INTU

Business Context and Reporting Period

Company: Intuit Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 31, 1999
Business Overview: Intuit develops and sells desktop software (Quicken, QuickBooks, TurboTax), financial supplies, and Internet-based services for individuals and small businesses. The company operates in North America and international markets through retail, direct, and online channels.

Key Financial Metrics

Note: All figures are unaudited. The Q1 1999 results include the impact of the CRI acquisition completed in May 1999.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 46% to $163.1 million, driven by a 67% increase in the Small Business division (QuickBooks and CRI payroll services) and a 27% increase in Consumer Finance (Quicken).
• Widening Loss: Net loss increased to $61.7 million from $49.2 million. This was primarily due to a $17.3 million unrealized loss on marketable securities (At Home/Excite@Home) and increased acquisition-related amortization expenses ($36.4 million vs. $21.0 million).
• Cash Flow Deterioration: Operating cash flow turned significantly negative ($59.1 million used) compared to a negligible outflow in the prior year. This was driven by the net loss, a $23.6 million increase in accounts receivable, and a $121.2 million decrease in income taxes payable (payment of prior year taxes).
• Investing Activity: Cash used in investing activities surged to $185.6 million, largely due to $54.6 million in cash acquisitions (Boston Light, SecureTax, Hutchison) and net purchases of short-term investments.

Guidance, Outlook, and Risks

• Seasonality: Management notes the business is highly seasonal. The quarter ended October 31 is typically a low-revenue period, with major revenue recognition occurring in the quarters ending January 31 and April 30 (tax season and holiday retail).
• Acquisition Impact: Future earnings will be impacted by non-cash amortization of goodwill and intangibles from recent acquisitions. Management estimates future amortization will reduce net income by approximately $97.9 million in fiscal 2000.
• Competition: Significant competitive pressure is anticipated in the personal tax market from Microsoft's expected entry in the 1999 tax year. Competition also exists in the mortgage and insurance markets.
• Year 2000 (Y2K): Intuit expects direct Y2K costs of $10–$16 million for fiscal 2000. While product remediation is largely complete, the company anticipates a significant increase in customer support calls related to Y2K issues, which could strain resources.
• Subsequent Events: On December 8, 1999, Intuit completed the acquisition of Rock Financial Corporation for approximately 8.6 million shares of stock. This will be accounted for as a pooling of interests, requiring restatement of historical financials.

Investor Verification Checklist

• Acquisition Amortization: Verify the impact of the $36.4 million in acquisition-related amortization on operating margins and the projected $97.9 million annual amortization expense.
• Marketable Securities Volatility: Review the $17.3 million loss on At Home (Excite@Home) stock and the valuation of other significant holdings (Checkfree, S1, Mortgage.com) which are subject to market volatility.
• Seasonal Cash Flow: Confirm that the negative operating cash flow of $59.1 million is consistent with historical seasonal patterns and that the $286.4 million cash balance is sufficient to fund operations until the high-revenue tax season.
• Rock Financial Integration: Assess the risks and integration costs associated with the subsequent acquisition of Rock Financial and its impact on the mortgage business model.
• Y2K Contingency: Evaluate the adequacy of the $10–$16 million budget for Y2K remediation and the potential for unplanned costs from increased customer support volumes.