Intuit Inc. — Form 10-Q Summary
Reporting period: Quarter ended January 31, 2017 (fiscal Q2 2017); year-to-date (YTD) figures cover the six months ended that date. Amounts are in millions, except per-share data and percentages.
Business context
Intuit provides financial-management software and services, principally QuickBooks and TurboTax, through Small Business, Consumer Tax, and ProConnect segments. The business is seasonal: Consumer Tax revenue is concentrated in the fiscal third quarter. Intuit sold Demandforce, QuickBase, and Quicken in fiscal 2016; these businesses are presented as discontinued operations.
Financial performance
| Metric | Q2 FY17 | Q2 FY16 | YTD FY17 | YTD FY16 |
|---|---|---|---|---|
| Revenue | $1,016 | $923 | $1,794 | $1,636 |
| Operating income (loss), continuing operations | $22 | $42 | $(39) | $13 |
| Net income (loss), continuing operations | $13 | $29 | $(17) | $(2) |
| Diluted EPS, continuing operations | $0.05 | $0.11 | $(0.07) | $(0.01) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $87 | $129 |
Q2 revenue rose 10%, while operating income declined 48% and diluted EPS declined 55%. YTD revenue rose 10%, but Intuit moved from operating income of $13 to an operating loss of $39. Operating margin was approximately 2.2% in Q2 FY17 versus 4.6% a year earlier, and negative 2.2% YTD versus positive 0.8%.
- Segment revenue, Q2 / YTD: Small Business $632 / $1,238, up 12% in each period; Consumer Tax $285 / $345, up 4% in each; ProConnect $99 / $211, up 18% / 9%.
- YTD segment operating income: Small Business $481, Consumer Tax $16, and ProConnect $120. Corporate and other unallocated costs were $656, versus $555 a year earlier.
- Balance sheet and liquidity at January 31: Cash and cash equivalents $392; investments $245; long-term investments $28. Intuit reported $637 of cash, cash equivalents, and investments for liquidity purposes. Current ratio was 0.6:1 and working capital deficit was $1,124.
- Debt: Short-term debt $687 and long-term debt $463, or $1,150 total. Debt included $500 of senior notes due March 15, 2017, a $500 term loan, and $150 drawn on the revolving facility.
- Cash use and shareholder returns: Cash decreased $246 YTD to $392. Investing cash flow was positive $43 and financing cash flow was negative $375. Intuit repurchased $390 of stock and paid $177 in dividends YTD; the declared dividend was $0.34 per share.
Changes and management commentary
Management attributed revenue growth mainly to Small Business Online Ecosystem growth and changes to QuickBooks Desktop offerings. QuickBooks Online subscribers increased 49% and online payroll customers increased 19% YTD. Under the revised Desktop model, revenue is recognized as services are provided over approximately three years.
A slower start to the tax season weighed on Consumer Tax results and consolidated operating income. Higher staffing, advertising and marketing, and share-based compensation also increased expenses. Consumer Tax and ProConnect first-half results were not considered indicative of full-year trends because of seasonality.
Outlook, risks, and unusual items
- Management expected significant operating cash generation during the rest of fiscal 2017 and believed available liquidity and cash generation would meet anticipated needs for at least 12 months. It intended to repay the $500 senior notes in fiscal Q3.
- Intuit expected slower ProConnect revenue growth in fiscal 2017 than historically, reflecting a greater focus on accountants’ value to small businesses and less reliance on price increases. It expected to continue returning excess cash through repurchases and dividends, subject to management and board discretion.
- The company reported compliance with debt covenants. The credit agreement includes leverage and interest-coverage requirements; variable-rate borrowings expose Intuit to interest-rate changes.
- Key risks include intense competition, seasonal tax-season execution, service availability and technology transitions, cybersecurity and customer-data protection, tax-fraud activity, regulation, and litigation. Intuit was cooperating with government inquiries regarding fraudulent tax filings and defending a consolidated putative class action; it considered the allegations without merit and did not expect pending claims to materially affect the financial statements beyond amounts accrued.
- YTD tax results included discrete stock-compensation tax benefits following early adoption of ASU 2016-09. The reported effective tax rate was approximately 72%; excluding discrete items, management reported an approximately 34% rate.
Important facts for investors to verify
- Whether the tax season recovered after the reported slower start, and the resulting full-year Consumer Tax performance.
- Whether QuickBooks Online growth and the new Desktop revenue-recognition pattern translate into sustainable revenue and margin growth.
- Repayment or refinancing of the $500 senior notes due March 2017 and the effect of debt and interest costs on liquidity.
- Progress on operating-cost growth, especially staffing, marketing, and share-based compensation, relative to revenue growth.
- Developments in tax-fraud investigations and related litigation, including any change in estimated exposure or customer impact.