Intuit Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, three months ended October 31, 2017; comparison is the three months ended October 31, 2016. Amounts are in millions except per-share data, percentages, and subscriber figures.
Business context
Intuit provides financial management and tax products and services, primarily in the United States. Its reporting segments are Small Business & Self-Employed, Consumer, and Strategic Partner. The company notes that Consumer tax revenue is highly seasonal, with most annual revenue typically recorded in the third fiscal quarter.
Financial results and key metrics
| Metric | Q1 FY18 | Q1 FY17 | Change |
|---|---|---|---|
| Net revenue | $886 | $778 | Up 14% |
| Operating loss | $(57) | $(61) | Loss narrowed $4 |
| Net loss | $(17) | $(30) | Loss narrowed $13 |
| Basic and diluted loss per share | $(0.07) | $(0.12) | Improved $0.05 |
| Cash used in operating activities | $(78) | $(205) | Use decreased $127 |
Revenue growth was driven primarily by Small Business & Self-Employed. Segment revenue was $694 (up 17%), Consumer $78 (up 7%), and Strategic Partner $114 (up 2%). Small Business & Self-Employed operating income rose to $301 from $239; Consumer’s seasonal operating loss widened to $55 from $38; Strategic Partner operating income was $72 versus $70.
Service and other revenue increased to $567 from $481; product revenue rose to $319 from $297. Cost of revenue was $196, or 22% of revenue, compared with $183, or 24%. Operating expenses increased 14% to $747, including higher staffing, outside services, marketing, and share-based compensation. Consolidated operating margin remained negative.
The reported effective tax rate was approximately 72%, versus 58%; excluding discrete items, primarily share-based compensation tax benefits, it was 33% versus 34%. The tax benefit from share-based compensation was $25 versus $19. The filing attributes the lower net loss in part to the narrower operating loss and increased share-based tax benefits.
Liquidity, debt, and capital allocation
At October 31, 2017, cash and cash equivalents were $529, investments $248, and long-term investments $31. Cash, cash equivalents, and investments totaled $777, unchanged from July 31. Current assets were $1,415 and current liabilities $2,117; working capital was a deficit of $702, versus a $529 deficit at July 31, and the current ratio was 0.7:1.
Total debt was $875: $450 classified as short-term and $425 as long-term. This included $400 outstanding on the revolving facility and $475 on the term loan. Intuit borrowed $400 on the revolver during the quarter, stating the first fiscal quarter is seasonally low for cash. It reported compliance with debt covenants. Financing cash flow was $158, including revolving borrowings; investing cash flow used $75. Cash and cash equivalents ended the quarter at $529.
Intuit repurchased 1.2 million shares for $170 and paid $105 in dividends. The board declared a further quarterly dividend of $0.39 per share, payable in January 2018. Approximately $1.4 billion remained authorized for repurchases.
Material changes, outlook, and risks
- Small Business & Self-Employed Online Ecosystem revenue increased 35% to $258; QuickBooks Online subscribers reached 2.55 million, up 56% year over year. Desktop Ecosystem revenue increased 8%, while QuickBooks Desktop units declined 35%.
- Management expects to generate significant operating cash during the balance of fiscal 2018 and believes available liquidity and operating cash will meet requirements for at least 12 months. It expects to continue returning excess cash through repurchases and dividends. The filing provides no specific quarterly or full-year revenue or earnings guidance.
- Intuit signed a purchase agreement with a minimum commitment of $450 through August 31, 2022. No other significant change to contractual obligations was reported.
- Intuit plans to adopt Topic 606 in fiscal Q1 beginning August 1, 2018, using full retrospective transition. Management expects earlier recognition of certain QuickBooks desktop and tax desktop license revenue, shifting revenue into earlier quarters, but does not expect annual total or segment revenue growth rates to differ significantly.
- Key risks include intense competition and technology change; cybersecurity, privacy, identity theft and tax-fraud exposure; service outages during tax-season peaks; seasonality; regulatory and litigation exposure; and interest-rate, foreign-currency, and debt risks. A putative class action related to fraudulent tax returns filed during the 2015 tax season remains pending; Intuit disputes the allegations and intends to defend itself. Management said pending claims were not expected to materially affect the financial statements, while noting outcomes are uncertain.
- Disclosure controls were deemed effective at the reasonable-assurance level, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether rapid QuickBooks Online subscriber and Online Ecosystem growth continues, and how it offsets the 35% decline in QuickBooks Desktop units.
- Whether the improved operating cash use and management’s liquidity expectations hold through seasonal cash needs, given the $702 working-capital deficit and $875 of debt.
- The eventual effect of Topic 606 on quarterly revenue timing, deferred revenue, and retained earnings when adopted.
- Progress and potential exposure from the 2015 tax-fraud-related litigation, other legal matters, and ongoing cybersecurity and fraud risks.
- Performance against the $450 minimum purchase commitment, and future repurchase and dividend activity relative to cash generation and borrowing.