Business context and reporting period
Intuit Inc. filed this Form 10-K for the fiscal year ended July 31, 2013. The company provides financial and business software and services, including QuickBooks, TurboTax, Quicken, ProSeries and Lacerte. Its strategy emphasized connected services, mobile products and cloud platforms. Fiscal 2013 results are presented on a continuing-operations basis after businesses designated for sale were classified as discontinued operations.
Financial results and key metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total net revenue | $4.171 billion | $3.808 billion |
| Operating income from continuing operations | $1.233 billion | $1.168 billion |
| Net income from continuing operations | $823 million | $764 million |
| Net income, including discontinued operations | $858 million | $792 million |
| Diluted EPS from continuing operations | $2.72 | $2.51 |
| Net cash from operating activities | $1.366 billion | $1.246 billion |
- Revenue rose 10%; operating income increased 6%, and continuing-operations net income and diluted EPS each increased 8%. Operating margin was approximately 29.6%, down from 30.7% in FY2012.
- Service and other revenue was $2.656 billion, up from $2.329 billion; product revenue was $1.515 billion, versus $1.479 billion.
- Small Business Group revenue grew 16%. Financial Management Solutions rose 20% (10% excluding Demandforce), Employee Management Solutions 12%, and Payment Solutions 14%. Consumer Tax revenue increased 4%; Accounting Professionals grew 6%.
- Cash, cash equivalents and investments were reported at $1.661 billion; working capital was $1.116 billion and the current ratio 1.9:1. Long-term debt was $499 million, principally 5.75% senior notes due March 2017. The $500 million revolving credit facility was undrawn.
- FY2013 capital expenditures were $195 million, including purchases of property and equipment and capitalized internal-use software. Cash dividends paid were $203 million; share repurchases were $292 million.
Material changes versus the prior comparable period
- Revenue growth was driven by small-business services and Consumer Tax. QuickBooks Online subscribers in the U.S. rose 26%, while QuickBooks desktop units fell 5%; Demandforce contributed to reported Financial Management Solutions growth.
- Operating expenses increased $306 million. Management cited about $85 million higher staffing costs, $60 million higher advertising and marketing expenses, and $23 million higher share-based compensation. Operating expenses rose to 57% of revenue from 54%.
- Operating cash flow increased $120 million to $1.366 billion. Cash, cash equivalents and investments rose $917 million from FY2012; management attributed cash generation to operations, employee stock-plan issuance and the Intuit Websites sale, partly offset by investment purchases, capital spending, dividends and repurchases.
- FY2013 fourth-quarter revenue was $634 million versus $567 million a year earlier. Continuing-operations operating loss was $60 million, compared with $47 million; continuing-operations net loss was $46 million, versus $32 million. The filing says fourth-quarter losses are typical because tax revenue is seasonal.
- FY2013 included a $46 million impairment of Intuit Health goodwill and acquired intangibles, following competitive and customer developments. The impairment reduced those assets’ carrying value to zero.
Outlook, commentary, risks and unusual items
- Management provided no quantified FY2014 revenue or earnings guidance in the supplied filing text. It expected continued significant operating cash generation and believed liquidity and operating cash flow would cover anticipated needs for at least 12 months. It expected comparable quarterly dividends, subject to Board approval.
- Intuit sold Intuit Financial Services on August 1, 2013 for approximately $1.025 billion cash and expected to record an approximately $49 million pretax disposal gain in FY2014’s first quarter. It sold Intuit Health on August 19, 2013 for cash consideration described as not significant. The company also announced a realignment of its businesses effective August 1, 2013.
- On August 23, 2013, Intuit paid $1.4 billion under an accelerated share repurchase agreement and initially received 17.6 million shares; final share delivery depends on the pricing period, scheduled to end in December 2013. A new $2 billion repurchase authorization was also approved.
- Key risks include intense competition, including free and low-priced services; dependence on successful product innovation and migration to mobile and cloud services; seasonal revenue and earnings volatility; service outages and data-center transition risks; cybersecurity, privacy and fraud exposure; regulatory changes; and reliance on third-party providers.
- The TurboTax refund-processing class-action matters were subject to a proposed settlement accrued in FY2013; the company said the amount was not material and court approval remained pending. Other routine litigation was not expected by management to have a material financial-statement impact.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor reported effective internal controls as of July 31, 2013.
Important facts for investors to verify
- Confirm the completed Intuit Financial Services sale proceeds, FY2014 disposal gain and the effect of divestitures on continuing revenue and cash generation.
- Review final share delivery and accounting under the $1.4 billion accelerated repurchase, including the impact on shares outstanding and liquidity.
- Assess whether recurring connected-services growth can offset declining desktop units, and whether expense growth moderates while margins recover.
- Check the persistence of seasonal quarterly losses, Consumer Tax unit trends, and any changes in free-tax competition or the Free File Alliance arrangement.
- Monitor execution of the organizational realignment, data-center migration, cybersecurity controls, and any material developments in litigation or regulatory matters.