Intuit Inc. — Q2 Fiscal 2021 Form 10-Q
Reporting period: Three and six months ended January 31, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share figures. Intuit provides financial management, tax and accounting products and services, including QuickBooks, TurboTax, ProConnect and, following its December 3, 2020 acquisition, Credit Karma.
Financial results
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $1,576 | $1,696 | $2,899 | $2,861 |
| Operating income (loss) | $(25) | $270 | $184 | $280 |
| Net income | $20 | $240 | $218 | $297 |
| Diluted EPS | $0.07 | $0.91 | $0.81 | $1.13 |
| Operating margin | (1.6)% | 15.9% | 6.3% | 9.8% |
| Net margin | 1.3% | 14.2% | 7.5% | 10.4% |
Q2 revenue fell 7%, while six-month revenue rose 1%. Product revenue was $495 million in Q2 and $862 million year to date; service and other revenue was $1,081 million and $2,037 million, respectively. Small Business & Self-Employed revenue grew 11% in Q2 and 12% year to date, led by online offerings. Consumer revenue fell 71% in Q2 and 56% year to date; ProConnect revenue decreased 8% and 5%, respectively. Credit Karma contributed $144 million of revenue and $38 million of segment operating income after acquisition.
Q2 operating costs and expenses were $1,601 million, up from $1,426 million. For the first six months, they were $2,715 million, compared with $2,581 million. Q2 general and administrative expense rose to $250 million from $159 million, and amortization of acquired intangible assets rose to $36 million from $1 million. The filing reports no consolidated gross margin percentage; cost of revenue was 23% of revenue in Q2 versus 20% a year earlier, and 21% year to date versus 22%.
Cash, liquidity and debt
- Operating cash flow for the six months was $324 million, versus $190 million a year earlier. Investing cash outflow was $3,266 million, including $3,045 million for acquisitions; financing cash outflow was $1,587 million.
- Cash, cash equivalents and investments were $2.738 billion at January 31, down $4.312 billion from July 31, 2020. Working capital was $1.417 billion, versus $4.451 billion; the current ratio was 1.5, versus 2.3. The cash-flow statement reports $2.178 billion of cash, cash equivalents and restricted cash, including customer funds.
- Debt was approximately $2.358 billion at January 31: $325 million short-term and $2.033 billion long-term. Intuit repaid the $325 million term-loan balance at maturity in February 2021. It had no balance on its $1 billion unsecured revolving facility at quarter-end; $48 million was outstanding on a subsidiary’s secured facility.
- Management said liquidity, investments and expected operating cash generation should cover anticipated needs for at least 12 months. The company reported compliance with applicable debt covenants.
Material changes and management commentary
- Credit Karma acquisition: Completed December 3, 2020. The filing gives total consideration of $8.1 billion, including assumed awards and restricted shares; the fair value of the purchase price was $7.2 billion, including $3.4 billion cash and $3.8 billion of Intuit stock. Preliminary allocation included $3.899 billion of goodwill and $3.372 billion of acquired intangible assets. Purchase accounting remains preliminary. The acquisition increased debt, share count, amortization and compensation costs.
- Tax-season timing: The IRS began accepting and processing 2020 returns on February 12, 2021, versus January 27, 2020. Management attributed much of the Consumer decline to this later start and said the first-half results are not indicative of full-year Consumer or ProConnect performance; substantially complete tax-season results were expected in Q3.
- Other operating factors: Q2 earnings included a $30 million gain from collection of a previously written-off note receivable and a $9 million gain on other long-term investments. The six-month period included $17 million of gains on other long-term investments. Lower marketing expense partly offset increased staffing, share-based compensation, acquisition-related costs and intangible amortization. Diluted shares increased following stock issued for the acquisition.
- Capital returns: The company repurchased 470,000 shares for $175 million in the first six months and had $2.2 billion of repurchase authorization remaining. It declared dividends of $1.18 per share for the six months; a further $0.59 quarterly dividend was declared in February.
- Outlook: The filing provides no numerical earnings or revenue guidance. Management expects to continue investing in product development, marketing, sales, technology, privacy and security, and expects service and other revenue to continue growing over time. It expects to return excess cash through dividends and repurchases, subject to business needs and Board discretion.
Risks, contingencies and unusual items
- Tax-program litigation: Approximately 125,000 individual arbitration claims were pending as of January 31, 2021, following litigation and regulatory inquiries concerning free online tax preparation programs. Intuit could incur approximately $380 million of additional arbitration fees, disputes their applicability and propriety, and cannot estimate a reasonably possible loss range for the underlying matters. A proposed class-action settlement was rejected by the court.
- COVID-19 and seasonality: The company cited uncertainty around customer demand, small-business health, tax filings, partner activity, operations and forecasting. Small-business closures or reduced activity and changes in tax deadlines could affect results.
- Credit Karma and valuation: Credit Karma’s business depends on financial-institution partners and credit-market activity. A prolonged downturn could reduce lender offers and marketing, impair platform activity and potentially lead to goodwill impairment. Credit Karma goodwill was $3.899 billion; the acquired reporting unit’s estimated fair value approximated its carrying value at acquisition.
- Other risks: Intuit highlighted competition, cybersecurity and privacy, fraud, service availability and third-party dependencies, acquisition integration, regulation and litigation. It excluded Credit Karma from its internal-control-over-financial-reporting assessment during the first year after acquisition while integration proceeds. Disclosure controls were judged effective as of period-end.
Most important facts for investors to verify
- Whether the delayed tax-season opening shifted Consumer and ProConnect revenue into Q3, and whether full-season results support management’s explanation for the Q2 decline.
- Credit Karma’s post-acquisition revenue and profitability, integration progress, realization of expected benefits, and final purchase-price allocation.
- The outcome and cost of the arbitration claims, including whether the potential $380 million of future fees is incurred and how the underlying claims are resolved.
- Operating cash generation and liquidity after the acquisition, term-loan repayment, dividends and repurchases.
- Whether acquired goodwill and intangible assets remain recoverable, and how amortization and share-based compensation affect future earnings.