Intuit Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended April 30, 2010. Intuit provides business and financial management products and services, including QuickBooks, TurboTax, Quicken, and online banking services. Unless stated otherwise, dollar amounts are in millions.
Financial performance
| Metric | Q3 FY2010 | Q3 FY2009 | Nine months FY2010 | Nine months FY2009 |
|---|---|---|---|---|
| Revenue | $1,607 (+13%) | $1,417 | $2,918 (+10%) | $2,652 |
| Operating income from continuing operations | $888 (+16%) | $765 | $927 (+16%) | $801 |
| Net income from continuing operations | $576 (+19%) | $485 | $587 (+13%) | $519 |
| Diluted EPS from continuing operations | $1.78 (+21%) | $1.47 | $1.80 (+15%) | $1.57 |
| Operating margin from continuing operations | 55.3% | 54.0% | 31.8% | 30.2% |
For the nine-month period, net income was $622, including a $35 net gain on the sale of Intuit Real Estate Solutions (IRES); the comparable prior-year net income was $518. Product revenue was $1,191 versus $1,185, while service and other revenue rose to $1,727 from $1,467. Consumer Tax was the largest segment, with nine-month revenue of $1,109, up 13%, reflecting TurboTax Online growth. All reportable segments recorded revenue growth for the nine months.
Costs and expenses increased $140 for the nine months. Management cited higher incentive compensation, expenses from PayCycle and Mint, increased revenue-related costs, and changes in executive deferred-compensation liabilities. Interest expense rose to $46 from $36. The nine-month effective tax rate was approximately 34%, versus 33% a year earlier; FY2010 included discrete tax benefits, and the rate excluding those benefits was approximately 37%.
Cash flow, balance sheet, and capital allocation
- Nine-month operating cash flow was $1,149, up from $878. Investing activities used $966, chiefly reflecting net investment purchases, $141 of business acquisitions, and $100 of capital expenditures; proceeds from the IRES sale were $122 net cash. Financing activities used $435, including $750 of share repurchases, partly offset by $326 from employee stock plans.
- At April 30, cash and cash equivalents were $430; short-term investments were $1,499. Management reported cash, cash equivalents, and investments of $1,929, excluding $92 of long-term investments. Working capital was $1,170 and the current ratio was 1.8:1. Customer funds of $275 had a corresponding $275 customer-deposit liability.
- Long-term debt was $998, consisting of $1 billion face value of senior notes due in 2012 and 2017. The company had an undrawn $500 revolving credit facility, expiring in 2012, and was in compliance with its covenants.
- Intuit repurchased 24.6 million shares for $750 in the nine months and had $150 of remaining repurchase authorization at April 30, 2010. The company stated that cash, investments, and operating cash generation should cover anticipated requirements for at least 12 months.
Material developments, outlook, and risks
- Intuit sold IRES on January 15, 2010 for approximately $128 cash and recorded a $35 net gain. Results were presented as discontinued operations.
- Intuit acquired Mint for approximately $170 in November 2009 and PayCycle for approximately $169 in July 2009. On May 21, 2010, after quarter-end, it acquired Medfusion for approximately $91 cash.
- Management emphasized seasonality: tax-related revenue is concentrated from November through April, and the company typically reports losses in its first and fourth fiscal quarters. The filing provides no specific quantified earnings or revenue guidance.
- Auction-rate securities totaled $198, including $110 classified as short-term and $88 as long-term. Auctions had generally continued to fail since 2008. Intuit reported receiving contractual interest, valued the securities approximately at par, and intended to exercise a UBS option to sell $110 at par; counterparty and liquidity risks remain.
- Risks include competition, product and technology execution, cybersecurity and customer-data exposure, seasonal fluctuations, economic weakness affecting small businesses and financial institutions, dependence on third parties, acquisition risks, litigation, and investment-market and tax uncertainty. Routine legal proceedings were not expected by management to materially affect results, though outcomes are uncertain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Adoption of a new multiple-deliverable revenue standard was under evaluation; its impact had not been determined.
Important facts for investors to verify
- How much of reported growth and earnings reflected organic performance versus acquisitions, seasonality, the IRES gain, and tax benefits.
- Whether TurboTax Online growth, the main stated Consumer Tax driver, persists in subsequent tax seasons.
- The recoverability and liquidity of auction-rate securities and the execution and counterparty risk of the UBS put option.
- The timing and funding of the $250 of income taxes payable expected to be paid in the fourth quarter, and the use of remaining buyback authorization.
- Future performance of the Financial Institutions business, whose prior-year goodwill valuation cushion was approximately 5%, and the effect of banking-sector weakness.
- The impact of the Medfusion acquisition and the pending revenue-recognition standard on future results.