Intuit Inc. — Q3 Fiscal 2020 Form 10-Q
Reporting period: Three and nine months ended April 30, 2020. Figures are in U.S. dollars; financial statement amounts are in millions unless noted. Intuit’s principal businesses are Small Business & Self-Employed, Consumer tax, and Strategic Partner tax offerings.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | First 9 months FY2020 | First 9 months FY2019 |
|---|---|---|---|---|
| Revenue | $3,002 | $3,272 | $5,863 | $5,790 |
| Operating income | $1,413 | $1,784 | $1,693 | $2,007 |
| Net income | $1,084 | $1,378 | $1,381 | $1,601 |
| Diluted EPS | $4.11 | $5.22 | $5.24 | $6.06 |
| Operating margin, approximately | 47.1% | 54.5% | 28.9% | 34.7% |
Q3 revenue fell 8%, operating income and net income each fell 21%, and diluted EPS fell 21% year over year. Nine-month revenue grew 1%, while operating income declined 16%, net income 14%, and diluted EPS 14%. Service and other revenue was $2,559 in Q3 and $4,522 year to date; product revenue was $443 and $1,341, respectively.
Segment revenue, Q3 / first nine months: Small Business & Self-Employed was $982 / $3,001, up 11% / 14%; Consumer was $1,827 / $2,426, down 15% / 10%; Strategic Partner was $193 / $436, down 18% / 5%. QuickBooks Online Accounting revenue grew 36% in Q3 and 40% year to date. Consumer and Strategic Partner results were affected by the shifted tax-filing deadline.
Cash flow and liquidity: Net cash provided by operations for the first nine months was $2,127, versus $2,446 a year earlier. Investing activities used $111 and financing activities used $796. At April 30, cash, cash equivalents and investments were $3,971; working capital was $2,149 and the current ratio was 1.8. Cash and cash equivalents alone were $3,371. Management reported sufficient resources for anticipated needs over at least 12 months, including the Credit Karma transaction, while warning that COVID-19 developments could change funding needs.
Debt: At April 30, short-term debt was $350 and long-term debt was $48, or $398 total. Intuit had no balance on its $1 billion unsecured revolver at quarter-end, but borrowed the full $1 billion in May 2020 for financial flexibility. The company reported compliance with debt covenants at April 30.
Margins and costs: Cost of service and other revenue rose to 16% of related revenue in Q3 from 12%, and to 22% year to date from 18%. Intuit attributed the increase to lower tax-related revenue from the filing extension and higher costs supporting TurboTax Live and QuickBooks Live. Q3 operating expenses rose 3% despite lower revenue, including increased staffing and transaction-related professional fees.
Material changes and management outlook
- The IRS extended the 2019 tax filing deadline from April 15 to July 15, 2020; states with personal income taxes mostly extended deadlines to July as well. Intuit expected sales and revenue to shift from Q3 to Q4, and said substantially complete tax-season results would not be available until Q4.
- Management said it began seeing COVID-19-related pressure on small businesses in mid-March, as many closed or scaled back. It had not experienced significant operational disruption through the reporting date but could not predict the pandemic’s full effects on demand, customers, partners, or results.
- On February 24, 2020, Intuit agreed to acquire Credit Karma for $7.1 billion, payable half in cash and half in Intuit stock, subject to customary adjustments and approvals. The transaction was expected to close before year-end 2020. The stated purchase consideration includes an estimated $1.0 billion fair value of awards expensed over service periods; a further approximately $300 million of employee RSUs is to be expensed over four years after closing. Certain termination circumstances could trigger a fee of $230 million to $350 million.
- Intuit temporarily suspended share repurchases in connection with the proposed acquisition. It declared $1.59 per share of dividends during the first nine months and declared a further $0.53 quarterly dividend in May.
- Intuit was approved as a non-bank SBA lender for the Paycheck Protection Program in April; program activity in Q3 was insignificant. At April 30, PPP-related amounts in notes receivable were also insignificant.
Risks, contingencies, and unusual items
- COVID-19 creates uncertainty around small-business demand, payment volumes, loan collections, tax-return filing behavior, customer refunds, partner operations, and access to financing. The altered tax season also makes quarterly results less predictable.
- Multiple putative class actions and regulatory inquiries concern the provision and marketing of Intuit’s free online tax preparation programs. Intuit disputes the allegations and intends to defend itself, but said it could not estimate a reasonably possible loss or range; legal and other costs are ongoing.
- The Credit Karma deal is subject to shareholder and regulatory approvals and other closing conditions. Failure to close, delays, integration challenges, or pandemic-related effects could create costs or affect expected benefits; the transaction may be dilutive to non-GAAP EPS after closing.
- Other key exposures include cybersecurity, fraud, privacy and data-protection regulation, competition (including free tax offerings and possible government-provided tax software), service availability, and credit risk in small-business lending and PPP activity.
- Intuit adopted lease accounting standard ASC 842 on August 1, 2019. It recognized operating lease right-of-use assets and liabilities, making the April 2020 balance sheet not directly comparable with July 2019; adoption had no material impact on operations or cash flows.
Most important facts for investors to verify
- Whether the shifted tax-filing season produced the anticipated Q4 recovery, and the full-year effect on Consumer and Strategic Partner revenue.
- How COVID-19 affected small-business customers, QuickBooks growth, payments and payroll volumes, loan performance, and cash generation after April 30.
- Credit Karma approval, closing, funding mix and costs, including the impact of the May revolver borrowing and any subsequent change in repurchases or leverage.
- Developments, potential costs, and regulatory outcomes in the free tax preparation litigation and inquiries; the filing provides no clear loss estimate.
- Whether cost growth, particularly service delivery and corporate expenses, moderates and supports recovery in operating margins.