Intuit Inc. — Q3 Fiscal 2019 Form 10-Q
Reporting period: Quarter and nine months ended April 30, 2019. The filing was signed May 23, 2019. Intuit provides consumer tax, small-business financial management, payroll, payments, and professional tax products. Results are seasonal, with tax-related revenue concentrated from November through April.
Financial performance
Amounts are in millions, except per-share data. Comparisons are with the prior-year periods; prior-period figures were restated for the adoption of Topic 606.
| Metric | Q3 FY19 | Q3 FY18 | First 9 months FY19 | First 9 months FY18 |
|---|---|---|---|---|
| Revenue | $3,272 (+12%) | $2,912 | $5,790 (+12%) | $5,161 |
| Operating income | $1,784 (+11%) | $1,601 | $2,007 (+14%) | $1,760 |
| Net income | $1,378 (+16%) | $1,186 | $1,601 (+17%) | $1,367 |
| Diluted EPS | $5.22 (+15%) | $4.53 | $6.06 (+15%) | $5.25 |
| Operating margin | 54.5% | 55.0% | 34.7% | 34.1% |
- Q3 product revenue was $498, up 4%; service and other revenue was $2,774, up 14%. Service and other revenue represented about 85% of Q3 revenue.
- Revenue growth reflected Small Business & Self-Employed online ecosystem expansion and higher Consumer revenue from product mix, TurboTax federal unit growth, and higher average revenue per customer.
- Q3 operating income growth was partly offset by higher advertising, marketing, and staffing costs. Net income also benefited from a lower effective tax rate. The effective tax rate was approximately 23% for Q3 and 21% year to date.
- First-nine-month operating cash flow was $2,446, versus $2,149. Investing activities used $301, versus $541; financing activities used $641, versus $469. Cash, cash equivalents, restricted cash, and restricted cash equivalents increased $1,498.
Segments and operating trends
- Small Business & Self-Employed: Q3 revenue $887 (+19%); nine-month revenue $2,628 (+15%). Online ecosystem revenue grew 38% in Q3 and 39% year to date. QuickBooks Online subscribers reached 4.2 million, up 32% year over year; QuickBooks Online Accounting revenue grew 42% in both periods.
- Consumer: Q3 revenue $2,150 (+10%); nine-month revenue $2,701 (+11%). Year-to-date TurboTax federal units grew 5%; segment growth also reflected higher-end product mix and average revenue per customer.
- Strategic Partner: Q3 revenue $235 (+9%); nine-month revenue $461 (+4%).
Balance sheet, debt, and capital allocation
- At April 30, cash and cash equivalents were $2,946; investments were $400 current and $13 long-term. Management reported cash, cash equivalents, and investments of $3,346, up $1,630 from July 31, 2018. Working capital was $1,958, and the current ratio was 1.9:1.
- Total debt was $448: $400 under the unsecured term loan, including $50 current, and $48 under a subsidiary’s secured revolving facility. No borrowings were outstanding under the $1 billion unsecured revolver. Intuit reported compliance with applicable debt covenants.
- On May 2, 2019, Intuit amended its credit agreement: the unsecured revolver maturity was extended to May 2, 2024, and interest margins were reduced; the term loan was modified to $400 million with lower interest margins.
- During the first nine months, Intuit repurchased 1.9 million shares for $413 and declared dividends totaling $1.41 per share ($376). Up to $2.8 billion remained authorized for repurchases at April 30. A $0.47-per-share dividend was declared in May, payable July 18, 2019.
Outlook, risks, and unusual items
- No specific full-year revenue, earnings, or EPS guidance is provided in the filing text. Management expects service and other revenue to continue growing, expects significant cash generation, and believes liquidity and operating cash flow will cover anticipated needs for at least 12 months. Management expects to return excess cash through repurchases and dividends, subject to business needs and board discretion.
- Key risks include intense competition, including free tax and accounting offerings; dependence on continued product innovation and customer adoption; cybersecurity, privacy, fraud, and service availability; seasonal concentration and tax-season execution; regulatory changes affecting tax preparation and data privacy; and credit risk from small-business lending. Intuit also identifies reliance on third-party providers, including cloud infrastructure.
- In May 2019, lawsuits and regulatory inquiries arose concerning the provision and marketing of free online tax preparation programs. Intuit said it believes the allegations are without merit and intends to defend the lawsuits and cooperate with investigations. The filing does not quantify potential exposure. A separate class action related to 2015 fraudulent tax filings received final approval and was dismissed on May 15, 2019; its settlement was not material to the financial statements.
- Topic 606 was adopted effective August 1, 2018 using full retrospective application. It changed the timing of revenue recognition for certain desktop QuickBooks and tax products; the filing restated comparative periods. The nine-month 2018 revenue and net income comparatives were increased by $185 and $205, respectively, by the adoption.
- Intuit reported no significant off-balance-sheet arrangements and no significant changes to contractual obligations during the first nine months. It expects adoption of the new lease standard in FY2020 to recognize operating lease assets and liabilities, but does not expect a material income-statement effect.
Most important facts for investors to verify
- Whether QuickBooks Online subscriber and revenue growth can persist, and whether online growth continues to offset slower desktop performance.
- How much of earnings growth reflects durable operations versus tax seasonality, tax-rate changes, and share-based compensation tax benefits.
- Future advertising, marketing, staffing, and other investment levels, and their effect on consolidated operating margins.
- Developments and potential financial or reputational effects from the free online tax preparation lawsuits and regulatory inquiries.
- Small-business loan portfolio performance, including originations, repayments, loss allowances, and use of the secured funding facility.
- Ongoing liquidity, debt covenant compliance, and the pace of buybacks and dividends relative to operating and strategic cash requirements.