Intuit Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2011; comparative periods ended January 31, 2010. Amounts are in U.S. dollars. Intuit provides business and financial management software and services, including QuickBooks, TurboTax, Quicken, and financial services for institutions.
Financial performance
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Net revenue | $878 million | $837 million | $1.410 billion | $1.311 billion |
| Operating income, continuing operations | $111 million | $139 million | $7 million | $39 million |
| Net income, continuing operations | $73 million | $80 million | $3 million | $11 million |
| Diluted EPS, continuing operations | $0.23 | $0.25 | $0.01 | $0.03 |
| Operating cash flow | $258 million | $245 million | $47 million | $105 million |
- Q2 revenue increased 5%; first-half revenue increased 8%. Product revenue was $430 million in Q2 and $646 million year to date; service and other revenue was $448 million and $764 million, respectively.
- Operating margin was approximately 12.6% in Q2 versus 16.6% a year earlier, and approximately 0.5% for the first half versus 3.0%. Cost of revenue was 21% of revenue in Q2 and 24% year to date; operating expenses rose to 67% and 75% of revenue, respectively.
- Cash and cash equivalents were $433 million and current investments were $459 million at January 31. Working capital was $520 million; the current ratio was 1.3:1. These exclude $337 million of customer funds and deposits, which are separately reported.
- Long-term debt was $998 million carrying value, representing $1 billion principal in fixed-rate notes: $500 million due in March 2012 and $500 million due in March 2017. Intuit had not drawn on its $500 million revolving credit facility and was in compliance with its covenants.
- First-half investing activities provided $804 million, largely reflecting net investment sales; capital expenditures were $135 million. Financing activities used $632 million, including $860 million of stock repurchases.
Changes versus prior comparable periods
- Q2 operating income declined 20% and continuing-operations net income declined 9%; first-half operating income fell 82% and continuing-operations net income fell 73%.
- Management attributed much of the profit pressure to a shift of Consumer Tax revenue into the third quarter. The IRS delayed acceptance of certain e-filed returns until mid-February; management believed taxpayers delayed filing as a result. First-half Consumer Tax revenue decreased 2%, while its operating income fell 59%.
- Small Business Group revenue rose 15% in Q2 and 13% year to date. Financial Management Solutions grew 21% in Q2 and 18% year to date, supported by QuickBooks desktop pricing and growth in online and enterprise products. Total QuickBooks software units declined 13% year to date.
- Operating expenses increased $67 million in Q2 and $136 million year to date, including higher marketing and staffing costs and expenses from Mint and Medfusion. Lower acquired-technology amortization partly offset these increases.
- First-half operating cash flow fell from $105 million to $47 million, reflecting lower income and seasonal working-capital needs. Cash, cash equivalents, and current investments declined $730 million from July 31, 2010, mainly due to share repurchases and the portfolio’s net investment sales and maturities.
- Prior-year reported net income included discontinued operations from the Intuit Real Estate Solutions sale: $34 million in Q2 and $35 million for the first half. Continuing-operations figures provide the more comparable earnings measure.
Outlook, commentary, and risks
- Management said it expected cash, investments, and operating cash generation to cover seasonal working capital, capital expenditures, contractual obligations, and other liquidity needs for at least the next 12 months. No specific full-year revenue or earnings guidance is provided in the filing text.
- Results are highly seasonal: tax revenue is concentrated in the second and third fiscal quarters, and management noted that tax-season results would not be substantially complete until Q3. Revenue timing can be affected by tax-form availability and taxing-agency e-file systems.
- Intuit recorded an approximately $9 million discrete tax benefit from retroactive reinstatement of the federal research and experimentation credit. The first half recorded a $12 million tax benefit on a $9 million pretax loss.
- At January 31, Intuit held $85 million of illiquid municipal auction-rate securities classified as long-term investments. Management estimated fair value near par and did not expect the illiquidity to materially impair overall liquidity; recovery may occur at maturity.
- Intuit repurchased 18.5 million shares for $860 million during the first half and had $1.14 billion of remaining repurchase authorization. A $250 million accelerated share repurchase payment and initial delivery of 4.2 million shares occurred on February 2, after quarter-end.
- Commitments included $465 million of operating leases, $281 million of purchase obligations, and $1 billion principal of senior notes. Two January lease amendments extended headquarters leases through 2024 and 2026; expected rent under those terms was approximately $210 million.
- Principal disclosed risks include intense competition, seasonality and tax-filing delays, cybersecurity and service interruptions, dependence on third parties, regulation, product quality and launch timing, litigation and intellectual-property claims, economic weakness, and refinancing or repayment of the 2012 notes. Routine legal proceedings were disclosed; management did not expect pending claims to materially affect financial position, results, or cash flows, while noting litigation outcomes are uncertain.
Important facts for investors to verify
- Whether the IRS-related timing shift resulted in the expected recovery of Consumer Tax revenue and margins in Q3.
- Whether Small Business growth, including online payroll and QuickBooks services, continues to offset weakness or margin declines in other segments.
- Cash generation and working-capital trends through the remainder of tax season, alongside the substantial repurchase program and capital spending.
- Plans and funding for the $500 million notes due March 2012; management said it intended to repay with operating cash or refinance if market conditions were favorable.
- Realizability and liquidity of auction-rate securities, and the assumptions behind product-return and rebate reserves and acquired-asset valuations.
- Progress on the accelerated share repurchase after quarter-end, and the terms and obligations associated with the extended headquarters leases.