Intuit Inc. — FY2015 Form 10-K
Business context and reporting period. Fiscal year ended July 31, 2015. Intuit provides financial and business-management software and services, principally through QuickBooks and TurboTax. Its continuing operations comprise Small Business, Consumer Tax, and Professional Tax. The company emphasized a shift from desktop products toward online subscriptions and connected services; those services represented 73% of revenue, or $3.0 billion.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $4.192 billion | $4.243 billion | Down 1% |
| Operating income, continuing operations | $738 million | $1.300 billion | Down 43% |
| Operating margin, continuing operations | 17.6% | 30.6% | Down 13.0 percentage points |
| Net income, continuing operations | $413 million | $853 million | Down 52% |
| Diluted EPS, continuing operations | $1.45 | $2.94 | Down 51% |
| Net income, including discontinued operations | $365 million | $907 million | Down 60% |
| Operating cash flow | $1.504 billion | $1.446 billion | Up 4% |
Service and other revenue increased to $3.046 billion from $2.784 billion, while product revenue declined to $1.146 billion from $1.459 billion. Continuing-operations net margin was approximately 9.9%, versus 20.1% in FY2014.
- Segments: Small Business revenue was $2.108 billion, down 2%; Consumer Tax revenue was $1.800 billion, up 8%; Professional Tax revenue was $284 million, down 33%.
- Segment operating income: Small Business $696 million, down 18%; Consumer Tax $1.131 billion, up 5%; Professional Tax $108 million, down 60%.
- Costs and unusual items: Operating expenses increased, including higher staffing, stock-based compensation and outside services. FY2015 included $148 million of goodwill and intangible-asset impairment charges in continuing-operations operating expenses. Total impairment charges in the cash-flow reconciliation were $297 million, including amounts associated with discontinued operations.
- Liquidity: Cash, cash equivalents and investments totaled $1.697 billion, down $217 million year over year. Working capital was $816 million, down from $1.200 billion; the current ratio was 1.5:1 versus 1.8:1.
- Debt: $500 million of 5.75% senior notes are due March 2017. The $500 million revolving credit facility was unused at year-end. The company reported covenant compliance.
- Capital returns: Intuit repurchased $1.2 billion of shares and paid $283 million in dividends during FY2015. Dividends declared were $1.00 per share, up from $0.76.
Material changes versus prior period
- Revenue fell slightly, but operating income and continuing-operations net income dropped sharply, reflecting revenue-recognition changes for desktop products, higher expenses, impairment charges, and a higher effective tax rate.
- QuickBooks desktop and Professional Tax desktop offerings began including ongoing enhancements or connected services. Revenue is now recognized over the service period—approximately three years for the affected QuickBooks products and through the calendar year for affected Professional Tax products—while related product costs are expensed as incurred.
- TurboTax U.S. federal units grew 7%; QuickBooks Online customers grew 57%, and online payroll customers grew 18%. These gains did not offset the effect of deferred desktop revenue in the affected segments.
- In Q4, management approved plans to sell Demandforce, QuickBase and Quicken. They were classified as discontinued operations and held for sale; FY2015 discontinued operations recorded a $48 million net loss, including a $124 million tax benefit.
Outlook, commentary and risks
- Management expected to generate significant operating cash flow in FY2016 and believed available cash, investments and operating cash flow would cover anticipated needs for at least 12 months. It expected connected-services revenue to continue growing and anticipated continued quarterly dividends and share repurchases, subject to board approval.
- No specific FY2016 revenue, earnings or margin guidance is provided in the filing text.
- Management said the desktop revenue-recognition transition affected FY2015 comparisons; it expected QuickBooks seasonality to become less pronounced, while tax businesses would remain highly seasonal.
- Intuit reported increased attempts during the 2015 tax season to use stolen identities to file fraudulent returns. It temporarily suspended state e-filing in certain states, added security measures, and faced inquiries from multiple government authorities and putative class-action lawsuits. The company said it did not believe the activity had materially harmed recent financial performance, but could not assure future results would be unaffected.
- Other key risks include intense competition and free offerings, cybersecurity and service interruptions, regulatory changes, tax-season execution and product accuracy, litigation and intellectual-property claims, and execution of business divestitures. The company also cited $500 million of debt due in 2017 and potential future impairment of goodwill or acquired intangibles.
Investor verification priorities
- Confirm the recurring earnings impact of desktop revenue deferrals and separate it from the FY2015 impairment and other unusual costs.
- Review the assumptions and allocation behind the $148 million continuing-operations impairment and the larger $297 million total cash-flow adjustment.
- Assess continuing growth, customer retention, monetization and margins in QuickBooks Online and TurboTax, alongside declines in desktop and Professional Tax revenue.
- Monitor outcomes and potential costs from tax-fraud inquiries and lawsuits, and evaluate security controls and service resilience.
- Verify the progress, terms and financial consequences of the planned Demandforce, QuickBase and Quicken divestitures, as well as the company’s capacity to manage the 2017 note maturity and capital returns.