5,883             2,525
Loss on revaluation of redeemable convertible preferred stock derivative          --                 --                735
Loss on other investments                                                         --                 --                24
Bad debt expense                                                                  35                 24                31
Amortization of deferred financing costs                                          68                 23                --
Changes in operating assets and liabilities:
Accounts receivable                                                               (2,728       )     (5,174      )     (3,380       )
Inventories                                                                       28                 5                 (234         )
Other assets                                                                      (1,343       )     (107        )     (1,608       )
Accounts payable                                                                  567                1,011             (1,156       )
Accrued compensation                                                              946                2,475             1,167
Accrued liabilities                                                               1,729              (383        )     (802         )
Other long-term liabilities                                                       1,220              (252        )     95
Net cash provided by operating activities                                         45,591             26,541            15,046
Cash flows from investing activities:
Purchase of marketable securities                                                 (379         )     (40,291     )     --
Purchase of property and equipment                                                (3,645       )     (2,376      )     (1,712       )
Purchase of software and capitalized software development costs                   (9,030       )     (6,896      )     (6,420       )
Purchase of other investments                                                     --                 (500        )     (305         )
Acquisition of intangible member assets                                           --                 (40,489     )     --
Net cash used in investing activities                                             (13,054      )     (90,552     )     (8,437       )
Cash flows from financing activities:
Dividend payments                                                                 --                 --                (50,347      )
Proceeds from initial public offering, net of payments for offering costs         --                 --                132,587
Proceeds from follow-on offering, net of payments for offering costs              --                 23,492            --
Proceeds from exercise of common stock options                                    7,142              1,915             2,430
Proceeds from exercise of common stock warrants                                   --                 --                2,380
Tax benefit from exercise of common stock options                                 16,634             11,557            3,429
Deferred financing costs paid                                                     --                 (317        )     --
Net cash provided by financing activities                                         23,776             36,647            90,479
Increase (decrease) in cash and cash equivalents                                  56,313             (27,364     )     97,088
Beginning cash and cash equivalents                                               83,641             111,005           13,917
Ending cash and cash equivalents                                                  $    139,954       $    83,641       $    111,005

Stock-based compensation expense (unaudited)

Total stock-based compensation expense included in the consolidated statements of operations and comprehensive income is as follows:

                                       Three months ended January 31,   Year ended January 31,
(in thousands)                         2017           2016              2017        2016
Cost of revenue                        $     522      $     348         $   1,780   $   1,088
Sales and marketing                    (16         )  198               914         903
Technology and development             613            336               1,903       1,014
General and administrative             880            747               3,801       2,878
Total stock-based compensation expense $     1,999    $     1,629       $   8,398   $   5,883

HSA Members (unaudited)

                                                                                                % change from   % change from
                                       January 31, 2017   January 31, 2016   January 31, 2015   2016 to 2017    2015 to 2016
HSA Members                            2,746,132          2,140,631          1,426,785          28%             50%
Average HSA Members - Year-to-date     2,339,091          1,600,327          1,087,962          46%             47%
Average HSA Members - Quarter-to-date  2,519,382          1,850,843          1,230,256          36%             50%
HSAs with investments                  65,906             44,680             30,552             48%             46%

Custodial assets (unaudited)

                                                                                                              % change from   % change from
(in thousands, except percentages)             January 31, 2017     January 31, 2016     January 31, 2015     2016 to 2017    2015 to 2016
Custodial cash                                 $        4,380,487   $        3,278,628   $        2,075,741   34%             58%
Custodial investments                          658,580              405,878              286,526              62%             42%
Total custodial assets                         $        5,039,067   $        3,684,506   $        2,362,267   37%             56%
Average daily custodial cash - Year-to-date    $        3,661,058   $        2,326,506   $        1,553,845   57%             50%
Average daily custodial cash - Quarter-to-date $        3,854,518   $        2,682,827   $        1,698,402   44%             58%

Net income reconciliation to Adjusted EBITDA (unaudited)

                                           Three months ended January 31,    Year ended January 31,
(in thousands)                             2017            2016              2017            2016
Net income                                 $     4,062     $     3,128       $   26,376      $   16,613
Interest income                            (146         )  (112           )  (531       )    (414       )
Interest expense                           69              68                275             91
Income tax provision                       1,961           1,168             13,744          8,941
Depreciation and amortization              2,559           1,890             8,889           6,393
Amortization of acquired intangible assets 1,083           981               4,297           2,208
Stock-based compensation expense           1,999           1,629             8,398           5,883
Other (1)                                  236             106               1,348           910
Adjusted EBITDA                            $     11,823    $     8,858       $   62,796      $   40,625

(1) For the three months ended January 31, 2017 and 2016, Other consisted of non-income based taxes of $101 and $85, and other costs of $135 and $21, respectively. For the years ended January 31, 2017 and 2016, Other consisted of miscellaneous taxes of $358 and $334, acquisition-related costs of $631 and $471, and other costs of $359 and $105, respectively.

Reconciliation of net income outlook to Adjusted EBITDA outlook

                                           For the year ending
(in millions)                              January 31, 2018
Net income                                 $30 - 34
Income tax provision                       18 - 19
Depreciation and amortization                12
Amortization of acquired intangible assets   4
Stock-based compensation expense             12
Other                                        1
Adjusted EBITDA                            $77 - 82
Investor Relations Contact:
Richard Putnam
801-727-1209
rputnam@healthequity.com

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