Business Context and Reporting Period
Company: Intuit Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: January 31, 1999 (Second Quarter of Fiscal Year 1999)
Business Overview: Intuit develops and sells small business accounting, tax preparation, and consumer finance desktop software, financial supplies, and Internet products. The company operates through retail, direct sales, and Internet channels. The reporting period includes the impact of the June 1998 acquisition of Lacerte Software Corporation.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended Jan 31, 1999 | Six Months Ended Jan 31, 1998 |
|---|---|---|
| Net Revenue | $457,919 | $333,471 |
| Net Income | $40,667 | $29,085 |
| Diluted EPS | $0.65 | $0.59 |
| Operating Cash Flow | $45,145 | $19,594 |
| Cash & Equivalents (End of Period) | $163,030 | $105,532 |
| Total Assets | $2,344,795 | $1,498,596 |
| Long-term Debt | $39,276 | $35,566 |
Margins (Six Months Ended Jan 31, 1999):
- Gross Margin (Revenue less Cost of Goods Sold): Approximately 77% (Cost of Goods Sold was 23% of revenue).
- Operating Margin: Approximately 8.2% (Income from operations was $37,576).
- Net Profit Margin: Approximately 8.9%.
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 37% year-over-year for the six-month period, driven by a 42% increase in software revenue and 10% in supplies. The Tax Division saw a 76% revenue increase, largely due to the inclusion of Lacerte results and higher TurboTax unit sales.
- Profitability: Net income rose 40% to $40.7 million. This was significantly aided by a $10.1 million realized gain on the sale of marketable securities (Checkfree, Verisign, and Concentric) and a change in accounting estimate regarding goodwill amortization for Lacerte, which reduced expenses by $19.0 million.
- Balance Sheet: Total assets increased by approximately $846 million, primarily due to a surge in marketable securities (unrealized gains on Excite and Checkfree stock) and higher accounts receivable due to seasonal product shipments.
- Cost Structure: Cost of goods sold as a percentage of revenue increased to 23% from 21%, attributed to higher infrastructure costs for Internet services and fee-for-support programs.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook:
- Seasonality: The company expects revenue to be strongest in the quarters ending January 31 and April 30. Operating results may fluctuate due to product release timing and acquisitions.
- Internet Strategy: Internet commerce revenue is growing rapidly but currently represents only about 10% of total revenue. Management anticipates continued investment in Internet infrastructure, which may keep cost of goods sold percentages elevated.
- Payroll Services: A new payroll processing service was introduced in October 1998. Management expects this service to be unprofitable in initial stages until a large subscriber base is achieved.
Unusual Items:
- Marketable Securities: Significant unrealized gains on Excite and Checkfree stock contributed to a $371 million increase in comprehensive income. The company has entered into a forward sale arrangement to dispose of a large portion of its Excite holdings.
- Acquisition: On March 3, 1999, Intuit announced an agreement to acquire Computing Resources, Inc. (CRI) for approximately $200 million to bolster its payroll services.
Risks and Contingencies:
- Year 2000 Compliance: The company faces class-action lawsuits alleging Quicken products are not Year 2000 compliant. While Intuit intends to defend vigorously, failure to achieve readiness could disrupt operations and result in significant costs.
- Competition: Intense competition in tax software (e.g., H&R Block's TaxCut) and potential entry by Microsoft into the tax market pose risks to pricing and market share.
- Legal Proceedings: Intuit filed a lawsuit against Checkfree Corporation in March 1999 alleging breach of a bill presentment agreement.
Investor Verification Checklist
- Marketable Securities Valuation: Verify the fair value and liquidity of the $1.1 billion in marketable securities (primarily Excite and Checkfree), noting the forward sale agreement for Excite shares.
- Year 2000 Litigation Status: Monitor the progress of the consolidated class-action lawsuits regarding Year 2000 compliance in Quicken products and potential settlement costs.
- CRI Acquisition Closing: Confirm the regulatory approval and closing of the $200 million acquisition of Computing Resources, Inc., and assess integration risks.
- Payroll Service Adoption: Track the subscriber growth and profitability timeline of the new online payroll service to ensure it meets management's expectations for offsetting fixed costs.
- Goodwill Amortization: Review the impact of the changed estimate for Lacerte goodwill amortization on future earnings projections for fiscal years 2002 and 2003.