Intuit Inc. — Q1 Fiscal 2019 Form 10-Q
Reporting period: Three months ended October 31, 2018; filed November 20, 2018. Intuit provides financial management and tax products and services, including QuickBooks and TurboTax. Results are seasonal: consumer and professional tax revenue is concentrated from November through April, so Q1 results are not necessarily indicative of the full year.
Financial performance
| Metric | Q1 FY19 | Q1 FY18 | Change |
|---|---|---|---|
| Revenue | $1.016 billion | $910 million | +12% |
| Operating loss | $10 million | $35 million | Loss narrowed $25 million |
| Net income (loss) | $34 million | $(2) million | Improved $36 million |
| Diluted EPS | $0.13 | $(0.01) | Improved $0.14 |
| Cash used in operating activities | $143 million | $78 million | Use increased $65 million |
- Service and other revenue rose 24% to $669 million; product revenue fell 6% to $347 million. Operating loss was about 1% of revenue versus about 4% a year earlier. Cost of revenue rose to 24% of revenue from 22%, while operating expenses declined to 77% of revenue from 82%.
- Small Business & Self-Employed revenue increased 11% to $908 million and segment operating income grew 8% to $460 million. Online Ecosystem revenue grew 42%; QuickBooks Online revenue grew 46%, with subscribers up 41% to 3.6 million. Desktop Ecosystem revenue declined 4%.
- Consumer revenue was $90 million, up 22%, and its operating loss narrowed to $41 million. Strategic Partner revenue was $18 million, up 6%, with a $20 million operating loss. Both tax-related segments were seasonally light.
- Net income included a $48 million income tax benefit on a $14 million pretax loss. Excess tax benefits from share-based compensation were $41 million, versus $25 million; management said the increase helped produce net income.
Liquidity, debt and capital returns
- Cash and cash equivalents were $1.084 billion; current investments were $248 million and long-term investments $13 million. Management reported cash, cash equivalents and investments of $1.332 billion, down $384 million from July 31, 2018. Working capital was $646 million and the current ratio was 1.4:1.
- Total debt was $425 million: $50 million short-term and $375 million long-term. No borrowings were outstanding on the $1 billion revolving facility, which expires February 2021. The company reported compliance with debt covenants.
- Cash used in investing activities was $20 million, including $76 million of small-business loan originations and $35 million of capital expenditures. Financing used $182 million, including $129 million of dividends and $95 million of treasury-stock purchases. Cash, cash equivalents and restricted cash declined $309 million, to $1.322 billion.
- Intuit declared and paid a $0.47-per-share quarterly dividend and declared another $0.47 dividend payable in January 2019. It repurchased about 467,000 shares for $101 million and had $3.1 billion of repurchase authorization remaining.
Changes, outlook and notable items
- Revenue growth was led by the Small Business & Self-Employed Online Ecosystem. Higher staffing and advertising costs partly offset revenue growth; operating expenses increased 4% to $779 million.
- Intuit adopted ASC 606 retrospectively from August 1, 2018. Prior periods were restated. For Q1 FY18, the restatement added $24 million to revenue, reduced operating loss by $22 million and improved net loss by $15 million. The change affected revenue timing and balance-sheet classifications, but not cash flows.
- Management expects to continue investing in product development, marketing, sales, IT infrastructure, privacy and security. It expects service and other revenue to continue growing, significant cash generation to continue, and cash and available resources to meet obligations for at least 12 months. It expects to return excess cash through repurchases and dividends, subject to operating needs and board discretion. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- The company noted that its Q1 consumer and professional tax results are not indicative of full-year trends; substantially complete results for the 2018 tax season were not expected until Q3 FY19. Its cash flows also reflect seasonal working-capital movements, including accrued bonus payments.
- A class action related to fraudulent tax returns during the 2015 tax season had a settlement in principle that was preliminarily approved and remained subject to final court approval; the settlement terms were not material to the financial statements. Intuit said routine legal matters were not expected to have a material impact, while noting outcomes remain uncertain.
- Key risks include intense competition, execution of cloud and product initiatives, cybersecurity and customer-data protection, service availability and tax-season readiness, fraud, regulatory and privacy-law changes, third-party dependencies, small-business loan credit risk, and tax and seasonal fluctuations. The 2017 Tax Act reduced the U.S. federal statutory rate to 21%; accounting for its effects was not yet complete, with no significant estimate adjustments recorded in the quarter.
Important facts for investors to verify
- How much reported earnings improvement reflects recurring operations versus share-based compensation tax benefits and the lower statutory tax rate.
- Whether QuickBooks Online subscriber and revenue growth continues, and how it compares with the decline in desktop ecosystem revenue.
- Whether seasonal tax-season performance, including product accuracy, service availability and fraud prevention, supports full-year results.
- Whether operating cash use and seasonal working-capital outflows reverse as expected, while dividends, repurchases and lending activity continue.
- The final effects of ASC 606 and the 2017 Tax Act, and any developments in the pending class-action settlement or other legal and regulatory matters.