Intuit Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended April 30, 2015. Comparisons are with the corresponding 2014 periods. Intuit provides financial and business management products and services, including QuickBooks, TurboTax, Quicken, Mint, and professional tax software. Results reflect continuing operations unless stated otherwise.
Financial performance
| Metric | Three months ended April 30, 2015 | Change year over year | Nine months ended April 30, 2015 | Change year over year |
|---|---|---|---|---|
| Revenue | $2.194 billion | Down 8% | $3.674 billion | Down 3% |
| Operating income | $906 million | Down 39% | $694 million | Down 49% |
| Net income from continuing operations | $501 million | Down 49% | $351 million | Down 61% |
| Diluted EPS from continuing operations | $1.78 | Down 47% | $1.22 | Down 60% |
| Operating margin | 41.3% | 62.6% in 2014 | 18.9% | 36.2% in 2014 |
Quarterly product revenue was $447 million, down from $735 million; service and other revenue was $1.747 billion, up from $1.653 billion. Year-to-date product revenue was $878 million versus $1.251 billion, while service and other revenue rose to $2.796 billion from $2.541 billion. The nine-month 2014 comparison included $46 million of discontinued-operations income; there was none in 2015.
For the quarter, cost of revenue was $219 million, selling and marketing $448 million, research and development $217 million, general and administrative $135 million, and goodwill impairment $263 million. The effective tax rate was approximately 44% for the quarter and 48% year to date; excluding discrete items, management reported adjusted effective rates of approximately 36% for both periods.
Segments and material changes
- Small Business: Quarterly revenue fell 5% to $539 million; nine-month revenue fell 1% to $1.640 billion. Online ecosystem revenue grew 20% in the quarter and 25% year to date; QuickBooks Online customers grew 55%. Desktop unit sales fell 23% in the quarter and 24% year to date, as the company emphasized online and subscription offerings.
- Consumer: Quarterly revenue increased 3% to $1.525 billion; nine-month revenue increased 6% to $1.857 billion. Consumer Tax revenue benefited from TurboTax unit growth; Consumer Ecosystem revenue declined, including lower Quicken desktop revenue.
- Professional Tax: Quarterly revenue declined 61% to $130 million; nine-month revenue declined 55% to $177 million. Intuit attributed much of the decline to the changed timing of desktop product revenue recognition.
Beginning in fiscal 2015, revenue from future QuickBooks and Quicken desktop offerings is recognized over approximately three years as services are provided, and Professional Tax revenue is recognized over the tax year. Intuit said this transition reduced current-period product revenue while related product costs are expensed as incurred. Management also cited higher staffing, marketing, outside-services, and share-based compensation costs.
Cash flow, liquidity, and capital
- Nine-month operating cash flow was $1.722 billion, compared with $1.530 billion a year earlier. Investing cash flow was an outflow of $95 million, versus an inflow of $419 million; financing cash flow was an outflow of $1.266 billion, versus $1.377 billion.
- Cash and cash equivalents were $1.193 billion at April 30, 2015. Cash, cash equivalents, and investments totaled $2.084 billion, up $170 million from July 31, 2014.
- Working capital was $741 million, down from $1.200 billion; the current ratio was 1.3:1 versus 1.8:1. Customer funds held and customer fund deposits were each $330 million.
- Long-term debt was $499 million, principally the 5.75% senior notes due March 2017. The $500 million revolving credit facility was unused; the company reported compliance with its covenants.
- Intuit repurchased 13.7 million shares for $1.2 billion and declared dividends of $0.75 per share during the first nine months. The board authorized an additional $2 billion repurchase program on May 19, 2015. A $0.25-per-share dividend was declared for payment in July.
Management expected significant operating cash generation to continue and said available cash, investments, and operating cash flow should cover anticipated needs for at least 12 months. It expected to pay approximately $180 million in income taxes in fiscal fourth quarter 2015. No specific revenue or earnings guidance is provided in the filing.
Outlook, risks, and unusual items
- Goodwill impairment: Intuit recorded a $263 million charge after lowering revenue and operating income forecasts for Mint Bills, formerly Check. Management shifted focus toward integrating bill pay into Mint and Quicken and reducing emphasis on Check’s biller and direct-pay channels. Further impairment is possible if integration is delayed or forecasts weaken.
- Tax-season fraud and legal inquiries: Intuit and certain states temporarily suspended state e-filing to address attempts to file fraudulent returns using stolen identities. The company reported inquiries from Congress, the FTC, SEC, and DOJ, and putative class-action lawsuits. Intuit disputes the allegations and intends to defend them; outcomes remain uncertain.
- Other unusual item: A $30 million pretax net gain on the sale of certain Payments-related assets partially offset higher operating expenses in the quarter and year to date.
- Operating and market risks: Management highlighted intense competition, seasonal results, execution risks in the transition to connected and subscription services, cybersecurity and service-availability risks, regulatory exposure, and potential volatility in revenue recognition. It also noted that roughly 9% of cash, cash equivalents, and investments were held by foreign subsidiaries and subject to repatriation tax considerations.
- The company reported no significant off-balance-sheet arrangements and no significant changes in contractual obligations during the first nine months. Disclosure controls were assessed as effective.
Key facts for investors to verify
- How much of the declines in revenue and operating income reflects timing from the new revenue-recognition approach versus underlying demand, particularly in Professional Tax and desktop products.
- Whether QuickBooks Online growth and TurboTax performance can offset desktop declines and growing customer-care and operating costs.
- The assumptions supporting the $263 million Mint Bills-related goodwill impairment and the risk of further impairment.
- The development and potential financial, regulatory, or reputational effects of tax-return fraud, government inquiries, and related lawsuits.
- Whether working-capital needs, repurchases, dividends, and the 2017 debt maturity remain manageable under seasonal or weaker operating conditions.