Business context and reporting period
Intuit Inc. filed this unaudited Form 10-Q for the first quarter of fiscal 2020, the three months ended October 31, 2019. The company provides financial management, tax, payroll, payments and related services, primarily in the U.S. Results are seasonal: Consumer and Strategic Partner tax revenue is concentrated in the November–April period, so Q1 is not representative of those segments’ full-year performance.
Financial performance and liquidity
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q1 FY20 | Q1 FY19 |
|---|---|---|
| Total revenue | $1,165 | $1,016 |
| Product revenue | $353 | $347 |
| Service and other revenue | $812 | $669 |
| Operating income (loss) | $10 | $(10) |
| Net income | $57 | $34 |
| Diluted EPS | $0.22 | $0.13 |
| Operating cash flow | $(127) | $(143) |
- Revenue increased 15%; service and other revenue rose 21% and represented about 70% of Q1 revenue.
- Cost of revenue was $290, or 25% of revenue, versus $247, or 24%, a year earlier. Operating expenses rose 11% to $865, slower than revenue growth.
- Net income included a $35 tax benefit on $22 of pretax income. The company reported a 24% effective tax rate excluding discrete items, mainly share-based compensation tax benefits; net income therefore should be considered in light of the tax benefit.
- At October 31, cash, cash equivalents and investments were $2,255, down $485 from July 31. Working capital was $1,405; the current ratio was 1.8:1. The balance sheet reported cash and cash equivalents of $1,630 and investments of $625.
- Cash used in investing was $57 and cash used in financing was $325; cash, cash equivalents and restricted cash declined $509 during the quarter. Financing outflows included $140 of share repurchases and $141 of dividends.
- Debt totaled $423: $50 short-term and $373 long-term on the balance sheet. This included $375 outstanding under the unsecured term loan and $48 under a subsidiary’s secured revolving facility. No amounts were drawn on the $1 billion unsecured revolving facility; Intuit reported covenant compliance.
Material changes versus the prior comparable period
- Small Business & Self-Employed revenue increased 15% to $1,046 and segment operating income increased 20% to $550. QuickBooks Online Accounting revenue grew 41%; Online Ecosystem revenue grew 35%.
- Consumer revenue increased 11% to $100, while its operating loss widened to $45 from $41. Strategic Partner revenue rose 6% to $19, while its operating loss increased to $21 from $20. Management noted both tax segments are seasonally light in Q1.
- Consolidated operating results improved from a $10 loss to $10 income, mainly on revenue growth, partly offset by higher staffing, outside services, advertising and marketing costs.
- Cash used in operations improved by $16 to $127, while net cash used in financing increased to $325 from $111, reflecting higher repurchases and dividends, among other factors.
Outlook, commentary, risks and unusual items
- No numerical full-year revenue or earnings guidance is provided in the supplied filing text. Management expects service and other revenue to continue growing, plans continued investment in product development, marketing, sales, technology infrastructure, privacy and security, and expects cash, investments and operating cash generation to cover liquidity needs for at least 12 months.
- Management attributes growth mainly to the Small Business Online Ecosystem and cites customer growth, higher effective pricing and mix toward higher-priced offerings in QuickBooks Online Accounting. It expects to return excess cash through repurchases and dividends, subject to operating needs and board discretion.
- Beginning in May 2019, legal proceedings and regulatory inquiries arose concerning the provision and marketing of Intuit’s free online tax preparation programs. Intuit disputes the allegations and intends to defend itself and cooperate. The company said potential losses beyond amounts accrued were not expected to have a material financial statement impact, while acknowledging outcomes are uncertain. The filing also identifies potential consequences to the IRS Free File Program and competition if it were discontinued.
- Key risks include intense competition, tax-business seasonality, cyberattacks and fraud, service availability during peak tax season, evolving privacy regulation (including the CCPA effective January 1, 2020), and credit risk from small-business lending.
- Intuit adopted the new lease standard on August 1, 2019 without restating prior periods. Adoption added operating lease right-of-use assets and liabilities; the company reported no material effect on its statements of operations or cash flows.
- Quarterly cash dividends declared were $0.53 per share, compared with $0.47 a year earlier. A subsequent $0.53 dividend was declared for payment in January 2020.
Important facts for investors to verify
- Whether QuickBooks Online and broader Small Business growth can be sustained, and how acquisition, pricing and customer mix contribute.
- How results develop through the tax season, given management’s warning that Q1 Consumer and Strategic Partner performance is not indicative of the fiscal year.
- Developments and financial or business effects of the free-tax-program litigation and regulatory inquiries, including implications for IRS Free File.
- Cash generation across seasonal quarters, the use of cash for buybacks and dividends, and the company’s debt maturities and covenant headroom.
- Whether cybersecurity, privacy, fraud-prevention and small-business loan risks result in service disruptions, losses, regulatory action or additional costs.