Intuit Inc. — Q2 Fiscal 2020 Form 10-Q
Reporting period: Three and six months ended January 31, 2020. Intuit provides financial management and tax products and services, including QuickBooks, TurboTax, Mint and professional tax offerings. Its three segments are Small Business & Self-Employed, Consumer, and Strategic Partner. Tax-related revenue is seasonal, concentrated from November through April.
Financial performance and liquidity
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Revenue | $1.696B | $1.502B | $2.861B | $2.518B |
| Operating income | $270M | $233M | $280M | $223M |
| Net income | $240M | $189M | $297M | $223M |
| Diluted EPS | $0.91 | $0.72 | $1.13 | $0.84 |
- Q2 operating margin was approximately 15.9%, compared with 15.5% a year earlier; net margin was approximately 14.2%, versus 12.6%.
- Q2 product revenue was $545M and service and other revenue was $1.151B. Service and other revenue grew 19% year over year.
- For the first six months, cash from operations was $190M, versus $198M. Investing activities used $96M and financing activities used $542M; cash, cash equivalents and restricted cash decreased $450M to $1.902B.
- At January 31, cash, cash equivalents and investments totaled $2.266B; working capital was $1.486B and the current ratio was 1.7:1. Debt was $411M in aggregate, including $363M under the unsecured term loan and $48M under a subsidiary’s secured facility. No balance was drawn on the $1B unsecured revolver; Intuit reported compliance with required debt covenants.
- Six-month dividends declared were $1.06 per share ($281M); Intuit repurchased $278M of shares. The board had authorized up to $2.4B of additional repurchases.
Material changes versus prior period
- Q2 revenue increased 13%, operating income 16%, net income 27%, and diluted EPS 26% year over year. Six-month revenue rose 14%, operating income 26%, net income 33%, and diluted EPS 35%.
- Small Business & Self-Employed revenue grew 17% in Q2 and 16% year to date, led by Online Ecosystem growth; QuickBooks Online Accounting revenue rose 43% in Q2. Consumer revenue increased 8% in Q2, while Consumer segment operating income was approximately flat; the timing of IRS return acceptance contributed to revenue growth. Strategic Partner revenue grew 8% in Q2.
- Higher staffing, marketing and corporate costs partly offset revenue growth. Six-month operating cash flow was slightly lower despite higher net income, with substantial cash use from accounts receivable and other working-capital movements.
- Intuit adopted the new lease standard on August 1, 2019. The adoption added operating-lease right-of-use assets and liabilities and did not materially affect earnings or cash flows; prior periods were not restated.
Outlook, commentary, risks and unusual items
- No numerical full-year revenue or earnings guidance is provided in the filing. Management expects service and other revenue to continue growing and believes cash, investments and operating cash generation will meet liquidity needs for at least 12 months. Management cautions that first-half Consumer and Strategic Partner results are not indicative of full-year performance because of tax-season timing.
- On February 24, 2020, after quarter-end, Intuit agreed to acquire Credit Karma for $7.1B, payable in equal portions of cash and Intuit stock, subject to customary adjustments and approvals. The cash portion is expected to use existing cash and the unsecured revolver. Closing was expected before year-end 2020; a $230M–$350M termination fee could apply in specified antitrust-related circumstances. The stated consideration includes estimated equity-award value, with additional post-close restricted stock units also contemplated.
- Intuit disclosed legal proceedings and regulatory inquiries begun in 2019 concerning the provision and marketing of its free online tax-preparation programs. The company disputes the allegations and intends to defend itself and cooperate with investigations; it said potential losses were not expected to materially affect the financial statements, while noting litigation outcomes are uncertain.
- Other key risks include intense competition, tax-season execution and service availability, fraud and cybersecurity, privacy regulation, reliance on third parties, small-business loan credit risk, and acquisition integration and regulatory approval. The filing identifies no significant off-balance-sheet arrangements or material change in market-risk disclosures.
- Six-month effective tax rate was approximately 2%, affected by share-based compensation tax benefits; excluding discrete items, management reported an estimated 24% rate.
Investor facts to verify
- Credit Karma acquisition approvals, final consideration, financing, integration costs and any change to expected closing or termination-fee exposure.
- Remaining tax-season results and whether Consumer and Strategic Partner growth reflects sustained demand or timing effects.
- Progress and outcomes of the Free File litigation and regulatory inquiries, including any effect on the IRS Free File program.
- Accounts-receivable collection and operating cash flow, given first-half working-capital cash use.
- Debt repayment and liquidity needs alongside planned dividends, repurchases and acquisition financing.