In their annual report, Health Equity reported the following ways they make money.

• Monthly Service Revenue: These included monthly money from Network partners and Custodial agreements with Individual members.
  • I think it is more like the fees paid to Health Equity by my employer.
  • I might also be paying some fees for maintaining my account.
  • More clients and more accounts would mean more revenue.
• Custodial Revenue: HSA Assets are held at their federally insured cash deposits. It means the cash I see in my account is not with Health Equity but with some federal entity on which Health Equity is earning interest. I think this is a good source of revenue because HSA is a saving account, and consumers might want to keep cash because the gains on saving are tax-free. But As we already know, not everyone is using it properly.
  • I think this revenue also includes: Record keeping fees on assets held with investment partners.
  • Less interest rate means less revenue. It might be impacting current income.
• Interchange Revenue: Fees paid by merchants on payments that their members make using their physical payment cards and virtual platforms. I think more like how Credit card company makes money on payments. 
  • It may be one area that may be susceptive to interruption.
  • A lot depends on how the customer chooses to pay.

I now want to find out how much individual revenue contributes to overall revenue. It will help me understand where they might face headwinds.

• All the revenue streams are consistently increasing smoothly, the Only exception being Servicing revenue. The acquisition must have played a part in the sudden increase.
• Even when HSA and HSA assets increased in the last couple of years. Custodial revenue is shrinking. It may be because Interest rates were at a historical low.
• They have increased their market share from 4% in 2010 to 16% by 2020. Health Equity is 2nd largest by Assets. Using technology as a platform, they are creating an eco-system of similar products, and the potential of cross-selling has not even scratched the surface.

I am now comfortable with the business and how they make money. It is time to take a closer look at finances and do my best to see if the growth aspects match companies’ performance. I am intimidated by finances and how to make a little sense out of them. So the first thing I did was to take a simple course to understand financial reports. Here is one of the free courses. Without further ado, let me start.

According to the company, let’s see what impacted their revenue, which they listed in an annual report.

• WageWorks integration: Multi-year integration effort. Health Equity identified opportunities of approximately $80 million in annualized ongoing net synergies to be achieved by the end of the fiscal year ending January 31, 2022. Roughly $60 million were achieved as of January 31, 2021.
• Non-recurring 100 million $ are needed to achieve long-term synergies. Out of which, it incurred 78 million last year. Not much capital expenditure going forward.
• HSA increased 8%. HSA with investment increased 51%. The total number of accounts didn’t grow because 5% (0.4 million) decrease in CBDs. 0.8 million commuter accounts are suspended due to work from the home trend.
• HSA account that generates custodial revenue is up 19%, and HSA account that doesn’t generate custodial revenue is down 36%. HSA assets increased by 24%. HSA assets directly impact custodial revenue. Total HSA cash is up 17%, and Total HSA investments are up 38%.

As we can see, revenue increased exponentially after the WageWorks acquisition. And it’s evident the operating expenses incrementally increased during that period. At the same time, net income is coming down. So the question needs to be asked: What are they doing with the extra revenue they are making? One we know is that operating expenses exploded by 53%. The merger and expansion are undoubtedly playing their part.

The money came from 2 sources—the current long-term debt of 1.3 Billion dollars and total outstanding shares in the market. The latter increased post-acquisition substantially even when it was all Cash Deal. The positive net change in cash is mainly from cash from financing and issuing shares of our common stock at a public offering price of $56.00 per share. It would mean that I would be owning less % of the company than I owned in early 2020, even when I am holding the same amount of stocks. Other credit agreement includes a five-year senior secured revolving credit facility in an aggregate principal amount of up to $350.0 million. They used 200 million cash to pay the term loan, and they needed money for general purposes, i.e., technology infrastructure and potential acquisitions. The good news is they are still generating good cash from operations.

In my next post, I will try to come up with reasoning why or why not to invest in health Equity and conclude if I am going in or not. Until then, Au revoir.