HealthEquity Lifts Outlook on Q1 Growth

HealthEquity (NASDAQ:HQY) reported fiscal 2026 first quarter (ended April 30, 2025) earnings on June 3, 2025, delivering 15% year-over-year revenue growth and raising full-year guidance. Key milestones included a 19% increase in adjusted EBITDA to $140.2 million, sharp reductions in quarterly fraud costs, and notable progress advancing both AI-enabled member experiences and regulatory engagement for expanded Health Savings Account (HSA) usage.

Fraud Mitigation Drives Service Cost Normalization and Restores Operational Confidence

Fraud losses in fiscal 2025's Q4 were $11 million, while in Q1 FY2026, this figure dropped by over 70% to $3 million, demonstrating significant improvement in the company’s risk posture. The launch and adoption of the Member First secure mobile experience and enhanced multi-factor authentication methods, along with concentrated investments in fraud prevention technology and personnel, have reduced fraud losses. However, the company is still working toward its targeted fraud loss run rate of one basis point of total HSA assets per year.

"The launch of a number of added security measures and greater adoption of our Member First secure mobile experience has reduced direct fraud service costs from about $11 million in Q4 to about $3 million in Q1, which is still too high. However, under the direction of Sunil [Seshadri], our CSO, and his dedicated security and fraud team, we have reprioritized our investments in advanced security and fraud detection and prevention technologies to drive the fraud run rate exiting this quarter towards our goal of one basis point of total HSA asset per year. We have seen each month this year lower sequential fraud as our controls take hold and more of our members move to a secure mobile experience."
— Scott Cutler, President and CEO

This accelerated reduction in fraud supports future margin expansion, bolstering institutional client trust and lowers acute operational risk, addressing a key prior overhang for long-term investors.

Proactive Yield Management Locks in Interest Income Stability Amid Reinvestment Risk

Among $5.7 billion of HSA custodial cash contracts maturing through FY2026-FY2027, forward Treasury contracts on $500 million were executed during Q2 to establish five-year base rates around 4%, hedging against interest rate volatility. While the full $4 billion of related maturities for FY2027 remain, the company’s explicit de-risking actions reduce variability in custodial revenue, which reached a record $156.5 million (up 29% year over year) and comprised the single largest revenue source.

"In order to further derisk expected interest rate volatility on the combined remaining $5.7 billion maturing over the next 20 months, we have entered into some forward Treasury contracts during Q2, essentially locking in five-year Treasury base rates at approximately 4% net of hedging costs on $500 million of these maturities. We anticipate further derisking transactions over the remainder of FY '26. We expect the average yield on HSA cash will be approximately 3.5% during fiscal 2026."
— James Lucania, Executive Vice President and CFO

This approach reduces revenue exposure to macroeconomic rate swings, supports the FY2026 guidance for $530 million–$550 million in adjusted EBITDA, and enhances longer-term cash flow predictability for capital allocation and future acquisitions.

Regulatory Tailwinds and Market Positioning Poise Company for Accelerated HSA Adoption

The pending federal budget bill (“House version”) includes provisions that, if enacted, could expand net HSA eligibility by 20 million Americans, according to company commentary on the proposed legislation. HealthEquity now serves nearly a quarter of all U.S. HSAs as of the 2024 year-end Devenir report. HealthEquity is supported by its strong client network of 100,000-plus employers, making it well positioned to capture share from both legislative expansion and organic market growth, as evidenced by 16% year-over-year growth in HSA members who invest.

"Our industry believes that these provisions could allow up to 20 million more American families to have access to the remarkable benefits provided by HSAs, and that would be the largest expansion of the regulatory framework in the last twenty years for HSAs. We believe many of these provisions will make it easier for employers to offer and to promote HSAs."
— Dr. Steve Neeleman, Vice Chair and Founder

Legislative expansion of HSA access, in addition to provisions favoring increased employer adoption and enhanced member flexibility, would directly accelerate HealthEquity's addressable market and drive revenue leverage due to the company's scale, infrastructure, and established distribution channels.

Looking Ahead

Management raised FY2026 guidance, now expecting revenue of $1.285 billion to $1.305 billion, GAAP net income of $173 million to $188 million ($1.96–$2.13 per share), non-GAAP net income of $320 million to $335 million ($3.61–$3.78 per share), and adjusted EBITDA of $530 million to $550 million. Guidance assumes further normalization of fraud losses to the one basis point of HSA asset target in the second half, approximately 3.5% HSA cash yield, additional share repurchases, and ongoing moderate technology and security investments. Management also indicated active advocacy and ongoing preparation for regulatory impacts.

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This article was created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.