Business Context and Reporting Period
Company: Intuit Inc.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended July 31, 1998
Business Overview: Intuit provides small business accounting, tax preparation, and consumer finance desktop software, financial supplies, and Internet products. Key brands include QuickBooks, TurboTax, and Quicken. The company is aggressively pivoting toward Internet-based commerce while maintaining its core desktop software revenue base.
Key Financial Metrics
| Metric | Fiscal 1998 | Fiscal 1997 | Change |
|---|---|---|---|
| Net Revenue | $592.7 million | $598.9 million | -1.0% |
| Net Income (Loss) | $(12.2) million | $68.3 million | Turned to Loss |
| Loss from Continuing Operations | $(12.2) million | $(2.9) million | Worsened |
| Diluted EPS (Loss) | $(0.24) | $1.44 | N/A |
| Cash & Equivalents | $138.1 million | $46.8 million | +195% |
| Total Assets | $1,498.6 million | $663.7 million | +126% |
| Long-term Obligations | $35.6 million | $36.4 million | -2.2% |
Margin Analysis: Cost of goods sold decreased to 20% of revenue (from 23% in 1997). However, operating expenses increased significantly due to strategic investments and acquisition charges. Research and development expenses rose to 18% of revenue.
Material Changes vs. Prior Period
- Revenue Decline: Overall revenue decreased 1% primarily due to the divestiture of the Parsons subsidiary in August 1997. Excluding Parsons, revenue would have grown 13%.
- Net Loss: The company reported a net loss of $12.2 million compared to a net income of $68.3 million in 1997. This shift was driven by a $53.8 million one-time charge for purchased research and development (R&D) related to the Lacerte acquisition and the absence of a $71.2 million gain from the sale of Intuit Services Corporation (ISC) recorded in 1997.
- Acquisition of Lacerte: Intuit acquired Lacerte Software Corporation for approximately $400 million in cash, financed by a public offering of 10 million shares of common stock. This significantly increased total assets and goodwill.
- Divestitures: The company sold its Parsons subsidiary (direct marketing consumer software) and its banking/bill payment processing subsidiary (ISC) in prior periods, impacting comparability.
- Internet Growth: Internet commerce revenues more than doubled, though they still represented only 8% of total revenue (6% from Internet products, 2% from electronic distribution).
Guidance, Outlook, and Risks
Management Commentary & Outlook
- Strategic Focus: Management is focusing on three areas: adding Internet connectivity to desktop software, expanding Internet-based resources (Quicken.com), and broadening small business offerings (e.g., online payroll).
- Profitability: Excluding one-time charges and discontinued operations, management indicated a 38% improvement in net income for fiscal 1998 over 1997, driven by lower cost of sales and support costs.
- Future Costs: Future amortization from acquisitions is expected to reduce net income by approximately $78.5 million in 1999, $72.8 million in 2000, and $61.6 million in 2001.
- Seasonality: Revenue is heavily seasonal, with tax products driving sales from November to March and consumer products peaking in the holiday season.
Risks and Contingencies
- Year 2000 (Y2K) Litigation: Six class-action lawsuits allege Quicken's online banking functions are not Y2K compliant. Intuit intends to defend vigorously but notes potential costs and operational disruptions.
- Internet Investment Risks: Significant investments in Internet businesses (e.g., AOL agreement requiring $30 million in guaranteed payments) carry risks of not generating meaningful revenue or profits in the near term.
- Competition: Intense competition in tax software (Block Financial) and consumer finance (Microsoft Money). Microsoft's potential entry into the personal tax market is a specific concern.
- Market Volatility: Significant holdings in Checkfree and Excite common stock are subject to high volatility. Subsequent to year-end, Checkfree stock value declined significantly.
Investor Verification Checklist
- Acquisition Integration: Verify the integration progress of Lacerte and whether the anticipated recurring revenue and profitability targets are being met.
- Internet Monetization: Assess the timeline for Internet commerce (Quicken.com, online payroll) to move from heavy investment to profitability, given the $30 million AOL commitment.
- Y2K Exposure: Monitor the status of the six class-action lawsuits regarding Y2K compliance and any associated remediation costs.
- Amortization Impact: Confirm the impact of future amortization charges ($78.5 million in 1999) on reported earnings.
- Marketable Securities: Review the valuation of significant equity investments in Checkfree and Excite, noting the volatility and potential for write-downs.