Intuit Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, three months ended October 31, 2014. Intuit provides financial and business management software and services, including QuickBooks, TurboTax, Quicken, Mint, and professional tax products. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change / context |
|---|---|---|---|
| Total revenue | $672 | $622 | Up 8% |
| Operating loss from continuing operations | $(114) | $(77) | Loss increased $37 |
| Net loss from continuing operations | $(84) | $(57) | Loss increased $27 |
| Net loss per share from continuing operations, basic and diluted | $(0.29) | $(0.20) | Loss per share increased |
| Net cash used in operating activities | $(118) | $(190) | Cash use improved $72 |
| Cash and cash equivalents at quarter end | $542 | $417 | Balance-sheet comparison: Oct. 2014 vs. Oct. 2013 |
Service and other revenue was $439, up from $393; product revenue was $233, up from $229. Cost of revenue, including acquired-technology amortization, was $175 versus $143, or 26% versus 23% of revenue. Operating expenses were $611 versus $556, equal to 91% versus 89% of revenue. The operating loss was approximately 17% of revenue, compared with approximately 12% a year earlier.
Segments: Small Business revenue was $548 (+5%) and operating income was $192 (+1%); its operating margin on segment revenue was 35%, down from 37%. Consumer revenue was $88 (+15%), with an operating loss of $34 versus $24. Professional Tax revenue was $36 (+46%), with an operating loss of $3 versus $9. Management cautioned that first-quarter Consumer and Professional Tax results are not indicative of full-year trends because of seasonality.
Balance sheet, liquidity and capital allocation
- At October 31, cash, cash equivalents and investments totaled $1.589 billion, down $325 million (17%) from July 31. Working capital was $1.077 billion, down $123 million; the current ratio was 1.8:1.
- Long-term debt was $499 million, consisting primarily of $500 million of 5.75% senior notes due March 2017. The $500 million revolving credit facility was unused; Intuit reported compliance with its covenants.
- Cash used in investing activities was $61 million, including $55 million for property and equipment. Financing activities used $123 million, including $114 million for share repurchases and $74 million of dividends paid. The quarterly dividend declared was $0.25 per share.
- Intuit had authorization to repurchase up to an additional $1.8 billion of stock through August 19, 2017. Management said cash, investments and expected operating cash flows should meet anticipated needs for at least 12 months.
Material changes and management commentary
- Intuit began delivering ongoing releases for future QuickBooks and Quicken desktop products and Professional Tax solutions. Revenue for the affected desktop offerings is recognized over approximately three years, and Professional Tax revenue over the tax year. Management said this change affected current-quarter revenue and expected it to partially mitigate seasonality; product costs are expensed as incurred rather than deferred with revenue.
- Small Business Online Ecosystem revenue grew 30%; QuickBooks Online customers grew 43%, online payroll customers 24%, and online payments charge volume 22%. Small Business desktop revenue declined 2%, and QuickBooks desktop unit sales fell 23%.
- Management attributed the greater operating loss to the revenue-recognition change and higher staffing, outside services, marketing, other operating expenses, and share-based compensation. Total share-based compensation expense rose to $61 million from $47 million.
- The quarter is seasonally weak: tax-related revenue is typically low in the first quarter while core expenses continue. Intuit expects connected-services revenue to keep growing and anticipated continued cash generation, but gave no specific fiscal 2015 revenue or earnings guidance in the filing.
Unusual items, risks and contingencies
- Prior-year results included $46 million of net income from discontinued operations, primarily associated with the 2013 sales of Intuit Financial Services and Intuit Health. The current quarter had no discontinued-operations income.
- Key risks include intense competition, execution of the shift to connected and subscription services, cybersecurity and service availability, seasonal and tax-filing timing, regulatory changes, transaction fraud, and reliance on third parties. Management noted that revenue-recognition timing can shift results between periods.
- Intuit reported routine legal matters, including intellectual-property claims, and stated that potential losses beyond accrued amounts were not expected to have a material financial-statement impact; outcomes remain uncertain.
- Available-for-sale investments were reported as not other-than-temporarily impaired. A 100-basis-point increase in the Federal Reserve target rate was estimated to reduce investment value by about $13 million. The filing reported no significant off-balance-sheet arrangements and effective disclosure controls.
Important facts for investors to verify
- How much the new revenue-recognition approach defers, and its effect on reported revenue, margins, and future periods; the filing does not provide a clear quantified deferral amount.
- Whether online customer and transaction growth continues, and how it compares with declines in desktop products and selected payment offerings.
- Whether operating expenses and share-based compensation moderate as revenue grows, given the quarter’s widening operating loss.
- How seasonal tax activity, tax-form timing, and the upcoming tax season affect full-year results; first-quarter tax results are not representative, according to management.
- Progress on cash generation, repurchases and dividends, and the ability to meet obligations while the $500 million notes approach their 2017 maturity.