Intuit Inc. — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended January 31, 2019. Figures are in U.S. dollars; financial statement amounts are in millions except per-share data. Intuit provides financial management, tax, payroll, payments and related services, primarily through QuickBooks and TurboTax. Results are seasonal, with consumer and professional tax activity concentrated from November through April.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $1,502 | $1,339 | $2,518 | $2,249 |
| Operating income | $233 | $194 | $223 | $159 |
| Net income | $189 | $183 | $223 | $181 |
| Diluted EPS | $0.72 | $0.70 | $0.84 | $0.70 |
| Operating margin | 15.5% | 14.5% | 8.9% | 7.1% |
- Q2 revenue rose 12%; operating income rose 20%, while net income and diluted EPS each increased 3%. For the six months, revenue rose 12%, operating income 40%, net income 23% and diluted EPS 20%.
- Service and other revenue was $969 million in Q2, up from $810 million; product revenue was $533 million, versus $529 million. For the six months, service and other revenue was $1,638 million and product revenue $880 million.
- Q2 operating expenses included $548 million selling and marketing, $295 million research and development, and $140 million general and administrative. Marketing and staffing costs increased; expenses grew more slowly than revenue over the six-month period.
- Cash provided by operations was $198 million for the six months, versus $174 million. Investing used $41 million and financing used $477 million; cash, cash equivalents and restricted cash decreased $322 million to $1,309 million.
- At January 31, cash and cash equivalents were $1,075 million and investments were $271 million, including $13 million long-term. Intuit reported $1,333 million of cash, cash equivalents and investments for liquidity purposes, down $383 million from July 31, 2018.
- Total debt was $413 million: $50 million short-term and $363 million long-term. The $1 billion unsecured revolving facility had no borrowings outstanding. Working capital was $643 million and the current ratio was 1.3:1.
Changes, segments and comparability
- Small Business & Self-Employed revenue rose 17% in Q2 to $833 million and 14% for six months to $1,741 million. Online Ecosystem revenue was the principal growth driver: QuickBooks Online Accounting revenue rose 38% in Q2 and subscribers reached 3.9 million, up 38% year over year.
- Consumer revenue increased 11% in Q2 to $461 million and 12% for six months to $551 million; management attributed growth primarily to a shift toward higher-end offerings. Management cautioned that first-half results are not indicative of full-year trends because of tax-season seasonality.
- Strategic Partner revenue was $208 million in Q2, down 1%, and $226 million for six months, broadly flat. Management likewise said first-half results are not indicative of full-year trends.
- Intuit adopted Topic 606 revenue recognition retrospectively from August 1, 2018, restating prior periods. The standard changed timing of revenue recognition for QuickBooks Desktop and consumer and professional tax desktop offerings. For example, it increased reported Q2 FY2018 revenue by $174 million and changed that period’s net income from a $21 million loss to $183 million income. Comparisons therefore use restated prior-period figures and may not match originally reported results.
Outlook, risks and notable items
- No specific fiscal 2019 revenue or earnings guidance is stated in the provided filing text. Management expects service and other revenue to continue growing, expects to generate significant operating cash, and believes available cash, investments and operating cash flow will cover anticipated needs for at least 12 months. It expects to return excess cash through repurchases and dividends, subject to operating needs and board decisions.
- Tax effects influenced earnings comparisons: Q2 FY2019 effective tax rate was approximately 20%, versus approximately 5% in Q2 FY2018, which included a $37 million benefit from remeasurement of deferred taxes under the 2017 Tax Act. For the six months FY2019, Intuit recorded a $2 million tax benefit on $221 million pretax income; share-based compensation tax benefits were $49 million, versus $33 million a year earlier.
- Intuit repurchased 1.3 million shares for $278 million during the six months and declared $0.94 per share in dividends. The board had authorized up to an additional $3.0 billion of repurchases as of January 31. A $0.47-per-share dividend was declared in February, payable April 18, 2019.
- After quarter-end, a subsidiary entered into a $300 million secured revolving facility to fund part of its small-business lending; it is secured by that subsidiary’s cash and receivables and is non-recourse to Intuit Inc. The filing states that at least 20% must be drawn and unused amounts incur a 0.50% fee.
- Key risks include intense competition, tax-season revenue concentration and peak-period service availability, cybersecurity, privacy and fraud, reliance on third-party platforms and providers, regulatory change, product accuracy, and credit risk in small-business lending. Small-business loans were unsecured; notes receivable were $88 million and the loan-loss allowance was not significant.
- A class-action settlement concerning alleged harm from fraudulent tax filings in 2015 had preliminary court approval and remained subject to final approval. Intuit said the settlement terms were not material; routine legal claims were not expected to have a material financial impact, though outcomes are uncertain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no significant off-balance-sheet arrangements.
Important facts for investors to verify
- Track QuickBooks Online subscriber and revenue growth, and whether online growth offsets slower desktop offerings.
- Review tax-season performance in the next quarter; management cautioned that first-half Consumer and Strategic Partner results do not predict full-year trends.
- Assess cash conversion and working-capital movements, particularly the seasonal accounts-receivable build and the cash decrease.
- Monitor the small-business loan portfolio, credit performance, and use and cost of the new subsidiary credit facility.
- Check the final approval and any subsequent developments in the 2015 tax-fraud class-action settlement, as well as cybersecurity, regulatory and tax risks.
- Account for Topic 606’s retrospective restatement when comparing reported results with older filings, and distinguish operating performance from discrete tax benefits.