Intuit Inc. — Fiscal 2014 Form 10-K
Reporting period: Fiscal year ended July 31, 2014. The filing is an annual report, not a standalone fourth-quarter filing. Intuit provides financial-management software and services, primarily through QuickBooks, TurboTax, Quicken, Mint, and professional tax products. Its three reportable segments are Small Business, Consumer, and Professional Tax.
Financial results and liquidity
- Revenue: $4.506 billion, up 8% from $4.171 billion. Service and other revenue was $2.984 billion, and product revenue was $1.522 billion. Connected services generated $3.0 billion, or 66% of revenue.
- Profitability: Operating income from continuing operations was $1.314 billion, up 7%, for a 29.2% operating margin (versus 29.6% in fiscal 2013). Continuing-operations net income was $861 million, up 5%; total net income was $907 million, including $46 million from discontinued operations. Diluted EPS was $2.96 from continuing operations and $3.12 including discontinued operations.
- Cash flow: Operating cash flow was $1.446 billion, versus $1.366 billion. Investing cash flow was negative $49 million and financing cash flow was negative $1.551 billion. Capital expenditures, including capitalized internal-use software, totaled $186 million.
- Liquidity and debt: Cash, cash equivalents, and investments were $1.914 billion, up $253 million year over year; working capital was $1.2 billion and the current ratio was 1.8:1. Long-term debt was $499 million, principally 5.75% notes due March 2017. The $500 million revolving credit facility was undrawn.
- Capital returns: Intuit repurchased $1.577 billion of stock and paid $220 million in dividends. Fiscal 2014 dividends declared were $0.76 per share.
Segments and changes versus fiscal 2013
- Small Business: Revenue of $2.253 billion, up 10%; segment operating income of $843 million, up 5%, with a 37% segment margin versus 39%. QuickBooks Online customers grew 40%, online payroll subscribers 25%, and ecosystem ARR 34%. Desktop QuickBooks license revenue declined 9%.
- Consumer: Revenue of $1.831 billion, up 7%; segment operating income of $1.139 billion, up 10%, with a 62% margin versus 61%. Paid federal TurboTax units rose 10%.
- Professional Tax: Revenue of $422 million, up 4%; segment operating income of $268 million, up 4%, with a 64% margin.
- Higher revenue and a $21 million gain on the sale of an equity investment supported earnings growth. Higher staffing, marketing, and share-based compensation costs partly offset those gains; the effective tax rate rose to approximately 34% from 32%.
Outlook, risks, and unusual items
- Intuit announced ongoing releases for future desktop products. It expected to defer approximately $400 million of revenue to future periods in fiscal 2015; QuickBooks and Quicken desktop revenue would generally be recognized over about three years. Management expected this change to partially reduce seasonality in Small Business and Professional Tax.
- Management expected significant operating cash generation in fiscal 2015 and believed available cash, investments, and operating cash flow would meet anticipated obligations for at least 12 months. The filing does not provide a clear consolidated revenue or earnings forecast.
- Fiscal 2014 included the sale of Intuit Financial Services for approximately $1.025 billion in cash and the acquisition of Check for approximately $369 million in cash and other consideration. Discontinued operations contributed $46 million to total net income.
- Principal risks include intense competition, especially from free or low-priced offerings; successful migration to online and mobile services; service availability and cybersecurity; privacy and regulatory requirements; tax-season product accuracy and timing; and dependence on third parties. Management described routine litigation and intellectual-property claims as not expected to materially affect the consolidated financial statements, while noting outcomes remain uncertain.
- Seasonality is significant: fiscal 2014 fourth-quarter revenue was $714 million and continuing-operations operating loss was $57 million. The filing says first- and fourth-quarter losses are typical as tax revenue is limited while core expenses continue.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- How the announced fiscal 2015 revenue deferrals affect reported growth, margins, and comparisons between periods.
- Whether connected-services growth and customer metrics continue to offset declining desktop license revenue and weaker non-core payment offerings.
- Cash deployment after the large fiscal 2014 repurchases, including remaining repurchase authorization of approximately $1.9 billion and the scheduled 2017 debt maturity.
- Check’s integration and the returns expected on its acquisition, alongside the impact of divestitures on comparisons with prior years.
- Developments in cybersecurity, tax regulation and competition, as well as the outcomes of legal matters and tax examinations.