Intuit Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2016; filed May 24, 2016. Intuit provides financial and business-management products and services, including QuickBooks and TurboTax. Results are seasonal, with Consumer Tax revenue concentrated in the third fiscal quarter. Unless noted, comparisons are with the corresponding 2015 period; amounts are in millions except per-share data.
Financial performance
| Metric | Three months ended Apr. 30, 2016 | Three months ended Apr. 30, 2015 | Nine months ended Apr. 30, 2016 | Nine months ended Apr. 30, 2015 |
|---|---|---|---|---|
| Revenue | $2,304 (+8%) | $2,135 | $3,940 (+13%) | $3,496 |
| Operating income, continuing operations | $1,285 (+21%) | $1,066 | $1,298 (+50%) | $868 |
| Net income, continuing operations | $848 (+29%) | $656 | $846 (+64%) | $515 |
| Diluted EPS, continuing operations | $3.26 (+40%) | $2.33 | $3.17 (+77%) | $1.79 |
| Total net income, including discontinued operations | $1,026 | $501 | $1,019 | $351 |
Calculated operating margin was approximately 55.8% for the quarter versus 50.0% a year earlier, and 32.9% year to date versus 24.8%. These comparisons reflect, in part, the absence of the prior-year $114 million goodwill impairment charge. Total net income also includes gains from divestitures; it should not be read as continuing-operations earnings.
- Revenue mix and segments: Q3 Small Business revenue was $580 (+12%), Consumer Tax $1,598 (+7%), and Professional Tax $126 (-3%). Nine-month revenue was $1,690 (+8%), $1,930 (+10%), and $320 (+81%), respectively. TurboTax Online federal units grew 15% year to date. QuickBooks Online subscribers grew 45% and online payroll customers 17% in the quarter.
- Cash flow: Nine-month operating cash flow was $1,711, compared with $1,722. Investing activities provided $578, including $463 proceeds from business sales; financing used $1,814, including $2,190 of share repurchases and $238 of dividends paid. Cash and cash equivalents ended at $1,289, up from $808 at July 31, 2015.
- Liquidity and debt: Cash, cash equivalents and investments totaled $1,613, down $84 from July 31, 2015; approximately 87% was in the U.S. Debt was $1,000: $500 of term-loan debt and $500 of 5.75% senior notes due March 2017, classified as current. No revolving-credit borrowings were outstanding; the facility provides $1 billion of capacity through February 2021. Working capital was negative $554, and the current ratio was 0.8:1, versus $816 and 1.5:1 at July 31, 2015. The filing attributes seasonality to working-capital fluctuations and the debt reclassification.
- Capital returns: Intuit repurchased 24.1 million shares for $2.2 billion during the first nine months, versus 13.7 million shares for $1.2 billion a year earlier. Remaining repurchase authorization was approximately $435 million. Dividends declared were $0.90 per share year to date; a further $0.30 quarterly dividend was declared for July 2016.
Material changes and unusual items
- Intuit completed the sales of Demandforce, QuickBase, and Quicken during the quarter for $463 million cash. It recorded a $354 million pretax disposal gain, partly offset by $178 million of tax, for a $176 million net gain in Q3. These businesses are presented as discontinued operations; the prior-year comparison was reclassified.
- Intuit refinanced its former revolving facility, repaying its $745 million outstanding balance and entering a new credit agreement with a $500 million term loan and $1 billion revolving facility. The company reported compliance with the financial covenants.
- Capital expenditures were $449 million year to date, including $262 million to purchase previously leased facilities. Management cited increased staffing, marketing, research and development, and share-based compensation costs.
- Revenue recognition changes for desktop products shift some revenue from product to service and recognize it over service periods. Management attributed Professional Tax’s year-to-date growth partly to this timing change; Q3 segment revenue declined 3%.
Outlook, commentary and risks
Management expected significant operating cash generation through the rest of fiscal 2016 and fiscal 2017, and believed available cash, investments and operating cash flow would cover anticipated needs for at least 12 months. It expected approximately $390 million of income-tax payments in fiscal Q4 and intended to return excess cash through repurchases and dividends, subject to board and management decisions. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
Management expects connected-services revenue to continue growing and Small Business product revenue to decline as service revenue rises, reflecting desktop pricing, online growth and subscription transitions. Principal risks include intense competition, seasonal tax business volatility, service availability and technology migration, cybersecurity and customer-data protection, tax-return fraud, regulation, and litigation. Intuit disclosed governmental inquiries and a putative class action related to fraudulent tax filings using stolen identities; it said it was cooperating and intended to defend the action. It believed potential losses beyond recorded accruals would not materially affect the statements, while noting litigation outcomes are uncertain. The filing also identified routine legal and intellectual-property matters.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no significant off-balance-sheet arrangements.
Most important facts for investors to verify
- Separate continuing-operations earnings from the $176 million after-tax divestiture gain and other discontinued-operation results.
- Assess the sustainability and seasonality of tax-quarter revenue and the impact of desktop revenue-recognition changes on segment comparisons.
- Review cash generation against substantial repurchases, dividends and capital spending, as well as the $1 billion debt balance and 2017 senior-note maturity.
- Monitor the tax-fraud inquiries and class action, cybersecurity exposure, and any resulting customer, regulatory or financial consequences.
- Confirm progress against management’s liquidity outlook, expected $390 million Q4 tax payment, and remaining $435 million repurchase authorization.