Executive Summary / Key Takeaways

• HealthEquity delivered a strong start to fiscal 2026, with Q1 results exceeding expectations, driven by robust growth in custodial revenue from favorable interest rates and increasing account balances, alongside solid performance in service and interchange revenue.
• The company raised its full-year fiscal 2026 guidance, projecting revenue between $1.285 billion and $1.305 billion and Adjusted EBITDA between $530 million and $550 million, reflecting expected continued revenue and margin expansion, supported by a projected 3.5% average yield on HSA cash.
• Significant investments in technology and security are underway, aimed at enhancing the member experience, driving operational efficiencies, and crucially, reducing the impact of sophisticated fraud activity, with direct fraud service costs already decreasing sequentially from Q4 FY25 to Q1 FY26.
• Strategic initiatives, including the rollout of AI-powered tools, a modernized mobile experience, and the Assist portfolio, are positioning HealthEquity for future organic growth by improving member engagement, optimizing employer plan design, and strengthening its competitive moat.
• Legislative advocacy efforts are actively supporting potential HSA expansion, including provisions that could significantly increase the addressable market by allowing new populations, such as working seniors on Medicare, to utilize these tax-advantaged accounts.

Setting the Scene: Health Savings, Tech, and the Purple Difference

HealthEquity, Inc. stands as a prominent player in the U.S. health savings and spending landscape, specializing in the administration of Health Savings Accounts (HSAs) and a suite of complementary Consumer-Directed Benefits (CDBs). Since its inception in 2002, the company has carved out a significant market position, notably becoming the largest HSA provider by account number and the second largest by assets as of December 2024, capturing a 21% share of HSA assets, up from just 4% in 2010. Its business model operates on a B2B2C framework, primarily reaching consumers through relationships with employers and a vast network of health plans, benefits brokers, and advisors.

The company's revenue streams are diversified across three key areas: service fees for account administration, custodial revenue derived from interest earned on HSA cash and client-held funds, and interchange fees from payment card usage. This structure provides a degree of resilience, although it introduces sensitivity to factors like interest rates and healthcare spending trends.

In a competitive arena populated by large, integrated healthcare entities like UnitedHealth Group (UNH)'s Optum, Elevance Health (ELV), and Cigna Group (CI), alongside specialized HSA custodians and benefits administrators, HealthEquity differentiates itself through a service-driven "Purple culture," product breadth, and a focus on ecosystem connectivity. While larger competitors may possess greater scale and broader distribution networks, HealthEquity aims to stand out through specialized technology and a commitment to empowering healthcare consumers. Its strategic response to this competitive environment is centered on enhancing its proprietary technology, deepening partnerships within the healthcare ecosystem, and driving better member outcomes.

Technological Differentiation: The Engine of Efficiency and Experience

At the core of HealthEquity's strategy is its proprietary technology platform, which serves as a critical differentiator and a key driver of operational efficiency and member engagement. The company has been actively investing in modernizing this platform, including migrating to the cloud and consolidating systems acquired through past acquisitions like WageWorks (WAGE).

This technological focus is yielding tangible benefits. The company is leveraging investments in mobility and Artificial Intelligence (AI) to transform service delivery. For instance, its award-winning Expedited Claims system utilizes AI to automate claims adjudication. This technology is already serving over 7,000 clients and processing millions of dollars in reimbursements, leading to increased member satisfaction and reduced processing costs. The impact is also visible in the reduction of direct fraud service costs, which decreased significantly from approximately $11 million in Q4 FY25 to about $3 million in Q1 FY26, as the company's improved capabilities in identifying and preventing sophisticated fraud take hold. Management has set a goal to drive the fraud run rate towards one basis point of total HSA assets per year by the end of fiscal 2026, underpinned by continued investments in advanced security and fraud detection technologies.

Furthermore, AI chat and AI agent tools are accelerating service delivery, accurately addressing member inquiries, and reducing call wait times and volume. The company is also modernizing multi-factor authentication through its mobile experience to enhance security. The newly relaunched mobile app, which saw approximately 1.2 million downloads by the end of Q1 FY26, is central to the "member-first secure mobile experience" strategy, aiming to drive greater engagement and provide a more secure access point to the platform. Building on the recently rolled out stacked chip card, HealthEquity is also working towards expanding into a digital wallet in the future, further enhancing the seamless spending experience for members.

These technological advancements are not merely features; they are foundational to HealthEquity's competitive moat. They enable the company to offer a more efficient and user-friendly experience compared to some competitors, potentially leading to higher customer retention and attracting new clients seeking modern, integrated benefits solutions. While larger competitors like UNH's Optum also invest heavily in technology, HealthEquity's specialized focus allows for targeted innovation within the HSA/CDB space, potentially providing an edge in specific functionalities and service delivery efficiency. The company's R&D efforts, reflected in its technology and development expenses (which increased 10% year-over-year in Q1 FY26), are strategically aligned to support this roadmap of continuous improvement and new product development.

Performance and Growth Drivers: Assets, Yields, and Accounts

HealthEquity's financial performance in the first quarter of fiscal 2026 demonstrated strong momentum, with total revenue reaching $330.8 million, a 15% increase compared to $287.6 million in the prior year period. This growth was primarily fueled by a significant surge in custodial revenue.

Custodial revenue grew by 29% year-over-year to $156.5 million in Q1 FY26. This impressive growth was largely attributable to two factors: a higher average annualized yield on HSA cash, which increased from 2.93% in Q1 FY25 to 3.50% in Q1 FY26, and a 12% increase in the average daily balance of HSA cash. The higher yield reflects both the prevailing market interest rate environment and the company's successful strategy of increasing participation in its Enhanced Rates offering, which generally provides a higher yield compared to the Basic Rates offering through depository partners. As of April 30, 2025, HSA Assets totaled $31.3 billion, a 15% increase year-over-year, comprising $17.1 billion in HSA cash and $14.2 billion in HSA investments. The company is actively managing its interest rate exposure, including entering into bond forward transactions in May 2025 to hedge a portion of the benchmark interest rate risk associated with future transitions of HSA cash to insurance company partners.

Service revenue saw a modest 1% increase to $119.8 million, driven by growth in Total Accounts and HSA investments, partially offset by lower average service fees per account. Interchange revenue grew by a notable 14% to $54.6 million, outpacing overall account growth, reflecting an increase in Total Accounts and higher spend per account using the company's payment cards.

Operational efficiency gains contributed to margin expansion. Gross profit margin improved to 68% in Q1 FY26 from 65% in Q1 FY25, as total revenue growth outpaced the 6% increase in total cost of revenue. While service costs increased 7%, partly due to fraud reimbursement costs, this was partially offset by efficiencies from technology investments. Interchange costs decreased 14% due to the transition to a single card processor. Operating expenses decreased 3% overall, notably driven by a 33% decrease in general and administrative expenses due to lower stock-based compensation, partially offset by increases in sales & marketing and technology & development as the company invests for growth.

Net income saw a significant 87% increase to $53.9 million in Q1 FY26, while Adjusted EBITDA grew 19% to $140.2 million, resulting in an Adjusted EBITDA margin of 42%, up from 41% in the prior year period. This financial performance underscores the company's ability to leverage favorable market conditions and operational improvements to drive profitability.

Strategic Initiatives and Future Outlook

HealthEquity's strategic direction is focused on expanding its market reach and enhancing its value proposition. The company continues to pursue inorganic growth through HSA portfolio acquisitions, such as the BenefitWallet acquisition in FY25, while maintaining a disciplined approach. The primary focus, however, is on organic growth driven by market trends and strategic initiatives.

The company is actively advocating for legislative changes to expand HSA access. Proposed provisions in Washington D.C., such as allowing working seniors eligible for Medicare Part A to contribute to HSAs, expanding eligibility on exchanges, permitting use with on-site clinics and direct primary care, and increasing contribution limits for lower earners, could significantly increase the addressable market. Management believes these changes could provide access to HSAs for up to 20 million more American families and make it easier for employers to offer and promote HSAs.

Technological innovation remains a cornerstone of the strategy. Beyond the operational efficiencies and security benefits discussed earlier, the company is developing tools like the HealthEquity Assist™ portfolio (Analyzer, Navigator, Momentum) to help employers optimize plan design and empower members with personalized insights and recommendations. The recent launch of Health Payment Accounts (HPAs) offers a no-interest, no-fee payment option for medical expenses, addressing a key barrier to care access.

Looking ahead, HealthEquity raised its fiscal year 2026 guidance, projecting total revenue between $1.285 billion and $1.305 billion. This outlook is based on an expected average annualized yield on HSA cash of approximately 3.5% and assumes relatively stable forward interest rate curves. The company anticipates continued revenue and margin expansion, with Adjusted EBITDA projected between $530 million and $550 million. While heavier service costs related to security investments are expected in the first half of FY26, management anticipates normalization in the second half, contributing to improved margins. The guidance also includes expectations for continued share repurchases under the existing $300 million authorization and potential reductions in revolving credit facility borrowings, while maintaining ample capacity for potential acquisitions.

Risks and Challenges

Despite the positive momentum and strategic initiatives, HealthEquity faces several risks. The company is currently subject to multiple legal actions and regulatory inquiries related to a cybersecurity incident in fiscal 2025 involving a business partner's account breach. While the company intends to vigorously defend these actions and has not accrued a loss liability, the outcome is uncertain and could have a material adverse impact.

Fluctuations in prevailing interest rates remain a significant factor influencing custodial revenue, although diversification of depository and insurance partners and the shift to Enhanced Rates help mitigate short-term volatility. Sustained declines in rates could negatively impact yields and revenue. Interest expense on the variable-rate revolving credit facility also exposes the company to interest rate risk.

The business is highly dependent on the tax-advantaged nature of its offerings. Changes in U.S. tax laws or healthcare policy could materially affect the market opportunity and business model. Competition from larger, well-resourced entities and other specialized providers poses an ongoing challenge, requiring continuous investment in technology and service differentiation. While the company has a strong track record in integrating acquisitions, integration risks persist with future transactions. Finally, while progress has been made, the threat of sophisticated fraud activity remains, necessitating ongoing investment and vigilance to protect member assets and data and manage associated costs.

Conclusion

HealthEquity's first quarter of fiscal 2026 results underscore a compelling investment narrative driven by a confluence of favorable market dynamics, strategic execution, and technological advancement. The company is effectively capitalizing on the current interest rate environment to fuel robust custodial revenue growth, while simultaneously expanding its account base and increasing member engagement.

Underpinning this performance is a clear strategic roadmap focused on leveraging proprietary technology, particularly in AI and mobile, to enhance the member experience, improve operational efficiency, and strengthen security against evolving threats. These investments are not only driving current margin expansion but are also building a more resilient and differentiated platform for future growth. Coupled with active legislative advocacy that could unlock significant new market opportunities and a disciplined approach to capital allocation, HealthEquity appears well-positioned to continue its growth trajectory. While risks such as cybersecurity threats and interest rate volatility warrant monitoring, the company's demonstrated ability to execute against its strategic priorities and deliver strong financial results suggests a positive outlook for investors focused on the long-term potential of the health savings market.