Intuit Inc. — Form 10-Q Summary
Business context and reporting period
Reports the three months ended October 31, 2015 (Q1 fiscal 2016), compared with the three months ended October 31, 2014. Intuit provides financial and business management products and services, including QuickBooks and TurboTax, and reports Small Business, Consumer Tax, and Professional Tax segments. Results reflect continuing operations; Demandforce, QuickBase, and Quicken were classified as discontinued operations in fiscal 2015 and were held for sale.
Consumer Tax revenue is highly seasonal, with most annual revenue typically concentrated in the quarter ending April 30. Management cautions that first-quarter results—particularly in the tax segments—are not indicative of full-year trends.
Financial performance
| Metric | Q1 FY16 | Q1 FY15 | Change |
|---|---|---|---|
| Total revenue | $713m | $612m | +17% |
| Operating loss, continuing operations | $29m | $109m | Loss narrowed 73% |
| Net loss, continuing operations | $31m | $81m | Loss narrowed 62% |
| Diluted loss per share, continuing operations | $0.11 | $0.28 | Loss per share narrowed 61% |
| Net cash used in operating activities | $197m | $118m | Use increased $79m |
Gross profit was approximately $547m, or 77% of revenue, versus $453m, or 74%, a year earlier. Operating margin was approximately negative 4%. The tax benefit was $9m; the reported effective tax rate was approximately 22%, compared with 31% a year earlier. Excluding specified discrete items and jurisdictional effects, management reported adjusted effective rates of approximately 36% and 37%, respectively.
Segment revenue and operating results: Small Business revenue was $546m (+5%) and operating income $211m (+12%); Consumer Tax revenue was $57m (flat) and operating loss $28m; Professional Tax revenue was $110m (+203%) and operating income $72m, versus a $3m loss. Segment operating income excludes unallocated corporate costs and certain amortization, so it does not equal consolidated operating income.
Liquidity, debt, and capital allocation
At October 31, cash and cash equivalents were $474m; investments were zero, down from $889m at July 31. Long-term investments were $28m. Cash, cash equivalents, and investments therefore totaled $474m, down $1.223bn from July 31. Working capital was negative $460m and the current ratio was 0.8:1, compared with $816m and 1.5:1, respectively, at July 31.
Cash from investing activities was $816m, including $1.004bn from sales and maturities of available-for-sale securities, partly offset by $70m of capital expenditures. Financing activities used $952m: the company borrowed $350m under its revolving facility, repurchased $1.253bn of shares for cash, and paid $82m in dividends. Cash declined by $334m during the quarter.
Total debt was $850m: $350m outstanding on a $500m revolving facility and $500m in 5.75% senior notes due March 2017. The facility expires February 2017, leaving $150m available; Intuit reported compliance with its covenants. Management said liquidity and expected operating cash flow should cover anticipated needs for at least 12 months. The company repurchased 14.4m shares at an average $88.50 and had $1.4bn of repurchase authorization remaining. A $0.30-per-share dividend was declared for payment in January 2016.
Material changes, outlook, and risks
- Revenue growth included a material revenue-recognition timing effect: QuickBooks desktop offerings and Professional Tax desktop products now include ongoing services, with revenue recognized over the service period. Management attributed Professional Tax’s sharp reported increase primarily to this change. Small Business online ecosystem revenue rose 28%; QuickBooks Online subscribers grew 57%, online payroll customers 17%, and online payments charge volume 14%. Small Business desktop revenue declined 1%.
- Operating expenses rose $14m to $576m. Staffing costs and share-based compensation increased; lower marketing expense partly offset those increases. Higher revenue and improved operating leverage contributed to the smaller consolidated operating loss.
- Management expects connected-services revenue to continue growing, anticipates significant operating cash generation in the balance of fiscal 2016, and expects to return excess cash through buybacks and dividends. The filing provides no numerical revenue or earnings guidance.
- Intuit agreed to purchase certain leased facilities for $262m cash; escrow was expected to close in January 2016 following the company’s November 9 unconditional acceptance.
- Risk areas include intense competition, technology and execution demands, system availability and third-party dependencies, cybersecurity and identity-theft tax fraud, regulatory scrutiny, seasonality, and litigation. Intuit disclosed government inquiries and a consolidated putative class action related to fraudulent tax-return filings; it said it intended to defend the suit and did not expect potential losses beyond accruals to materially affect the financial statements. Outcomes remain uncertain.
Most important facts for investors to verify
- How much reported revenue growth reflects underlying demand versus the changed timing of revenue recognition for desktop products.
- Whether online customer and transaction growth translates into sustained revenue and segment profitability, and how desktop declines develop.
- Cash generation and working-capital trends, particularly after large buybacks, the facility borrowing, and the planned $262m property purchase.
- Refinancing or repayment plans for the $500m notes and $350m revolving-facility borrowing, both due or expiring in 2017.
- Developments in tax-fraud inquiries and litigation, cybersecurity protections, and the planned divestitures of Demandforce, QuickBase, and Quicken.