Intuit Inc. — Q2 FY2016 Form 10-Q
Reporting period: Three and six months ended January 31, 2016. Amounts are in millions except per-share data. Intuit provides financial and tax software and services, including QuickBooks and TurboTax. Results below are for continuing operations unless noted; Demandforce, QuickBase and Quicken were classified as discontinued operations and held for sale.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Revenue | $923 | $749 | $1,636 | $1,361 |
| Operating income (loss) | $42 | $(89) | $13 | $(198) |
| Net income (loss), continuing operations | $29 | $(60) | $(2) | $(141) |
| Total net income (loss), including discontinued operations | $24 | $(66) | $(7) | $(150) |
| Diluted EPS, continuing operations | $0.11 | $(0.21) | $(0.01) | $(0.50) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $109 | $247 |
- Q2 revenue grew 23%; six-month revenue grew 20%. Approximate gross margin improved to 78% in Q2 and 78% year to date, from 75% in each comparable period, based on reported revenue less cost of revenue.
- YTD operating margin was approximately 0.8%, versus approximately negative 14.5% a year earlier. Q2 operating margin was approximately 4.6%, versus negative 11.9%.
- Segment revenue for the six months: Small Business $1,110, up 6%; Consumer Tax $332, up 23%; Professional Tax $194, up 309%. Small Business operating income was $410; Consumer Tax $34; Professional Tax $113. These segment figures precede $544 of unallocated corporate costs and other items.
- Q2 diluted EPS from continuing operations was $0.11. Six-month continuing-operations loss per share narrowed to $0.01 from $0.50.
Cash, debt and liquidity
- At January 31, cash and cash equivalents were $334; short-term investments were zero and long-term investments were $28. The company reported $334 of cash, cash equivalents and investments in its selected liquidity measure, excluding funds held for customers.
- Total debt was $1,245: $745 outstanding under the former revolving credit facility ($245 short term and $500 long term) and $500 of senior notes. The notes bear 5.75% interest and mature in March 2017.
- Working capital was negative $882 and the current ratio was 0.6:1, compared with positive working capital of $816 and a 1.5:1 ratio at July 31, 2015. Customer funds and matching deposits were $373 each.
- Six-month investing cash flow was positive $493, primarily reflecting net sales and maturities of investments, partly offset by $394 of property and equipment purchases. Financing cash flow was negative $1,065, including $1,725 of share repurchases and $161 of dividends, partly offset by $745 of borrowings. Cash declined $474 to $334.
- In January, Intuit paid $262 cash to purchase certain leased facilities. The company said existing liquidity and expected operating cash flows should cover anticipated needs for at least the next 12 months.
Changes, outlook and notable items
- Revenue and reported profitability improved substantially year over year, partly because prior-year results reflected the timing change in desktop-software revenue recognition. Intuit began recognizing revenue for certain QuickBooks and Professional Tax desktop offerings over the service period rather than largely at sale; this shifts revenue between periods and limits direct comparability.
- Management attributed growth to connected offerings: QuickBooks Online subscribers increased 49%, online payroll customers 17%, and TurboTax Online federal units 23% year to date. Consumer Tax results remain highly seasonal; the company said the tax season would not be substantially complete until Q3.
- Intuit reported a $12 discrete tax benefit from retroactive reinstatement of the federal research and experimentation credit. The six-month effective tax rate was approximately 87%; management said the rate excluding specified discrete items and jurisdictional loss effects was approximately 35%.
- On February 1, 2016, after quarter-end, Intuit replaced its prior credit facility with a five-year facility comprising a $500 term loan and a $1 billion revolving facility. It borrowed $250 under the new revolver that day. The facility includes leverage and interest-coverage covenants.
- Management expects connected-services revenue to continue growing, expects significant operating cash generation, and expects to return excess cash through repurchases and dividends. No numerical earnings or revenue guidance is provided in the supplied filing text.
- Key risks include intense competition, tax-season variability, cybersecurity and identity-theft fraud, reliance on connected-service systems and third parties, regulatory scrutiny, and execution risks in product and infrastructure transitions. Regulatory inquiries and a putative class action relate to fraudulent tax filings using stolen identities; Intuit disputes the allegations and says potential losses beyond accruals are not expected to be material, while noting litigation outcomes are uncertain.
- Intuit repurchased 19.1 million shares for $1.7 billion during the six months and had approximately $900 million of authorization remaining at January 31. It declared $0.60 per share in dividends during the period and declared a further $0.30 quarterly dividend payable in April.
Important facts for investors to verify
- Separate underlying operating growth from changes in desktop-software revenue recognition and tax-season timing, especially for Professional Tax.
- Assess cash generation against large repurchases, capital spending, negative working capital and total debt; verify the impact and terms of the new post-quarter credit facility.
- Track the completed tax season, TurboTax unit growth, and whether connected-service customer growth translates into durable revenue and margins.
- Monitor identity-fraud investigations and litigation, cybersecurity performance, and any change in estimated legal exposure.
- Review the $12 tax benefit and other discrete items when comparing effective tax rates and earnings across periods.