Business Context and Reporting Period
Company: Intuit Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: July 31, 2009
Business Overview: Intuit is a leading provider of business and financial management solutions for small and medium-sized businesses, consumers, accounting professionals, and financial institutions. Flagship products include QuickBooks, TurboTax, Quicken, and Digital Insight. The company operates seven reportable segments: Financial Management Solutions, Employee Management Solutions, Payments Solutions, Consumer Tax, Accounting Professionals, Financial Institutions, and Other Businesses.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Total Net Revenue | $3,182.5 million | $3,071.0 million |
| Operating Income | $682.1 million | $650.8 million |
| Net Income (Continuing Ops) | $447.0 million | $450.8 million |
| Diluted EPS (Continuing Ops) | $1.35 | $1.33 |
| Cash, Cash Equivalents & Investments | $1,347.0 million | $827.8 million |
| Long-Term Debt | $998.2 million | $998.0 million |
| Working Capital | $884.0 million | $306.3 million |
| Operating Cash Flow | $812.4 million | $830.2 million |
Margins: Operating margin was approximately 21.4% in fiscal 2009 compared to 21.2% in fiscal 2008. The effective tax rate for fiscal 2009 was 31%, down from 35% in fiscal 2008, largely due to discrete tax benefits.
Material Changes vs. Prior Period
- Revenue Growth: Total net revenue increased 4% ($111.5 million) driven by growth in Consumer Tax (+7%), Payments Solutions (+15%), Employee Management Solutions (+8%), Accounting Professionals (+8%), and Financial Institutions (+4%). This was partially offset by declines in Other Businesses (-14%) and Financial Management Solutions (-2%).
- Segment Performance: Consumer Tax revenue growth was fueled by a 36% increase in TurboTax Online units, offsetting an 11% decline in desktop units. Payments Solutions saw a 14% growth in the core merchant services customer base, though transaction volume per customer declined 8% due to the economic environment.
- Acquisitions: In July 2009, Intuit acquired PayCycle, Inc. for approximately $169 million to expand online payroll offerings. In September 2009 (subsequent event), Intuit agreed to acquire Mint Software Inc. for approximately $170 million.
- Cost Structure: Total costs and expenses increased $80.2 million. Increases were driven by acquired businesses (Homestead, ECHO), higher marketing expenses for TurboTax and QuickBooks launches, higher depreciation for infrastructure, and increased share-based compensation. These were partially offset by lower performance incentive payouts and staffing savings.
- Net Income: Net income from continuing operations decreased 1% ($3.8 million). This decline was primarily due to the absence of a $51.6 million pre-tax gain on the sale of outsourced payroll assets recorded in fiscal 2008 and lower interest income due to reduced interest rates.
Guidance, Outlook, Risks, and Unusual Items
- Seasonality: The business is highly seasonal. Revenue is typically highest in the second and third fiscal quarters (ending Jan 31 and Apr 30) due to tax season and QuickBooks releases. The company typically reports losses in the first and fourth quarters.
- Connected Services Strategy: Management continues to pivot toward "Connected Services" (SaaS), which accounted for over 56% of fiscal 2009 revenue. The strategy focuses on social, mobile, and global connectivity.
- Auction Rate Securities (ARS): Intuit held $244.5 million in municipal auction rate securities at July 31, 2009. Due to market illiquidity since February 2008, auctions have failed. The company values these at par but faces liquidity risk. An agreement with UBS AG provides an option to sell $140.9 million of these securities at par starting June 30, 2010.
- Key Risks:
- Competition: Intense competition in all segments, including free online offerings and government-provided tax filing services (Free File Alliance).
- Economic Downturn: Reduced consumer and small business spending impacting software purchases and transaction volumes.
- Technology & Security: Risks related to system interruptions, data breaches, and the complexity of migrating to new data centers.
- Regulatory: Changes in tax laws, financial services regulations, and privacy laws could increase compliance costs or limit revenue opportunities.
- Unusual Items: A $12.6 million charge was recorded in fiscal 2009 for the historical use of certain technology licensing rights. Discrete tax benefits of $18.0 million (state agreement) and $6.9 million (retroactive federal R&D credit) lowered the effective tax rate.
Investor Verification Checklist
- ARS Liquidity: Verify the status of the $244.5 million municipal auction rate securities and the likelihood of realizing par value via the UBS agreement or other means.
- Free File Alliance: Monitor the status of the Free File Alliance agreement with the IRS, which was set to expire in October 2009, as non-renewal could expose Intuit to direct government competition in tax preparation.
- Online Transition: Assess the sustainability of revenue growth in TurboTax Online and QuickBooks Online versus the decline in desktop software sales.
- Acquisition Integration: Review the integration progress and financial impact of the PayCycle and Mint Software acquisitions.
- Seasonal Cash Flow: Confirm that cash reserves are sufficient to cover operating expenses during the typically loss-making first and fourth fiscal quarters.