Intuit Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2011, the three months ended October 31, 2010. Intuit provides business and financial management software and services, including QuickBooks, TurboTax, Quicken, payroll, payments and online banking solutions. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 |
|---|---|---|
| Revenue | $532 | $474 |
| Operating loss | $(104) | $(100) |
| Net loss from continuing operations | $(70) | $(69) |
| Net loss per share, diluted | $(0.22) | $(0.21) |
| Operating cash flow | $(211) | $(140) |
| Capital expenditures | $51 | $32 |
- Revenue grew 12%; management attributed about 60% of growth to the three Small Business Group segments. Revenue increased in all segments.
- Cost of revenue was $159, or 30% of revenue, versus $166, or 35%. Total costs and expenses rose to $636 from $574; operating expenses increased $69, including higher staffing, marketing, acquisition-related and share-based compensation costs.
- Net loss per share from continuing operations worsened 5%. The effective tax benefit rate was approximately 37%, compared with 38%.
- Cash and cash equivalents were $112 at October 31, versus $214 at July 31. Cash, cash equivalents and current investments totaled $1,174, down $448 from July 31; an additional $89 was classified as long-term investments, including $85 of auction-rate securities.
- Working capital was $874, down from $1,074; the current ratio was 1.8:1, versus 1.9:1. Customer funds and matching customer deposits were each $363 and should be distinguished from unrestricted liquidity.
- Long-term debt was $998 carrying value, unchanged from July 31; principal consists of $500 of 5.40% notes due March 2012 and $500 of 5.75% notes due March 2017. A $500 revolving credit facility was undrawn; the company reported compliance with its covenants.
Segments and material comparisons
- Financial Management Solutions revenue rose 15% to $154 and operating income increased to $33. QuickBooks desktop units declined 20%, while higher average selling prices and growth in QuickBooks Online, Enterprise Solutions and Intuit Websites supported revenue.
- Employee Management Solutions revenue increased 11% to $107; online payroll customers rose 19%, while total payroll customers were flat.
- Payment Solutions revenue increased 7% to $80, but operating income fell to $12; merchant-customer growth was partly offset by lower transaction volume per merchant.
- Financial Services revenue rose 1% to $81, while operating income declined to $15, reflecting higher staffing costs and the prior-year comparison before sale of its lending business.
- Other Businesses revenue grew 27% to $56, but operating income declined to $1. Growth included Quicken, international small-business offerings and the Mint and Medfusion acquisitions.
- Consumer Tax and Accounting Professionals revenue increased to $29 and $25, respectively, but both recorded operating losses. Management cautioned that first-quarter tax revenue mainly reflects extended filings for the prior tax year and is not indicative of current tax-season trends.
Cash flow, outlook, risks and unusual items
- Operating cash use increased to $211, reflecting the seasonal loss, a $114 increase in income taxes receivable and payment of prior-year bonuses. Investing activities provided $285, primarily from net investment sales, offset in part by capital spending. Financing activities used $177, including $330 of share repurchases, partly offset by $154 of employee stock-plan proceeds.
- Intuit repurchased 7.3 million shares for $330, compared with 10.6 million shares for $300 in the prior-year quarter. At quarter-end, up to $1.67 billion remained authorized for repurchases through August 16, 2013.
- No specific earnings or revenue guidance is provided in the filing. Management expects cash, investments and operating cash generation to cover anticipated needs for at least the next 12 months. It emphasizes that first-quarter results are seasonally weak; revenue is usually highest in fiscal Q2 and Q3, and losses are typical in Q1 and Q4.
- The $85 of municipal auction-rate securities were illiquid, valued using a discounted cash flow model and classified as long-term. Management said it did not expect their reduced liquidity to materially impair its ability to meet liquidity needs.
- The company adopted updated accounting guidance for multiple-deliverable revenue arrangements prospectively on August 1, 2010; it reported no significant effect on revenue timing or pattern. Prior-year comparisons reflect IRES as discontinued operations; IRES had contributed $19 of revenue and $1 of net income in Q1 FY2010. Mint and Medfusion were acquired in fiscal 2010.
- Key disclosed risks include intense competition (including free tax and financial offerings), seasonal volatility, product launch and tax-form timing, service outages and data-center migration, cybersecurity and privacy incidents, transaction fraud, regulation, litigation and intellectual-property claims, acquisition integration, investment-market risk, and refinancing the 2012 notes. Routine legal matters 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. It reported no significant off-balance-sheet arrangements.
Important facts for investors to verify
- How the seasonal tax quarter and subsequent tax-season performance affect full-year revenue and earnings; the filing gives no quantitative guidance.
- Whether the higher operating expense base—particularly staffing, marketing and acquisition-related costs—translates into sustained growth and improved operating results.
- The composition and accessibility of liquidity, including customer funds, auction-rate securities and the $448 decline in cash, cash equivalents and current investments.
- The company’s plan and financing capacity for the $500 million notes due in March 2012, and continued compliance with credit-facility covenants.
- Whether share repurchases at the reported scale remain consistent with operating cash needs and investment priorities.
- Potential effects of competition, cybersecurity or service interruptions, regulatory changes, litigation, and acquisition integration on customer retention and financial results.