Business context and reporting period
Intuit Inc. filed this Form 10-K for the fiscal year ended July 31, 2016. The company provides financial and business-management products and services, including QuickBooks, TurboTax, Lacerte and ProSeries. Its reportable segments are Small Business, Consumer Tax and ProConnect. Connected services generated $3.4 billion, or 73% of fiscal 2016 revenue.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $4.694 billion | $4.192 billion |
| Operating income from continuing operations | $1.242 billion | $738 million |
| Net income from continuing operations | $806 million | $413 million |
| Diluted EPS from continuing operations | $3.04 | $1.45 |
| Net income, including discontinued operations | $979 million | $365 million |
| Cash from operating activities | $1.401 billion | $1.504 billion |
| Cash, cash equivalents and investments | $1.080 billion | $1.697 billion |
Revenue rose 12%; operating income from continuing operations rose 68%, and net income from continuing operations rose 95%. Approximate operating margin increased to 26.5% from 17.6%; continuing-operations net margin rose to 17.2% from 9.9%. Fiscal 2016 included a lower effective tax rate (about 33% versus 42%) and no repeat of the prior-year operating impairment charge.
Revenue mix: Small Business $2.293 billion (+9%), Consumer Tax $1.973 billion (+10%), and ProConnect $428 million (+51%). Segment operating margins were approximately 38%, 65% and 62%, respectively. The filing attributes much of the ProConnect increase to a change in desktop-product revenue recognition, not comparable customer growth; ProConnect customers grew about 1%.
For fiscal Q4 ended July 31, 2016, revenue was $754 million, operating loss from continuing operations was $56 million, and net loss from continuing operations was $40 million. Consumer Tax revenue is highly seasonal, with nearly half of annual revenue typically in the quarter ended April 30.
Liquidity, debt and capital allocation
At July 31, 2016, Intuit had $1.0 billion of debt outstanding: $500 million of senior notes due March 2017 and $500 million under a term loan. The balance sheet classified $512 million as short-term debt and $488 million as long-term debt. A separate $1 billion revolving facility had no borrowings outstanding. Working capital was a deficit of $637 million and the current ratio was 0.7:1, versus positive working capital of $816 million and a 1.5:1 ratio a year earlier; the notes’ reclassification to current debt contributed to the change.
Fiscal 2016 investing cash flow was positive $371 million and financing cash flow was negative $1.940 billion. The company repurchased $2.264 billion of shares, paid $318 million in dividends and spent $522 million on capital expenditures. Management said available cash, investments and expected operating cash flow should cover requirements for at least 12 months.
Material changes, outlook and notable items
- QuickBooks desktop offerings began including ongoing enhancements and connected services in fiscal 2015; revenue is now recognized over approximately three years. ProConnect desktop revenue is recognized as services are provided through the relevant calendar year. These changes materially affected year-over-year comparisons.
- Intuit sold Demandforce, QuickBase and Quicken for $463 million cash in fiscal 2016, recording a $354 million pretax gain and $173 million net gain in discontinued operations. The sales reflected management’s decision to focus on core small-business and tax businesses.
- Management expects connected-services revenue as a share of total revenue to continue to grow and expects to generate significant cash from operations. It anticipated slower ProConnect revenue growth in fiscal 2017 as it emphasized accountants’ value to small businesses and relied less on price increases. No overall numerical fiscal 2017 guidance is provided in the supplied filing text.
- Key risks include intense competition (including free offerings and potential government tax-preparation services), service availability and data-center migration, cybersecurity and tax-return fraud, privacy regulation, seasonal peak-period execution, and dependence on third-party providers. The company disclosed government inquiries and putative class actions related to fraudulent tax returns filed using stolen identities; it said it was cooperating and intended to defend the lawsuits. It did not expect pending claims, beyond amounts accrued, to have a material financial-statement impact.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also assessed disclosure controls as effective.
Important facts for investors to verify
- Separate continuing-operations earnings from the $173 million discontinued-operations gain when assessing recurring profitability and EPS.
- Assess the effect of the desktop revenue-recognition changes on reported segment growth, especially ProConnect’s 51% increase.
- Review near-term refinancing or repayment of the $500 million notes due March 2017, the term-loan covenants, and liquidity given negative working capital.
- Track whether online customer growth, payments volume and connected-services expansion translate into durable revenue and margins.
- Monitor outcomes of tax-fraud-related government inquiries and litigation, along with cybersecurity, service-availability and regulatory developments.