INTUIT INC. annual report, FY2018

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Intuit Inc. — Fiscal 2018 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended July 31, 2018, not a standalone fiscal Q4 filing. Intuit provides financial management and tax products and services, including QuickBooks, TurboTax, Mint, and professional tax offerings. It reported approximately 50 million customers and operated through Small Business & Self-Employed, Consumer, and Strategic Partner segments. Consumer tax activity is highly seasonal; the quarter ended April 30 generated nearly half of annual revenue.

Financial performance

  • Revenue: $5.964 billion, up 15% from $5.177 billion. Service and other revenue was $4.502 billion, or 75% of total revenue.
  • Profit: Operating income was $1.497 billion, up 7%; operating margin was approximately 25.1%, compared with 26.9% in fiscal 2017. Net income was $1.211 billion, up 25%, and diluted EPS was $4.64, up 25%.
  • Cash flow: Operating cash flow was $2.112 billion, versus $1.599 billion. Investing cash flow was negative $532 million and financing cash flow was negative $634 million. Capital expenditures were $124 million.
  • Liquidity: Cash, cash equivalents, and investments totaled $1.716 billion, up $939 million year over year. Working capital was $288 million, compared with a $529 million deficit; the current ratio was 1.1, versus 0.7.
  • Debt: Debt totaled $438 million at year-end, including $50 million classified as short-term. No balance was outstanding on the $1 billion revolving facility; Intuit said it complied with its credit covenants.
  • Shareholder returns: Intuit paid $407 million in dividends ($1.56 per share) and repurchased $272 million of shares. After year-end, the board authorized an additional $2 billion in repurchases, bringing total authorization to $3.2 billion.

Segments and changes versus prior year

  • Small Business & Self-Employed: Revenue of $2.994 billion, up 18%; segment operating income of $1.257 billion, up 17%. QuickBooks Online subscribers reached 3.4 million, up 43%. Online Ecosystem revenue grew 40%; QuickBooks Desktop units declined 15%.
  • Consumer: Revenue of $2.517 billion, up 14%; segment operating income of $1.596 billion, up 14%. Growth reflected higher average revenue per customer, 4% growth in TurboTax federal units, and mix shifting toward higher-priced offerings.
  • Strategic Partner: Revenue of $453 million, up 4%; segment operating income of $281 million, up 6%.
  • Consolidated operating income grew more slowly than revenue, in part because of higher staffing, marketing, outside-services, and share-based compensation costs. Research and development expense rose to $1.186 billion, or 20% of revenue, from $998 million, or 19%.

Outlook, risks, and unusual items

  • Management expected to continue generating significant operating cash flow in fiscal 2019 and believed available cash, investments, and operating cash flow would cover anticipated needs for at least 12 months. It provided no quantified fiscal 2019 revenue or earnings guidance in the supplied filing text.
  • The Tax Cuts and Jobs Act reduced the federal corporate tax rate; Intuit reported a 19% effective tax rate versus 29% in fiscal 2017. Fiscal 2018 included share-based compensation tax benefits and a $35 million tax benefit from a subsidiary reorganization, partly offset by a $43 million provisional tax charge for deferred-tax remeasurement. Tax accounting was not yet finalized.
  • Intuit recorded a $79 million loss on the sale of its Quincy, Washington data center. Fiscal 2018 also included acquisitions of TSheets, Exactor, and Applatix for approximately $412 million in combined cash and other consideration.
  • Adoption of revenue standard Topic 606 was expected to accelerate recognition for certain desktop software. The filing’s pro forma adjustment increases fiscal 2018 revenue by $61 million, net income by $118 million, and diluted EPS by $0.45; the filing planned full-retrospective adoption. This materially affects comparisons with reported historical results.
  • Principal risks include intense competition and free or low-cost alternatives; cybersecurity, privacy, identity theft, and fraud; reliance on cloud infrastructure including AWS and other third parties; peak-season service or product failures; tax and data-protection regulation; and credit risk in small-business lending. The IRS Free File agreement was scheduled to expire in October 2020.
  • A proposed settlement of a class action related to 2015 tax-season identity fraud was awaiting court approval; Intuit stated the proposed terms were not material to its financial statements. The CEO transition to Sasan Goodarzi, effective January 1, 2019, was announced after year-end.

Most important facts for investors to verify

  • Reconcile fiscal 2018 reported results with Topic 606’s retrospective adjustments and assess the resulting revenue, earnings, and deferred-revenue comparability.
  • Track QuickBooks Online subscriber growth and monetization against the decline in QuickBooks Desktop units.
  • Assess whether expense growth and the $79 million data-center sale loss constrain operating-margin improvement.
  • Review the sustainability of fiscal 2018’s lower effective tax rate, including final Tax Act accounting and discrete tax benefits.
  • Monitor seasonal operating cash flow, debt repayment, and planned dividends and repurchases, alongside security, fraud, and Free File developments.