Business Context and Reporting Period
Company: Intuit Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: January 31, 2008 (Second Quarter of Fiscal Year 2008)
Business Overview: Intuit provides business and financial management solutions for small businesses, consumers, and accounting professionals. Key products include QuickBooks, TurboTax, Quicken, and Lacerte. The company operates six reportable segments: QuickBooks, Payroll and Payments, Consumer Tax, Professional Tax, Financial Institutions, and Other Businesses.
Key Financial Metrics
| Metric (in millions, except per share) | Three Months Ended Jan 31, 2008 | Three Months Ended Jan 31, 2007 | Six Months Ended Jan 31, 2008 | Six Months Ended Jan 31, 2007 |
|---|---|---|---|---|
| Total Net Revenue | $834.9 | $750.6 | $1,279.8 | $1,101.1 |
| Operating Income | $173.6 | $214.7 | $70.4 | $116.2 |
| Net Income (Continuing Ops) | $116.0 | $145.6 | $68.4 | $88.4 |
| Diluted EPS (Continuing Ops) | $0.34 | $0.40 | $0.20 | $0.25 |
| Cash Flow from Operations | $198.9 | $243.1 | $37.5 | $106.4 |
| Long-Term Debt | $997.9 | $997.8 | $997.9 | $997.8 |
| Cash & Investments | $837.2 | $1,303.7 | $837.2 | $1,303.7 |
Note: Figures are unaudited. Net income from continuing operations excludes discontinued operations (IDMS) and gains from the sale of outsourced payroll assets.
Material Changes vs. Prior Period
- Revenue Growth: Total net revenue increased 11% in the quarter and 16% year-to-date (YTD). Growth was primarily driven by the acquisition of Digital Insight Corporation (contributing ~$65M in the quarter and ~$131M YTD) and growth in the Consumer Tax segment.
- Profitability Decline: Operating income decreased 19% in the quarter and 39% YTD. This decline was due to higher costs and expenses associated with the Digital Insight acquisition, increased R&D investment, and higher marketing spend, which outpaced revenue growth.
- Segment Performance:
- Consumer Tax: Revenue increased 11% due to growth in TurboTax Online units.
- Professional Tax: Revenue decreased 19% in the quarter and 17% YTD due to the deferral of approximately $23 million in revenue to the third quarter caused by product changes and delivery delays.
- Financial Institutions: Revenue increased significantly (non-meaningful % change) due to the inclusion of Digital Insight.
- Payroll and Payments: Revenue was flat in the quarter but would have grown 16% adjusted for the transition of customers to ADP.
- Unusual Items: The company recorded a pre-tax gain of $14.0 million in the quarter and $38.0 million YTD from the sale of outsourced payroll assets to ADP. Interest expense increased to $13.5 million in the quarter and $27.6 million YTD due to debt issued for the Digital Insight acquisition.
Guidance, Outlook, Risks, and Contingencies
- Acquisitions: Intuit acquired Homestead Technologies Inc. for ~$170 million in December 2007. It also entered an agreement to acquire Electronic Clearing House, Inc. (ECHO) for ~$131 million, expected to close in Q3 FY2008.
- Capital Allocation: The company repurchased 16.3 million shares for $500 million YTD. As of Jan 31, 2008, $300 million remained authorized for future repurchases.
- Liquidity Risk (Auction Rate Securities): Intuit held ~$328 million in municipal auction rate securities. Beginning in February 2008, auctions failed for ~$140 million of these securities. While management does not believe the carrying value is impaired, liquidity is restricted until a successful auction or maturity occurs. The company may reclassify these from current to long-term assets.
- Seasonality: Revenue is highly seasonal, with tax products peaking in Q2 and Q3. The company typically reports losses in Q1 and Q4.
- Capital Expenditures: Planned capital expenditures for FY2008 are expected to increase to ~$300 million, driven by a new data center construction in Washington state.
Key Facts for Investor Verification
- Revenue Deferral: Verify the impact of the $23 million Professional Tax revenue deferral on Q3 FY2008 results.
- Auction Rate Securities: Monitor the status of the $140 million in failed auction rate securities and potential reclassification to long-term assets.
- Integration Costs: Assess the ongoing impact of Digital Insight integration on operating margins and expense ratios.
- ADP Transition: Track the remaining customer transition to ADP and the associated recognition of the remaining gain on sale of payroll assets.
- Debt Servicing: Confirm compliance with debt covenants (Debt/EBITDA and Interest Coverage) given the $1 billion in senior notes.