Intuit Inc. — Fiscal 2019 Form 10-K
Reporting period: Fiscal year ended July 31, 2019. This is an annual report, not a standalone Q4 filing; quarterly data for the quarter ended July 31, 2019 are noted below. Intuit provides financial management, tax, payroll, payments and related services through Small Business & Self-Employed, Consumer and Strategic Partner segments.
Financial performance
- Revenue: $6.784 billion, up 13% from $6.025 billion. Service and other revenue was $5.161 billion, or 76% of total revenue; product revenue was $1.623 billion.
- Profitability: Operating income was $1.854 billion, up 19%, with an operating margin of approximately 27.3% (about 25.9% in fiscal 2018). Net income was $1.557 billion, up 17%; diluted EPS was $5.89, up 16%. Net margin was approximately 22.9%, versus 22.1%.
- Cash flow: Cash from operations was $2.324 billion, compared with $2.112 billion in fiscal 2018. Investing activities used $566 million and financing activities used $1.034 billion. Capital expenditures were $155 million.
- Liquidity and debt: Cash, cash equivalents and investments totaled $2.740 billion at year-end, up $1.024 billion year over year. Working capital was $1.628 billion and the current ratio was 1.8:1. Total debt was $436 million, including $388 million under the term loan and $48 million under the secured facility; no balance was outstanding on the $1 billion unsecured revolving facility. Intuit reported compliance with debt covenants.
- Segments: Small Business & Self-Employed revenue was $3.533 billion, up 15%; Consumer was $2.775 billion, up 11%; Strategic Partner was $476 million, up 4%. QuickBooks Online subscribers reached 4.5 million, up 32%; QuickBooks Online Accounting revenue rose 41%.
- Fiscal Q4: Revenue was $994 million, versus $864 million a year earlier. Operating loss was $153 million and net loss was $44 million; diluted loss per share was $0.17. Results reflect the company’s pronounced tax-season seasonality.
Changes versus fiscal 2018
- Revenue growth accelerated in Small Business & Self-Employed to 15% from 19% in fiscal 2018? No: fiscal 2018 growth was 19%, so growth moderated while revenue continued to expand; the online ecosystem remained the principal driver, growing 38% in fiscal 2019.
- Consumer growth moderated to 11% from 15%, supported by a 5% increase in TurboTax federal units, higher average revenue per customer and a shift toward higher-priced offerings, including TurboTax Live.
- Operating income increased 19%; higher revenue and the absence of fiscal 2018’s $79 million loss on the Quincy data-center sale contributed. Higher advertising, marketing, staffing and outside-service costs partly offset the increase.
- Net income growth was 17%, compared with 35% in fiscal 2018. Fiscal 2018 included tax benefits tied to the Tax Cuts and Jobs Act and a subsidiary reorganization; fiscal 2019’s reported effective tax rate was approximately 17%, versus 15% in fiscal 2018.
- Cash from operations increased to $2.324 billion from $2.112 billion. Cash and investments rose to $2.740 billion from $1.716 billion.
Outlook, risks and notable items
- Management expects significant cash generation to continue in fiscal 2020, believes available cash, investments and operating cash flow will cover anticipated needs for at least 12 months, and expects service and other revenue to continue growing. The filing does not provide a specific fiscal 2020 revenue or EPS forecast.
- Intuit expects to return excess cash through share repurchases and dividends, subject to operating and strategic needs. Fiscal 2019 dividends declared were $1.88 per share; the board declared a subsequent quarterly dividend of $0.53 per share.
- Key risks include intense competition (including free tax-preparation products and potential government tax-preparation services), cybersecurity, privacy and fraud, system availability and peak tax-season execution, evolving regulation, and the ability to retain customers and sustain online growth.
- Beginning in May 2019, lawsuits and regulatory inquiries arose concerning the provision and marketing of free online tax-preparation programs. Intuit disputes the allegations and plans to defend itself and cooperate with investigations. The IRS Free File agreement was scheduled to expire in October 2021. The company stated that pending legal matters were not expected to have a material financial-statement impact, but outcomes remain uncertain.
- Small-business lending exposes Intuit to borrower credit risk and reliance on funding institutions. Notes receivable were $95 million at year-end; the allowance for loan losses was not significant.
- Adoption of revenue-recognition rules was applied retrospectively and changed the timing of revenue recognition for certain desktop products; comparative periods shown are restated. Intuit planned to adopt the new lease standard in fiscal 2020, estimating $320–$370 million of operating-lease right-of-use assets and liabilities at adoption, with no material income-statement or cash-flow effect expected.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified revenue-contract performance-obligation judgments as a critical audit matter.
Investor verification points
- Confirm the drivers and durability of QuickBooks Online subscriber and revenue growth, alongside continued performance in payroll, payments and lending.
- Assess whether Consumer growth, TurboTax unit trends and premium-product mix can be sustained amid free alternatives and Free File-related legal and regulatory developments.
- Review cash conversion, working-capital seasonality, debt maturities and the extent to which buybacks and dividends are supported by operating cash flow.
- Track the outcome and potential costs of the free tax-preparation lawsuits and inquiries, and monitor cybersecurity, fraud and tax-season service reliability.
- Evaluate the effects of revenue-recognition presentation changes and the fiscal 2020 lease-standard adoption when comparing reported periods.