10-Q: HealthEquity Reports Strong Q2 Growth, Boosted by HSA Assets

HealthEquity, Inc. announced significant financial and operational growth for the second quarter and first half of fiscal 2026, driven by increased HSA assets and strategic technology investments.

Summary

• Total revenue for the three months ended July 31, 2025, increased by 9% to $325.8 million, up from $299.9 million in the prior year.
• Net income for the three months ended July 31, 2025, surged by 67% to $59.9 million, compared to $35.8 million in the same period last year.
• Diluted earnings per share (EPS) for the quarter rose by 70% to $0.68, up from $0.40 year-over-year.
• Adjusted EBITDA for the quarter increased by 18% to $151.1 million, from $128.3 million in the previous year.
• Total HSA Assets grew by 12% to $33.1 billion as of July 31, 2025, compared to $29.5 billion a year prior.
• The number of Health Savings Accounts (HSAs) administered increased by 6% to 9.99 million, and total accounts (HSAs and CDBs) reached 17.14 million, up 5%.
• Custodial revenue saw a 15% increase for the quarter, reaching $159.9 million, primarily due to a higher average annualized yield on HSA cash (3.51% vs. 3.10%).
• The company authorized a new $300 million common stock repurchase program in June 2025, with $351.8 million remaining authorized under all programs as of July 31, 2025.
• The One Big Beautiful Bill Act (OBBBA), signed in July 2025, is expected to significantly reduce corporate income tax payments for fiscal years ending January 31, 2026, and 2027, by allowing immediate expensing of domestic research and experimental expenditures and bonus depreciation.

Sentiment

Score: 8

Explanation: The company reported strong financial results with significant increases in revenue, net income, and EPS. Operational metrics like HSA Assets and Total Accounts also showed healthy growth. The new stock repurchase program and favorable tax legislation (OBBBA) are positive catalysts. While there are ongoing legal and regulatory risks related to a cybersecurity incident and a slight slowdown in new organic HSA sales, the overall outlook and performance are very positive.

Positives

• Strong revenue growth across all segments, with total revenue up 9% for the quarter and 12% for the six months.
• Significant increase in net income (up 67% for the quarter, 76% for six months) and diluted EPS (up 70% for the quarter, 77% for six months).
• Robust growth in HSA Assets (up 12% to $33.1 billion), driven by a 23% increase in HSA investments.
• Expansion of customer base with 6% growth in HSAs and 5% growth in Total Accounts.
• Improved custodial revenue yield, with average annualized yield on HSA cash increasing to 3.51% from 3.10%.
• Operating expenses decreased by 1% for the quarter and 2% for the six months, indicating improved efficiency.
• New $300 million stock repurchase program demonstrates confidence in future performance and commitment to shareholder returns.
• Positive impact from the One Big Beautiful Bill Act (OBBBA) expected to significantly reduce future tax payments.
• Efficiencies from technology investments led to a decrease in service costs and interchange costs.

Negatives

• New HSAs from sales decreased by 13% quarter-to-date and 18% year-to-date, indicating a slowdown in organic account acquisition compared to the prior year.
• Service revenue growth was modest at 1%, partially offset by lower average service fees per account.
• Technology and development expenses increased by 11% for the quarter and 10% for the six months, reflecting ongoing investment but also higher costs.
• Interest expense increased by 10% for the six months ended July 31, 2025, primarily due to a higher average principal balance on debt.

Risks

• The company is subject to multiple legal actions, including a consolidated putative class action lawsuit and a mass arbitration action, related to a cybersecurity incident in fiscal 2025 where a business partner's user account was breached, potentially exposing personally identifiable information.
• Several regulatory inquiries are ongoing related to the cybersecurity incident, with the amount of potential loss currently not reasonably estimable.
• Litigation is subject to inherent uncertainties, and an unfavorable outcome could have a material adverse impact on financial position, results of operations, and cash flows.
• Concentration of market risk in tax-advantaged healthcare accounts means a significant downturn or changes in federal/state laws could materially affect results.
• Inflationary factors may adversely affect operating results if revenue does not correspondingly increase with inflation.
• Concentration of credit risk exists in cash and cash equivalents, accounts receivable, and derivatives, with a vast majority of cash and cash equivalents not covered by federal depository insurance.
• Exposure to interest rate risk on HSA Assets and Client-held funds, despite hedging, as sustained declines in prevailing interest rates could reduce custodial revenue.
• Changes in healthcare policy, such as 'Medicare for all' plans, could materially and adversely affect the business.
• Changes in tax policy, which underpin the company's offerings, are speculative and may affect the business in unpredictable ways.

Future Outlook

The company anticipates continued increases in service, custodial, and interchange revenue, driven by growth in Total Accounts and higher yields on HSA cash. Service costs are expected to decrease due to technology investments and operational efficiencies, while custodial costs are projected to rise with increasing HSA cash balances. Sales and marketing, and technology and development expenses are expected to increase due to continued investment in client engagement, technology modernization, and security. General and administrative expenses and amortization of acquired intangible assets are expected to decrease. The One Big Beautiful Bill Act is projected to significantly reduce corporate income tax payments for fiscal years 2026 and 2027. The company believes existing liquidity sources will be sufficient for at least the next 12 months, but may seek additional financing if needed for future business activities.

Management Comments

• "We believe that continued growth in healthcare costs and related factors will spur continued growth in HSA-qualified health plans and HSAs and may encourage additional policy changes making HSAs or similar vehicles available to new populations such as individuals in Medicare."
• "We believe that increased participation in our Enhanced Rates offering, diversification of Depository Partners and insurance company partners, varied contract terms, and other factors reduce our exposure to short-term fluctuations in prevailing interest rates and mitigate the short-term impact of sustained increases or declines in prevailing interest rates on our custodial revenue."
• "We expect our sales and marketing expenses to increase as we continue to focus on our Client and member engagement programs, including campaigns to reach individuals who are newly eligible for HSAs under recent legislative expansion."
• "We expect our technology and development expenses to increase as we continue to invest in the development and security of our proprietary technology, including our ongoing modernization project described earlier."

Industry Context

HealthEquity operates in the growing U.S. healthcare savings and spending market, which is experiencing structural changes driven by rising healthcare costs and increased participation in HSA-qualified health plans. The recent One Big Beautiful Bill Act (OBBBA) further expands HSA availability and eligibility, creating new market opportunities. The company maintains a leadership position as the largest HSA provider by number of accounts and second largest by HSA Assets, and the largest provider of other CDBs, differentiating itself through technology and service culture amidst competition from banks, financial institutions, and health plans.

Comparison to Industry Standards

• According to the 2024 Year-End Devenir HSA Research Report, as of December 2024, HealthEquity was the largest HSA provider by number of accounts.
• According to the 2024 Year-End Devenir HSA Research Report, as of December 2024, HealthEquity was the second largest HSA provider by HSA Assets.
• HealthEquity believes it is the largest provider of other Consumer-Directed Benefits (CDBs).

Management Changes

Corporate Governance

Legal Proceedings

• The company is subject to multiple legal actions, including a consolidated putative class action lawsuit in federal court and a mass arbitration action, stemming from a cybersecurity incident in fiscal 2025 where a business partner's user account containing personally identifiable information was breached.
• Plaintiffs allege failure to implement reasonable data security practices, seeking unspecified monetary damages, equitable relief, costs, and attorneys' fees.
• The court dismissed without prejudice the company's motion to compel arbitration and motion to dismiss in May 2025, allowing refiling after discovery.
• The company is also subject to several regulatory inquiries related to the cybersecurity incident.
• No loss accrual has been recorded as the company does not believe contingent liabilities are probable or estimable, but an unfavorable outcome could have a material adverse impact.

Stakeholder Impact

• Shareholders: Positive impact from strong financial performance, increased profitability, and a new stock repurchase program. Potential negative impact from legal/regulatory risks related to the cybersecurity incident.
• Employees: Continued investment in human capital through technology-enabled training, career development, and advancement opportunities, supporting the 'Purple culture'.
• Customers (HSA/CDB members): Enhanced services through technology investments (self-service, APIs, AI tools, mobile wallet) and expanded HSA eligibility due to new legislation. Potential concern regarding data security due to the past cybersecurity incident.
• Network Partners and Clients: Continued focus on expanding scope of services and attracting new partners through diverse distribution footprint and product breadth.
• Creditors: Company remains in compliance with all covenants under its credit agreement, indicating sound financial management of debt obligations.

Next Steps

• Continue to evaluate and integrate acquired HSA portfolios and businesses.
• Invest in the modernization of proprietary technology platforms to support new opportunities and enhance security, privacy, and infrastructure.
• Focus on Client and member engagement programs, including campaigns to reach individuals newly eligible for HSAs under recent legislative expansion.
• Monitor and react to relevant legal and regulatory trends, particularly regarding privacy and data security.
• Continue to manage interest rate risk through diversification of depository and insurance company partners and the use of Treasury bond forwards.
• Complete remaining merger integration activities to further reduce associated expenses.

Key Dates

Recommendation

HealthEquity's Q2 2025 results demonstrate exceptional financial health and operational efficiency, with significant year-over-year growth in revenue, net income, and EPS. The robust increase in HSA Assets and the strategic focus on technology modernization and client engagement position the company for continued market leadership. The new $300 million stock repurchase program signals strong management confidence and commitment to shareholder returns. Furthermore, the One Big Beautiful Bill Act is expected to provide substantial tax benefits in the coming fiscal years. While the ongoing cybersecurity-related legal and regulatory challenges present a risk, the company's strong performance, market position, and positive future outlook make it a compelling 'strong buy' for long-term investors.

Keywords

Health Savings Accounts, HSA, Consumer-Directed Benefits, CDB, HealthEquity, HQY, SEC Filing, 10-Q, Financial Results, Custodial Revenue, Interchange Revenue, HSA Assets, Stock Repurchase, Cybersecurity, Healthcare Technology, Financial Services, Tax-Advantaged Accounts