HealthEquity/WageWorks Combination Bearing Fruit

Introduction:

HealthEquity’s (HQY) tie-up with WageWorks (WAGE) is starting to bear fruit. The synergies of this combination were evident in the company’s Q3 2020 quarterly results as the stock rallied over 12% post earnings. HealthEquity made a bold move to acquire WageWorks for approximately $2 billion in an all-cash deal. This acquisition has expanded HealthEquity’s moat in the Health Savings Account space while providing new revenue verticals in complementary product offerings. This move is already expanding HealthEquity’s total addressable market as Consumer-Directed Benefits (CDBs) via pre-tax spending accounts such as additional Health Savings Accounts (HSAs), health and dependent care Flexible Spending Accounts (FSAs), health reimbursement accounts (HRA), Commuter Benefit Services, wellness programs, COBRA and other employee benefits are absorbed into its product offerings. This acquisition provides access to a larger client base and access to health brokers that will help drive HealthEquity’s penetration over the long term. The combination of WageWorks’ leading consumer directed benefits with HealthEquity’s HSA platform is highly synergistic and will drive growth while expanding the total addressable market in years to come (Figure 1).

 Figure 1 – High level overview of the newly combined HealthEquity and WageWorks company

HealthEquity’s Q3 2020 Earnings and Unique Positioning:

HealthEquity announced its Q3 2020 earnings and the initially popped 16% in after-hours trading. This quarter was the first full quarter with WageWorks being fully integrated into the company’s financial numbers as the acquisition closed on August 30th 2019. 

Revenue for Q3 was $157.1 million, growing 123% compared to $70.5 million for the third quarter ended October 31, 2018, and 21% excluding the impact of the WageWorks acquisition. Revenue this quarter included: service revenue of $87.6 million, custodial revenue of $47.0 million, and interchange revenue of $22.5 million. HSAs now exceeds 5 million, an increase of 37% year over year, or 16% excluding acquired HSAs. Active HSAs were 4.1 million, up 38% from one year ago, including 197,000 HSAs with investments, an increase of 29% year over year. Total Accounts as of October 31, 2019 reached 12.5 million, including 7.5 million CDBs, 6.8 million from the WageWorks acquisition. Total HSA Assets as of October 31, 2019 were $10.5 billion, an increase of 48% year over year, or 24% excluding acquired HSA assets. Total HSA Assets included $7.9 billion of HSA Cash and $2.5 billion of HSA Investment Assets (Figure 2).  

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Disclosure: The author holds shares in AAL, AMC, GE, KSS, SLB, TRIP, USO and X. However he may engage in options trading in any of the underlying securities. The author has no business relationship ...

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