Intuit Inc. — Fiscal 2018 Second-Quarter Form 10-Q
Reporting period: Three and six months ended January 31, 2018. Intuit provides financial-management and tax products and services, including QuickBooks and TurboTax. Its three reported segments are Small Business & Self-Employed, Consumer, and Strategic Partner.
Financial results and liquidity
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $1.165B | $1.016B | $2.051B | $1.794B |
| Operating income (loss) | $20M | $22M | ($37M) | ($39M) |
| Net income (loss) | ($21M) | $13M | ($38M) | ($17M) |
| Diluted EPS | ($0.08) | $0.05 | ($0.15) | ($0.07) |
| Operating margin | 1.7% | 2.2% | (1.8%) | (2.2%) |
Q2 gross margin was approximately 79%, versus 80% a year earlier; first-half gross margin was approximately 78% in both periods. Q2 revenue rose 15% and first-half revenue rose 14%. Service and other revenue grew faster than product revenue: 18% versus 7% in Q2, and 18% versus 7% year to date.
Q2 net loss reflected a $39M provisional tax charge from remeasuring deferred tax assets after the Tax Cuts and Jobs Act, partly offset by share-based compensation tax benefits. Q2 income tax provision was $40M on $19M pretax income. The enacted federal rate reduction to 21% results in a blended 26.9% federal rate for Intuit’s fiscal 2018; tax accounting remained provisional at quarter-end.
For the six months, operating cash flow was $174M, up from $87M. Investing cash outflow was $486M, including $362M for acquisitions; financing cash inflow was $258M, including net revolving-credit borrowings. Cash and cash equivalents ended at $478M, compared with $529M at July 31, 2017. Cash, cash equivalents, and investments totaled $726M, excluding $422M held for customers.
At January 31, 2018, total debt was approximately $1.103B: $690M current and $413M long-term. Working capital was negative $1.130B and the current ratio was 0.6:1. Management attributed liquidity fluctuations in part to seasonality and deferred revenue. The company said available funds and expected operating cash flow would meet anticipated needs for at least 12 months. It intended to repay the $640M revolving-facility balance during Q3 FY2018. Debt covenants were met.
Performance changes and business drivers
- Small Business & Self-Employed: Q2 revenue rose 19% to $736M; first-half revenue rose 18% to $1.430B. Online Ecosystem revenue grew 39% in Q2 and 37% year to date. QuickBooks Online subscribers reached 2.8M, up 51%. QuickBooks Desktop units declined 15% in Q2 and 24% year to date.
- Consumer: Q2 revenue increased 12% to $334M and first-half revenue increased 11% to $412M. Management cited higher average revenue per customer, partly offset by the later IRS opening of the filing season. It cautioned that first-half results are not indicative of the full year because the business is seasonal.
- Strategic Partner: Q2 revenue declined 4% to $95M; first-half revenue declined 1% to $209M. First-half segment operating income was $121M, approximately flat year over year.
- Consolidated operating income declined 9% in Q2 despite revenue growth, as expenses increased, including staffing, advertising and marketing, and outside services. First-half operating loss narrowed by $2M.
Outlook, notable items, and risks
- No specific revenue or earnings guidance was provided in the supplied filing text. Management expected operating cash generation to continue and connected-services revenue to grow as a share of total revenue. Consumer tax revenue is heavily concentrated in the fiscal third quarter; Q3 has represented nearly half of annual revenue in recent years.
- Intuit acquired TSheets.com, Exactor, and Applatix for combined cash and other consideration of approximately $412M, including about $27M of awards and other consideration to be expensed over future service periods. The acquisitions added time-tracking, scheduling, and sales-tax capabilities to QuickBooks. About $318M was recorded as goodwill.
- A new minimum purchase commitment of $450M runs through August 31, 2022. The company repurchased $253M of shares and declared $0.78 per share in dividends during the first half; $1.3B remained authorized for repurchases. A $0.39-per-share dividend was declared in February.
- Key risks include intense competition, dependence on product innovation and third parties, cybersecurity and customer-data fraud, service availability and tax-season execution, regulatory changes, litigation, and acquisition integration. A putative class action relates to alleged harm from fraudulent tax filings in 2015; Intuit disputed the allegations and said it would defend the case. Management did not expect pending claims, beyond accrued amounts, to have a material financial impact.
- Topic 606 adoption was planned for Q1 FY2019 using full retrospective application. Intuit expected desktop software license revenue, particularly QuickBooks and tax products, to be recognized earlier within fiscal years, while not expecting materially different annual revenue growth rates. Disclosure controls were reported effective.
Investor verification priorities
- Confirm the final tax-accounting impact of the Tax Act; the $39M deferred-tax remeasurement was provisional.
- Track repayment of the $640M revolver balance and liquidity through the seasonal tax-revenue peak.
- Assess the sustainability and profitability of QuickBooks Online growth alongside declining Desktop unit volumes and rising operating costs.
- Review acquisition integration, the allocation of purchase consideration, and the $450M purchase commitment.
- Monitor tax-season results, cybersecurity and fraud developments, and the outcome of the 2015-related litigation.