Business Context and Reporting Period
Company: Intuit Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 30, 1999 (Third Quarter of Fiscal Year 1999)
Business Overview: Intuit develops and sells small business accounting, tax preparation, and consumer finance desktop software, financial supplies, and Internet products. The company operates through retail, direct, and Internet channels globally.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Apr 30, 1999 |
Nine Months Ended Apr 30, 1999 |
Nine Months Ended Apr 30, 1998 |
|---|---|---|---|
| Net Revenue | $239,701 | $697,620 | $475,467 |
| Net Income | $72,555 | $113,222 | $26,879 |
| Diluted EPS | $1.12 | $1.79 | $0.54 |
| Operating Cash Flow (9mo) | $237,092 | ||
| Cash & Equivalents (Balance Sheet) | $330,225 (as of Apr 30, 1999) | ||
| Long-Term Debt | $36,043 (as of Apr 30, 1999) |
Margins (Nine Months Ended Apr 30, 1999):
- Net Revenue: $697.6 million
- Cost of Goods Sold: $156.7 million (22.5% of revenue)
- Operating Income: $83.2 million (11.9% of revenue)
- Net Income Margin: 16.2%
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 69% for the quarter and 47% for the nine-month period compared to the prior year. This growth was driven by the Small Business division (up 93% Q/Q, 52% Y/Y) and the Tax division (up 100% Q/Q, 84% Y/Y), largely due to the inclusion of the Lacerte acquisition and new product releases (QuickBooks '99, TurboTax).
- Profitability: The company transitioned from a net loss of $2.2 million in the prior year's quarter to a net income of $72.6 million. The nine-month net income increased from $26.9 million to $113.2 million.
- Unusual Items: The nine-month period included a realized gain of $68.7 million from the sale of marketable securities (Excite, Verisign, and Concentric stock). Excluding this gain, operating performance remains strong but lower.
- Acquisition Impact: Results include the Lacerte acquisition (completed June 1998), which significantly boosted tax division revenue and increased amortization expenses ($62.8 million for the nine months).
- Balance Sheet: Total assets grew from $1.5 billion to $2.5 billion, primarily due to an increase in marketable securities (fair value increased from $499 million to $1.1 billion) and cash equivalents.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Seasonality: The business is highly seasonal, with peak revenues in the quarters ending January 31 and April 30. The company expects lower revenues in the fourth quarter (ending July 31).
- Internet Strategy: Internet commerce revenue is growing rapidly but currently represents only 14% of total revenue. Management expects continued growth but notes significant costs associated with infrastructure and third-party partnerships (e.g., AOL, Excite@Home).
- Payroll Services: The new QuickBooks payroll processing service is currently unprofitable due to upfront infrastructure and acquisition costs. Profitability is expected only after accumulating a large subscriber base.
- Future Amortization: Non-cash amortization from acquisitions is expected to reduce net income by approximately $56.3 million for the remainder of fiscal 1999.
Risks and Contingencies:
- Year 2000 Compliance: The company is facing class-action lawsuits alleging Quicken's online banking functions are not Year 2000 compliant. Management estimates direct Y2K costs of $6.5 million for fiscal 1999 and potential lost revenue of $10–$17 million due to free remediation solutions.
- Market Volatility: Significant holdings in Checkfree (19.7%) and Excite/At Home (9.9%) are subject to market volatility. A permanent decline in value could result in charges to operations.
- Competition: Intense competition in the tax market (e.g., H&R Block) and potential entry by Microsoft into the personal tax market pose risks to pricing and market share.
- Integration Risks: Recent acquisitions (CRI, Lacerte) introduce integration challenges and new business risks, particularly regarding the payroll processing business.
Investor Verification Checklist
- Revenue Quality: Verify the sustainability of revenue growth excluding the one-time $68.7 million gain on sale of securities and the impact of the Lacerte acquisition.
- Year 2000 Litigation: Monitor the status of the consolidated class-action lawsuits regarding Quicken's Y2000 compliance and potential settlement costs.
- Payroll Service Viability: Assess the timeline for the QuickBooks payroll service to reach profitability given the current unprofitable status and high upfront costs.
- Investment Portfolio: Review the valuation and liquidity of marketable securities (Checkfree, At Home) and the impact of the forward sale agreement for Excite stock (expected $253.2 million gain in Q4).
- Seasonal Cash Flow: Confirm that cash reserves ($330 million) are sufficient to cover the expected cash outflows for the CRI acquisition installments and the Security First investment ($50 million) during the low-revenue fourth quarter.