HealthEquity, Inc 2027 Q2 Earnings Call

Good morning, everyone. Thank you for joining us for HealthEquity second quarter fiscal 2027 earnings conference call. As Rocco said, my name is Richard Putnam. I do investor relations for HealthEquity. Joining me today are Scott Cutler, President and CEO, Dr. Stephen Neeleman, Vice Chair and founder of the company, and James Lucania, Executive Vice President and CFO. A press release announcing our second quarter financial results was issued earlier this morning and includes certain non-GAAP financial measures that we will reference. You can find a copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures on our investor relations website, which is ir.healthequity.com. Our comments and responses to your questions reflect management's view as of today, August 27, 2026, and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates, or other information that might be considered forward-looking.

There are many important factors relating to our business which could affect our results. These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from statements made here today. We caution against placing undue reliance on these forward-looking statements, and we also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock, as detailed in our latest annual report on Form 10-K and subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information or future results. Before I turn this call over to Scott, I want to cover three brief updates.

First, we recently launched Investor Answers, an AI-enabled tool on our investor relations website that makes HealthEquity's disclosed materials easier to search and navigate. You can find this on the menu of our investor relations landing page, and we welcome your feedback as we continue to improve the experience. Second, as a reminder of the cadence we set last year, we expect to publish year-end sales metrics after the conclusion of our January 31 fiscal year, and we will provide fiscal 2028 guidance when we report our fiscal 2027 year-end financial results. Finally, we're excited to welcome you to our Draper headquarters for our next Investor Day. It's scheduled for April 13, 2027. Please save the date, and we will share additional information and details as we get closer. With that out of the way, let's turn the call over to Scott.

Thank you, Richard, and welcome everybody. We appreciate you joining us this morning. I am really excited about Investor Answers and look forward to hosting many of you at our Investor Day in April. Turning to Q2, our results build on the momentum we reported in Q1 and show the HealthEquity model scaling with greater durability. We delivered accelerated revenue growth and higher profitability, including a record adjusted EBITDA margin of 48% and raised fiscal 2027 guidance. It was also a quarter of strong execution across the business with growing Marketplace activity, continued technology-enabled efficiency, and lower service costs as HSA accounts reached a record 10.7 million. The key takeaway is simple. Q1 demonstrated that the model is scaling, and Q2 showed that the model is becoming more durable, supported by stronger operating cash flow and disciplined capital allocation.

The strength of our model is especially important in a market where healthcare affordability remains one of the biggest financial challenges families face. Healthcare costs are projected to rise at a near double-digit rate next year, adding to the responsibility already being placed on consumers, employers, and health plan partners. Against that backdrop, HealthEquity's role is increasingly important, helping members save, spend, and invest with greater confidence while helping clients manage healthcare costs more effectively. Our strategy is to continue evolving our scaled platform into a healthcare financial operating system that connects accounts, assets, payments, investing, Marketplace, and advisory capabilities in one integrated experience. Our second quarter results show the acceleration of that evolution across three drivers: account and asset growth, deeper engagement, and technology and AI-enabled efficiency. Let me start with account and asset growth.

In the second quarter, we continued to see strong HSA momentum across accounts, assets, and sales. Total HSA assets were up 14% year over year. Total HSAs grew 8%, and new HSAs from sales grew 24% year over year. New HSAs from sales set a Q2 record and marked our strongest quarter outside of the Q4 open enrollment period. Client retention remains strong amid a very busy contract cycle, with renewals once again on pace to be well above 90% for the year, supporting our confidence in the category and our pipeline. This matters because account growth is only the starting point. As accounts mature, members can use more of the platform over time, expanding the value of each relationship. That creates a more durable model by adding growth opportunities beyond new account volume in any single year. Second, members are engaging more deeply as they save, spend, and invest.

Monthly active users on the app reached 1.4 million in July, up 62% year over year, while total app downloads exceeded 5 million. Mobile is increasingly the front door of member engagement. We plan to build on that momentum with our next generation app, which we expect to roll out in the coming months. The app is designed to make it easier for members to access all of their HealthEquity accounts in a single location, find relevant education, manage reimbursements, and connect to Marketplace, all while lowering cost to serve. We believe it will help members make more personalized, confident decisions while giving HealthEquity better insight into member needs and more ways to serve them. Marketplace extends that member experience, connecting members to health and wellness solutions.

At the end of the quarter, Marketplace had more than 14,000 active members with continued month-over-month growth as we began more targeted member campaigns. Since our prior earnings call, Marketplace has broadened across more categories, merchants, and member touchpoints. Our health-related categories now include metabolic health, hormonal health, diagnostics, consumer health devices, skincare, and recovery. We are adding merchants to support these offerings and developing additional categories, including sleep, health, vision, and pediatric care, which we believe expands Marketplace to meet more household health needs. We have also begun testing promotional campaigns, including Health Savings Days, which drove record Marketplace activity last week. These campaigns are helping increase awareness, drive traffic, and conversion, while giving us additional insight into member demand and the levers that can scale member adoption. While Marketplace revenue is immaterial to our overall financial results today, purchase activity and subscriber growth are encouraging and meaningful signals.

Early analysis of HSA members who were not previously contributing shows Marketplace purchasers were more likely to begin contributing than comparable members who had not made a Marketplace purchase. These signals give us greater conviction that a stronger app experience and relevant Marketplace offerings can move members from account ownership to deeper engagement, expanding the long-term value of each relationship. Investing is another measure of deeper engagement and an area where we reached new records in Q2. We ended the quarter with a record number of investing HSA members, up 20%, and record HSA invested assets with invested asset balances of 28%. HSA members who invest tend to hold larger balances, have higher average contributions, and show higher engagement in spending over time, increasing the long-term value of the member relationship without requiring a new account to be opened.

With approximately 9% of our total HSA population investing today, we see a substantial opportunity to help more members realize the full tax-free growth benefits of their HSA. To support that opportunity, we recently launched Simply Invest, an investment lineup with no administrative fee designed to make HSA investing more competitive and accessible. The same principle applies across our technology investments. We are improving the member experience, strengthening security, and lowering cost to serve by simplifying workflows, increasing automation, and creating more operating leverage. AI is a key part of that work. We are extending it across a broad and growing set of workflows, moving quickly from concept to implementation while managing costs with discipline and tying those investments to measurable outcomes.

In open enrollment, for example, we are using AI to support a digital client onboarding experience and the development of custom multilingual materials, reducing manual work while improving speed, consistency, and the ability to support our clients at scale. In service, AI-driven automation continued to drive down service costs per account across our client member organization. In targeted workflows, AI helped resolve 85% of routine chat inquiries and contained 55% of card-related phone contacts. Enhanced self-service capabilities and operational efficiencies helped reduce human-handled calls 25% year-over-year, with card-related calls declining even faster, at 30% year-over-year. AI is helping us strengthen security. Fraud loss remains significantly below target. At the same time, card acceptance improved, and service costs continued to benefit from stronger prevention, automation, and secure mobile adoption. For members, that means simpler self-service for routine needs. For clients, it means less administrative complexity.

For HealthEquity, it means a more scalable operating model. This is the operating leverage story in action. Better service, stronger security, and lower cost to serve, all moving together. Across the business, account and asset growth, deeper engagement, and technology-enabled efficiency are expanding the value of existing member relationships, improving scalability, and increasing confidence in the durability of our model. We are increasing investments in areas where we are seeing momentum, including digital engagement, Marketplace, brand, marketing and promotional campaigns, investing adoption, and service automation. Strong operating cash flow gives us the flexibility to fund those growth investments, maintain capacity for strategic opportunities, and return capital to shareholders. With that, I'll turn it over to Jim to walk through our second quarter financial results, including our margin performance, capital allocation, and raised fiscal 2027 outlook.

Thanks, Scott. Hi, everyone. I'll review our fiscal 2027 second quarter GAAP and non-GAAP financial results, then provide more detail on our balance sheet, capital allocation, and raised outlook. Reconciliations of GAAP measures to the non-GAAP measures are included in today's press release. Second quarter revenue growth accelerated to 8% year over year. Service revenue was a record $124.4 million, up 6% year over year, supported by account growth and the increased engagement Scott discussed, including growing Marketplace activity and invested HSA balances. Custodial revenue grew 10% to a record $175.9 million. Annualized yield on HSA cash was 3.83%, reflecting higher replacement rates and increased participation in enhanced rates. Interchange revenue grew 5% to $50.4 million, reflecting higher member spending and transaction activity. Gross profit was a record $258 million, or approximately 74% of revenue, compared with 71% in the second quarter last year.