Intuit Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended January 31, 2015 (fiscal 2015). Amounts are in millions of dollars, except per-share data and where noted. Intuit provides financial-management and tax software and services, principally in the United States, through Small Business, Consumer, and Professional Tax segments. Results exclude the Intuit Financial Services and Intuit Health businesses, sold in August 2013 and classified as discontinued operations.
Financial results and position
| Metric | Three months ended Jan. 31, 2015 | Prior-year quarter | Six months ended Jan. 31, 2015 | Prior-year six months |
|---|---|---|---|---|
| Total revenue | $808 | $782 | $1,480 | $1,404 |
| Operating loss from continuing operations | $(98) | $(46) | $(212) | $(123) |
| Net loss from continuing operations | $(66) | $(37) | $(150) | $(94) |
| Net loss per share from continuing operations, diluted | $(0.23) | $(0.13) | $(0.53) | $(0.33) |
- Quarterly revenue increased 3%; six-month revenue increased 5%. Service and other revenue grew to $610 for the quarter and $1,049 year to date, while product revenue declined to $198 and $431, respectively.
- Approximate operating-loss margins were 12.1% for the quarter and 14.3% year to date, compared with 5.9% and 8.8% in the respective prior-year periods.
- Quarterly revenue by segment: Small Business $553 (down 1%); Consumer $244 (up 30%); Professional Tax $11 (down 69%). Six-month revenue: Small Business $1,101 (up 2%); Consumer $332 (up 26%); Professional Tax $47 (down 21%).
- Small Business Online Ecosystem revenue grew 26% in the quarter and 28% year to date; QuickBooks Online customers grew 50%. These gains were offset in part by lower desktop sales. Consumer Tax benefited from the earlier IRS opening of filing for 2014 returns; Consumer Ecosystem revenue fell 26% year to date.
- Expenses grew faster than revenue: six-month operating expenses were $1,311, up $103. Management cited higher staffing, advertising and marketing, and share-based compensation. Small Business segment operating margin fell to 31% for the quarter from 35%; Professional Tax losses widened.
- Six-month operating cash flow was $247, versus $142 a year earlier. Investing cash flow was a use of $35, compared with a source of $828, which included $1.025 billion from the prior-year divestiture. Financing cash use was $558, mainly reflecting share repurchases and dividends. Cash and cash equivalents declined $367 to $482.
- At January 31, cash, cash equivalents and investments totaled $1.367 billion, down $547 from July 31, 2014. Working capital was $469, versus $1.200 billion; the current ratio was 1.2:1, versus 1.8:1. Customer funds held ($354) are matched by customer fund deposits and should be distinguished from available corporate liquidity.
- Long-term debt was $499, comprising $500 million of 5.75% senior unsecured notes due March 2017, carried net of discount. Intuit had an unused $500 million revolving facility expiring in 2017 and was covenant-compliant. It reported no significant off-balance-sheet arrangements.
Material changes and unusual items
- Beginning in fiscal 2015, Intuit changed its delivery and revenue-recognition approach for future QuickBooks and Quicken desktop offerings and Professional Tax solutions. Revenue is recognized as services are provided—approximately three years for the desktop offerings and over the tax year for Professional Tax. Related revenue deferrals reduced reported product revenue, while product costs are expensed as incurred.
- The IRS began accepting 2014 federal returns on January 20, 2015, several days before quarter-end; the prior year’s opening was January 31. Intuit said it deferred about $40 million of Consumer Tax revenue from the prior-year second quarter to the third quarter because some state returns could not be processed by quarter-end.
- In early February 2015, Intuit and certain states temporarily suspended electronic filing of state tax returns as a precaution amid suspicious filings using stolen identity information. The company cited negative publicity and warned that future-period results could be affected; it said its results to date had not been adversely affected.
- A retroactive reinstatement of the federal research and experimentation credit generated an approximately $11 million discrete tax benefit in the quarter and six-month period. Six-month 2014 net loss included $46 million of income from discontinued operations; comparisons of continuing operations are more representative of ongoing results.
- Six-month repurchases totaled $668 million for 7.5 million shares; $114 million of late-January purchases settled in February. The company declared $0.50 per share in dividends during the six months and announced a further $0.25 quarterly dividend payable April 20, 2015.
Outlook, management commentary and risks
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expected significant operating cash generation in fiscal 2015 and believed available liquidity and operating cash flow would meet requirements for at least the next 12 months. It expected to return excess cash through repurchases and dividends, subject to management and board discretion.
- Results are seasonal: tax sales concentrate from November through April, and the second and third fiscal quarters are typically strongest. Intuit expected near-term seasonality to continue, although ongoing product releases and online/subscription adoption may partly mitigate it over time.
- Management’s strategy emphasizes product experience, connected services and open platforms, and using customer data to improve offerings. Competition, rapid technology change, execution of the desktop-to-connected-services transition, customer adoption, and monetization remain important uncertainties.
- Key disclosed risks include tax-filing fraud and security/privacy breaches; service outages and dependence on internal and third-party systems; intense competition, including free offerings and potential government tax-preparation services; regulatory changes; product quality or launch delays; litigation and intellectual-property claims; and seasonal fluctuations.
- Intuit reported routine legal proceedings and said it did not believe potential losses, beyond amounts accrued, would materially affect its financial statements, while noting litigation outcomes are uncertain. It also held $21 million of illiquid municipal auction-rate securities classified as Level 3 and said it did not intend to sell them.
Important facts for investors to verify
- How the new ongoing-release revenue-recognition model affects future reported revenue, margins, deferred revenue and comparisons with prior periods.
- Whether QuickBooks Online growth and other connected-service gains can offset desktop declines, and whether the Consumer Tax quarter’s growth persists after the filing season.
- Developments in tax-return fraud, state e-filing availability, customer confidence and any resulting effect on subsequent-quarter results.
- Cash generation and liquidity after repurchases, dividends and seasonal working-capital movements; distinguish customer funds from corporate funds.
- Repayment or refinancing plans for the $500 million notes due in March 2017, and continued compliance with revolving-facility covenants.
- Any material changes in litigation, contingencies, tax exposures, or the valuation and recoverability of goodwill and acquired intangible assets.