Intuit Inc. Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2018; filed May 22, 2018. Unless otherwise noted, amounts are in millions of dollars. Intuit sells financial management and tax products and services, principally in the United States, through Small Business & Self-Employed, Consumer, and Strategic Partner segments. Consumer tax revenue is highly seasonal and concentrated in the third fiscal quarter.
Financial results
| Metric | Q3 FY18 | Q3 FY17 | Nine months FY18 | Nine months FY17 |
|---|---|---|---|---|
| Revenue | $2,925 (+15%) | $2,541 | $4,976 (+15%) | $4,335 |
| Operating income | $1,615 (+12%) | $1,444 | $1,578 (+12%) | $1,405 |
| Net income | $1,200 (+24%) | $964 | $1,162 (+23%) | $947 |
| Diluted EPS | $4.59 (+24%) | $3.70 | $4.47 (+23%) | $3.63 |
| Operating margin | 55.2% | 56.8% | 31.7% | 32.4% |
Q3 revenue comprised $505 product revenue and $2,420 service and other revenue. The Consumer segment generated $2,035 of Q3 revenue, Small Business & Self-Employed $759, and Strategic Partner $131. Q3 revenue growth reflected Small Business online ecosystem expansion and higher Consumer average revenue per customer, TurboTax federal units, and premium-product mix. Management attributed lower operating margin to expense growth, including marketing, staffing, outside services, and share-based compensation.
For the first nine months, operating cash flow was $2,149, versus $1,889 a year earlier. Investing cash outflow was $588, including $363 for acquisitions; financing cash outflow was $469, including $272 of repurchases and $305 of dividends paid. Cash and cash equivalents rose to $1,614 from $529 at July 31, 2017.
At April 30, 2018, cash, cash equivalents, and investments were $1,936; working capital was $142, and the current ratio was 1.1:1. Debt totaled $450, comprising $50 short-term and $400 long-term; no revolving credit borrowings were outstanding. The company reported compliance with its debt covenants.
Material changes and notable items
- Small Business & Self-Employed revenue rose 16% in Q3 and 17% year to date. QuickBooks Online subscribers reached 3.2 million, up 45% year over year; online ecosystem revenue grew 41% in Q3 and 39% year to date. QuickBooks Desktop units declined 8% in Q3 and 18% year to date.
- Consumer revenue grew 14% year to date, supported by a 4% increase in TurboTax federal units, higher average revenue per customer, and mix shift to higher-end offerings. Strategic Partner revenue grew 4% year to date.
- Intuit acquired TSheets.com, Exactor, and Applatix for approximately $412, including approximately $27 of equity awards and other consideration to be expensed over future service periods. The acquisitions added about $318 of goodwill, none tax-deductible.
- The Tax Cuts and Jobs Act reduced the U.S. federal corporate rate. Intuit reported an approximately 26% effective tax rate for Q3 and year to date, compared with 33% and 31%, respectively, in the comparable prior periods. The company recorded a provisional $44 tax charge related primarily to deferred-tax remeasurement; its tax accounting remained subject to finalization.
- Intuit repurchased 1.9 million shares for $272 in the first nine months and declared dividends of $1.17 per share. A subsequent quarterly dividend of $0.39 per share was declared in May 2018.
Outlook, risks, and contingencies
- Management expects to continue investing in product development, marketing, sales, technology infrastructure, privacy, and security. It expects connected-services revenue as a share of total revenue to keep growing.
- Management believes available cash, investments, and operating cash flow will meet liquidity needs for at least 12 months and expects to return excess cash through repurchases and dividends. It expected to pay approximately $320 in income taxes in fiscal Q4 2018.
- Intuit planned to adopt revenue-recognition Topic 606 in fiscal Q1 2019 using the full retrospective method. The filing anticipates earlier recognition of certain QuickBooks Desktop and tax desktop revenue, shifting revenue into earlier quarters, and a cumulative adjustment to retained earnings; it did not expect a significant change to annual total or segment revenue growth rates.
- Key risks include intense competition, seasonal reliance on tax-season operations, cybersecurity and identity-theft fraud, service outages and technology transitions, product accuracy and launch execution, privacy and regulatory changes, and acquisition integration. The filing highlights the EU GDPR compliance deadline of May 25, 2018.
- Intuit reported a putative class action related to fraudulent tax-return activity in 2015 and routine legal and regulatory matters. It said potential losses beyond amounts accrued were not expected to materially affect the consolidated financial statements, while noting litigation outcomes remain uncertain.
- A minimum purchase commitment of $450 runs through August 31, 2022. The company reported no significant off-balance-sheet arrangements.
Important facts for investors to verify
- Whether sustained growth in QuickBooks Online and other connected services offsets declining QuickBooks Desktop units, and how subscriber growth translates into revenue and profit.
- How much Q3 and year-to-date earnings growth reflects the lower tax rate and share-based compensation tax benefits, versus operating performance; also verify final Tax Act accounting.
- Whether increased spending and acquisition integration affect margins, particularly given operating margin contraction in both comparison periods.
- Cash generation and liquidity after seasonality, the expected Q4 tax payment, the $450 purchase commitment, dividends, and repurchases.
- Progress and financial-statement effects of Topic 606 adoption, including quarterly revenue timing and the retained-earnings adjustment.
- Developments in the 2015 tax-fraud litigation and the company’s cybersecurity, privacy, and peak-season service risks.