Business context and reporting period
Intuit Inc. filed this unaudited Form 10-Q for the quarter and six months ended January 31, 2014 (fiscal 2014 Q2). It provides business and financial-management products and services, including QuickBooks, TurboTax, Quicken, Lacerte and ProSeries. Its reporting segments are Small Business, Consumer and Professional Tax. Comparisons below are with the corresponding 2013 periods and reflect continuing operations unless noted.
Intuit sold Intuit Financial Services (IFS) and Intuit Health in August 2013 and presents both, along with the previously sold Intuit Websites business, as discontinued operations. Management reorganized continuing operations into the three current segments effective August 1, 2013.
Financial results and key metrics
| Metric | Three months ended Jan. 31 | Six months ended Jan. 31 |
|---|---|---|
| Net revenue | $782 million, down 12% from $884 million | $1.404 billion, down 3% from $1.446 billion |
| Operating income (loss), continuing operations | $(46) million, versus $84 million | $(123) million, versus $11 million |
| Net income (loss), continuing operations | $(37) million, versus $65 million | $(94) million, versus $11 million |
| Diluted EPS, continuing operations | $(0.13), versus $0.21 | $(0.33), versus $0.04 |
| Operating margin, continuing operations | Approximately (5.9)%, versus 9.5% | Approximately (8.8)%, versus 0.8% |
| Operating cash flow | Quarterly figure not provided in the filing text | $142 million, versus $111 million |
Including discontinued operations, net loss was $37 million for Q2 and $48 million for the six-month period; the prior-year figures were net income of $71 million and $52 million, respectively. Q2 product revenue was $287 million versus $402 million, while service and other revenue was $495 million versus $482 million. Six-month product revenue was $516 million versus $629 million, and service and other revenue was $888 million versus $817 million.
Costs of revenue were 23% of revenue in both Q2 and the six-month period, compared with 19% and 21%, respectively, in the prior year. Operating expenses were 83% of revenue in Q2 versus 72%, and 86% for six months versus 78%. Small Business segment operating margin was 35% in Q2 versus 37%, and 36% for six months, flat year over year.
By segment, Q2 revenue was $560 million for Small Business (up 8%), $187 million for Consumer (down 28%) and $35 million for Professional Tax (down 67%). Six-month segment revenue was $1.080 billion for Small Business (up 9%), $264 million for Consumer (down 20%) and $60 million for Professional Tax (down 53%).
At January 31, 2014, cash and cash equivalents were $625 million, investments were $706 million and long-term investments were $45 million. Management reported cash, cash equivalents and investments of $1.331 billion, down $330 million from July 31, 2013. Working capital was $751 million, down from $1.116 billion; the current ratio was 1.4:1 versus 1.9:1. Long-term debt was $499 million, principally the 5.75% senior notes due March 2017. The $500 million revolving facility was undrawn, and the company reported compliance with its covenants.
Six-month investing cash flow was positive $828 million, primarily reflecting $1.025 billion of proceeds from the IFS sale. Financing cash flow was negative $1.345 billion, including $1.402 billion of share repurchases and $111 million of dividends. Cash and cash equivalents declined by $384 million, ending at $625 million. Intuit repurchased 20.2 million shares for $1.4 billion during the six months, including under a $1.4 billion accelerated share repurchase agreement. Up to a further $2.0 billion was authorized for repurchases through August 2017.
Material changes versus the prior comparable period
- Small Business continued to grow, led by connected and subscription offerings: six-month QuickBooks Online customers grew 30%, desktop subscribers 19%, and Enterprise Solutions customers 20%. Desktop license revenue declined 7% for the six-month period.
- Consumer Tax revenue recognition was affected by tax-season processing and product changes. Intuit deferred approximately $84 million of Q2 Consumer Tax revenue to Q3: about $40 million because it could not process all state returns received on the quarter’s final day, and about $44 million due to changes in TurboTax offerings.
- Professional Tax revenue fell because certain product functionality was delivered in Q3 rather than Q2. Management said tax-season results for Consumer and Professional Tax would not be substantially complete until Q3.
- Operating costs increased despite lower revenue. For the first six months, staffing expense was approximately $48 million higher and share-based compensation was $8 million higher; unallocated corporate costs also increased.
- The IFS sale generated approximately $1.025 billion in cash and a $36 million after-tax gain. The Intuit Health sale generated an approximately $10 million net gain, primarily reflecting a tax benefit.
Outlook, management commentary, risks and contingencies
Management expects the IRS’s delayed start to accepting 2013 federal returns to shift some Consumer Tax revenue from Q2 into Q3, and expects certain Professional Tax revenue to occur in Q3 with delivery of functionality. The filing does not provide a clear numerical full-year revenue or earnings forecast. Management expects significant operating cash generation in fiscal 2014 and believes available cash, investments and operating cash flow will cover seasonal working capital, capital expenditure, contractual, debt-service and other needs for at least the next 12 months. It expects to return excess cash through repurchases and dividends, subject to board discretion.
Management emphasized a strategy focused on mobile-first products, connected services, open platforms and using customer data to improve offerings. It expects connected-services revenue to continue growing. It also noted intense competition, ongoing investment in product development and marketing, and the seasonal nature of tax and QuickBooks revenue; quarterly results may shift with tax-form availability, filing acceptance and product delivery timing.
Principal disclosed risks include competition (including free tax and financial offerings), successful product and technology development, service interruptions and dependence on third-party systems, cybersecurity and protection of sensitive customer data, regulatory changes, transaction processing and fraud, seasonality, and potential product returns. The company had $28 million of illiquid municipal auction-rate securities classified as Level 3; management said it did not expect to need to sell them before recovery. A TurboTax refund-processing class-action settlement was approved and an appeal dismissed; the parties agreed to seek dismissal of a related state case. Intuit said potential losses from other pending matters were not expected to materially affect its financial statements, while noting litigation outcomes remain uncertain.
There were no significant off-balance-sheet arrangements or significant changes to contractual obligations reported for the six-month period. Disclosure controls were concluded to be effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the approximately $84 million of deferred Consumer Tax revenue and the shifted Professional Tax functionality were recognized in Q3 as expected, and how the full tax season compared with management’s expectations.
- Whether Small Business growth and connected-service customer gains continued to offset declining desktop license sales and potential weakness in non-core payments offerings.
- How operating expenses, staffing and share-based compensation affected margins as revenue recovered or changed seasonally.
- Cash generation and liquidity after the IFS divestiture and substantial repurchases; remaining repurchase authorization, dividend policy and the impact on share count.
- Developments in cybersecurity, service availability, regulatory exposure, litigation, and the valuation or recovery timing of the $28 million auction-rate securities.