Intuit Inc. — Form 10-Q Summary
Business context and reporting period
Reports the first quarter of fiscal 2017, the three months ended October 31, 2016, compared with the three months ended October 31, 2015. Intuit provides financial and business-management products and services, including QuickBooks and TurboTax. Results reflect continuing operations; Demandforce, QuickBase, and Quicken were sold in fiscal 2016 and presented as discontinued operations. Consumer Tax revenue is highly seasonal, and management cautions that first-quarter tax results are not indicative of the full year.
Key financial metrics
| Metric | Q1 FY17 | Q1 FY16 |
|---|---|---|
| Revenue | $778 million | $713 million |
| Operating loss from continuing operations | $61 million | $29 million |
| Net loss | $30 million | $31 million |
| Diluted loss per share | $0.12 | $0.11 |
| Net cash used in operating activities | $205 million | $188 million |
| Cash, cash equivalents, and current investments at period end | $605 million | Not stated for comparable quarter |
Revenue increased 9% year over year. Cost of revenue was $183 million, or 24% of revenue, versus $166 million, or 23%; total operating expenses were $656 million, or 84% of revenue, versus $576 million, or 81%. Segment operating income was $240 million for Small Business and $70 million for ProConnect; Consumer Tax had a $39 million operating loss.
At October 31, 2016, total assets were $3.933 billion and total liabilities were $2.997 billion. Debt totaled $1.1 billion: $625 million short-term and $475 million long-term. Current assets were $1.262 billion and current liabilities $2.181 billion, a $919 million working-capital deficit and a 0.6:1 current ratio. Cash and cash equivalents were $360 million. Cash declined $278 million during the quarter.
Investing activities provided $98 million, compared with $816 million in the prior-year quarter; financing activities used $166 million, compared with $961 million. The prior-year investing and financing cash flows included substantially different investment sales and share repurchases. The company repurchased 1.8 million shares for $192 million and paid $89 million in dividends. The quarterly dividend declared was $0.34 per share.
Material changes versus the prior comparable period
- Small Business revenue rose 11% to $606 million; Small Business Online Ecosystem revenue grew 26%, QuickBooks Online subscribers 41%, and online payroll customers 24%. QuickBooks desktop revenue rose 76%, partly reflecting prior product-accounting changes and unusually high renewals associated with operating-system upgrades.
- Consumer Tax revenue increased 6% to $60 million but remained seasonally low; its operating loss widened to $39 million from $28 million.
- ProConnect revenue increased 1% to $112 million, while segment operating income fell 3% to $70 million.
- Operating loss more than doubled, mainly because of higher staffing, advertising and marketing, and share-based compensation costs. Net loss narrowed slightly, but diluted loss per share increased as weighted-average shares declined.
- Intuit early adopted ASU 2016-09 on share-based compensation. It recognized $19 million of excess tax benefits in the quarter, affecting the tax provision; the reported effective tax rate was approximately 58%, versus approximately 22% in the prior-year quarter.
Outlook, risks, contingencies, and unusual items
- No specific full-year revenue or earnings guidance is provided. Management expects significant cash generation from operations and believes available liquidity and expected operating cash flow will meet requirements for at least the next 12 months.
- Management expects connected-services revenue to continue growing as a share of total revenue. It expects slower ProConnect growth in fiscal 2017 as it emphasizes accountants’ value to small businesses rather than relying as much on price increases.
- Key risks include intense competition, technological change, dependence on online systems and third-party providers, cybersecurity and customer-data protection, tax-season service availability, fraud, regulatory changes, and pronounced tax-business seasonality.
- Regulatory authorities, including the FTC, SEC, DOJ, Congress, and state Attorneys General, are investigating identity-related tax-return fraud. Intuit is also defending a consolidated putative class action related to the events. The company says it believes the allegations are without merit and does not currently expect pending claims to have a material financial impact beyond amounts accrued; outcomes remain uncertain.
- The $500 million 5.75% senior notes mature March 15, 2017. Intuit also had $500 million outstanding on its term loan and $100 million drawn on its $1 billion revolving facility. It reported compliance with applicable debt covenants.
- About 30% of cash, cash equivalents, and investments were held by foreign subsidiaries and subject to repatriation-tax considerations. The company reported no significant off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Small Business Online growth and QuickBooks desktop renewals persist, and how much desktop growth reflects unusual renewal timing or revenue-recognition changes.
- Whether elevated operating expenses, especially staffing, marketing, and share-based compensation, translate into durable growth and improved operating margins.
- Cash generation and liquidity through the seasonal tax cycle, including management of the working-capital deficit and the March 2017 senior-note maturity.
- Developments in tax-fraud inquiries and related litigation, and any resulting customer, regulatory, or financial effects.
- Progress on cybersecurity, system availability, and the implementation impacts of newly adopted and pending accounting standards.