Intuit Inc. Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2017. Unless stated otherwise, amounts are in millions of dollars. Intuit provides financial and tax management products and services, including QuickBooks and TurboTax, through its Small Business, Consumer Tax, and ProConnect segments. Consumer Tax revenue is highly seasonal and concentrated in the third fiscal quarter.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Revenue | $2,541 (+10%) | $2,304 | $4,335 (+10%) | $3,940 |
| Operating income from continuing operations | $1,444 (+12%) | $1,285 | $1,405 (+8%) | $1,298 |
| Net income from continuing operations | $964 (+14%) | $848 | $947 (+12%) | $846 |
| Diluted EPS from continuing operations | $3.70 (+13%) | $3.26 | $3.63 (+15%) | $3.17 |
- Q3 operating margin was approximately 56.8%, versus 55.8% a year earlier; the nine-month margin was approximately 32.4%, versus 33.0%. These are calculated from reported revenue and operating income.
- Q3 product revenue was $467, up 2%; service and other revenue was $2,074, up 12%. Nine-month product revenue was $1,063, up 7%, and service and other revenue was $3,272, up 11%.
- For the nine months, operating cash flow was $1,889, capital expenditures were $178, investing cash flow was negative $22, and financing cash flow was negative $1,149. Cash and cash equivalents increased $712 to $1,350. Operating cash flow less capital expenditures was $1,711.
- At April 30, cash, cash equivalents, and investments totaled $1,593, excluding separately presented customer funds. Total debt was $500: $50 short-term and $450 long-term. Working capital was negative $239, and the current ratio was 0.9:1. The filing attributes the working-capital deficit in part to business seasonality.
- Declared dividends were $0.34 per share for Q3 and $1.02 per share for the nine-month period. Nine-month repurchases totaled $478; $1.9 billion of authorization remained at April 30.
Segment results and changes
- Small Business: Q3 revenue was $671, up 16%, and segment operating income was $277, up 24%. Nine-month revenue was $1,909, up 13%, and operating income was $758, up 18%. Online Ecosystem revenue grew 30% in Q3 and 29% year to date; QuickBooks Online subscribers were up 59% year over year. Desktop revenue growth benefited from changes that spread recognition of certain QuickBooks Desktop revenue over approximately three years; desktop units declined 15% in Q3.
- Consumer Tax: Q3 revenue was $1,754, up 10%, and operating income was $1,428, up 10%. Nine-month revenue was $2,099, up 9%, and operating income was $1,444, up 9%. Management cited 2% growth in TurboTax federal units year to date and a shift toward higher-priced products.
- ProConnect: Q3 revenue was $116, down 8%, and operating income was $73, down 15%. Nine-month revenue was $327, up 2%, while operating income fell 3% to $193. Management said it prioritized customer retention and product experience over price increases, slowing revenue growth; higher staffing costs pressured margins.
- Q3 2016 net income included $178 from discontinued operations; nine-month 2016 net income included $173 from discontinued operations. Intuit sold Demandforce, QuickBase, and Quicken in fiscal 2016. Comparisons of continuing operations exclude those businesses.
Outlook, risks, and notable items
- No specific revenue, earnings, or EPS guidance is provided in the filing. Management expected significant operating cash generation through the remainder of FY2017 and FY2018, and believed available liquidity and expected operating cash would cover obligations and needs for at least 12 months. It expected approximately $400 in income-tax payments in Q4 FY2017.
- Management expects connected-services revenue to continue growing as a share of total revenue and expects to return excess cash through repurchases and dividends, subject to management and board decisions. A $0.34-per-share dividend payable July 18, 2017 was declared after quarter-end.
- Intuit repaid $500 of 5.75% senior notes at maturity in Q3 using operating cash. A separate $500 term loan remained outstanding; quarterly principal payments were scheduled to begin in July 2017. No revolver borrowings were outstanding at April 30, and the company reported compliance with its debt covenants.
- Risks highlighted include intense competition, seasonal dependence on tax season, service availability and technology-transition risks, cybersecurity and customer-data threats, tax-return fraud, regulatory scrutiny, and litigation. The company is cooperating with government inquiries into fraudulent tax returns and is defending a consolidated putative class action related to those events; it said it believes the lawsuit allegations are without merit.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing also notes that several accounting standards, including revenue recognition and lease accounting changes, were not yet adopted and their impacts were being evaluated.
Investor verification priorities
- Check whether Small Business online customer and revenue growth persists, and whether desktop revenue trends remain affected by multi-year revenue recognition and declining unit sales.
- Assess the sustainability of Consumer Tax growth and margins given tax-season concentration and year-to-year seasonality.
- Track ProConnect retention-focused strategy, staffing costs, and operating margins.
- Reconcile cash generation with seasonal working-capital needs, the planned tax payment, debt amortization, repurchases, and dividends; note the negative working capital.
- Monitor outcomes of tax-fraud-related government inquiries and litigation, cybersecurity and service-continuity risks, and the effects of pending accounting standards.