Why did Intuit report a net loss in fiscal 1996 despite revenue growth of 28%?

The loss came from acquisition accounting. Intuit recorded $8.0 million of purchased in-process R&D from the IIS acquisition and carried about $40.6 million of goodwill and purchased-intangible amortization. Because the in-process R&D charges and goodwill amortization are non-deductible for tax, the company paid $16.2 million in income taxes on only $1.9 million of pre-tax income, which pushed it to a net loss of $20.7 million.

What is the CheckFree transaction and why does it matter?

Intuit agreed to sell its banking and bill payment processing subsidiary, Intuit Services Corp., to CheckFree in exchange for 12.6 million CheckFree shares (about 23% of CheckFree after issuance), valued at roughly $227.6 million as of September 13, 1996. Intuit will exit direct back-end bill-pay processing, keep the Investor Insight and IntelliCharge revenue, and expect royalties and connectivity fees. The deal still requires regulatory and CheckFree shareholder approval and is expected to close by early 1997. Intuit has said it plans to sell about two million of the CheckFree shares.

What are the main risks to Intuit's core tax and software business?

Tax software is seasonal and tied to annual tax law changes, which concentrates revenue in November through March and makes calculation errors costly; the company took charges of $1.3 million in fiscal 1995 and $1.2 million in fiscal 1996 for such errors. Competition from Microsoft Money, which is aggressively promoted with free offers, and from lower-priced or free Windows 95 products could pressure pricing and margins. A shift from packaged software toward the Internet could also reduce product sales. Distributor concentration is also notable, with Ingram at 13% and Merisel at 5% of fiscal 1996 revenue.

How is Intuit's balance sheet and cash position?

The balance sheet is solid. At July 31, 1996, the company held $198.0 million of cash and short-term investments, total assets of $418.0 million and stockholders' equity of $299.2 million, with only $5.6 million of long-term notes payable. Operating cash flow was $61.5 million, but capital spending was high at $69.3 million, largely for new Mountain View facilities and infrastructure. Management believes its cash will cover seasonal working capital and capital expenditure needs for at least the next twelve months.

What should investors watch in the coming year?

Key items include whether Quicken and tax product launches proceed on schedule amid the Trio injunction motion, the timing and approval of the CheckFree deal, progress of the Internet and electronic financial services strategy (InsureMarket, NETworth, OpenExchange), and the impact of rising amortization and R&D spending on fiscal 1997 earnings. The company also warned of possible quarterly volatility, a seasonal loss pattern in the July and October quarters, and the risk that the German subsidiary's execution problems recur.

INTU 10-K FY1996 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed October 24, 1996. Cited figures are marked; the original filing is the authoritative source.

Intuit's fiscal 1996 10-K (year ended July 31, 1996) shows a company growing rapidly on the top line but still unprofitable on a GAAP basis.

Net revenue rose 28% to $538.6 million^a from $419.2 million, led by tax preparation products (TurboTax, Power Tax) and QuickBooks. However, the company posted a net loss of $20.7 million (-$0.46 per share), driven by $8.0 million of purchased in-process R&D, roughly $40.6 million of goodwill and acquisition-related amortization, and a tax provision of $16.2 million on pre-tax income of only $1.9 million, because acquisition charges were non-deductible. Operating loss narrowed to $5.8 million from $65.0 million a year earlier.

Cash and short-term investments were stable at $198.0 million^b with no debt of consequence, and operating cash flow was a healthy $61.5 million. The filing is dominated by strategic change. Intuit announced in September 1996 that it will sell its banking and bill payment subsidiary, Intuit Services Corporation, to CheckFree in exchange for 12.6 million CheckFree shares valued at about $227.6 million, and it is pushing an Internet and electronic financial services strategy that includes OpenExchange, InsureMarket, NETworth and QFN.

Management warned that heavy non-cash amortization may cause losses in fiscal 1997, and that the Internet trend could pressure its packaged-software sales. Investors should weigh the core franchise's growth and cash generation against near-term earnings pressure, the outcome of the CheckFree transaction, and several litigation matters, most notably a Trio Systems suit seeking $60 million^c and a motion for a preliminary injunction that could affect Quicken shipments. The filing also reveals operational stress.

The company had a German subsidiary launch delay, customer service problems, and recurring calculation errors in tax products. It began charging for QuickBooks support and repriced employee stock options after the share price fell from its highs. Seasonality is significant: the company routinely posts losses in its July and October quarters and earns most of its profit in the January and April quarters.

02—Key points

Key Highlights

Net revenue grew 28% to $538.6 million in fiscal 1996, from $419.2 million, driven mainly by tax products (including Power Tax) and QuickBooks.
Net loss narrowed to $20.7 million (-$0.46 per share) from $44.3 million a year earlier, though the result still reflects $8.0 million of in-process R&D charges and about $40.6 million of acquisition-related amortization.
Operating loss improved to $5.8 million from $65.0 million, and cost of goods sold fell to 26% of revenue from 29%.
Cash and short-term investments were $198.0 million at July 31, 1996, with operating cash flow of $61.5 million and minimal debt.
Pending sale of Intuit Services Corp. (online banking and bill pay) to CheckFree for 12.6 million CheckFree shares valued at about $227.6 million, expected to close in early calendar 1997.
Heavy goodwill and intangible amortization may produce losses in fiscal 1997, and the company expects research and development and selling spend to keep rising.
Material litigation includes the Trio Systems suit seeking $60 million and a preliminary injunction motion that could affect Quicken shipments; new Quicken products were slated for October 24, 1996.

03—Questions

Frequently Asked Questions

Why did Intuit report a net loss in fiscal 1996 despite revenue growth of 28%?
The loss came from acquisition accounting. Intuit recorded $8.0 million of purchased in-process R&D from the IIS acquisition and carried about $40.6 million of goodwill and purchased-intangible amortization. Because the in-process R&D charges and goodwill amortization are non-deductible for tax, the company paid $16.2 million in income taxes on only $1.9 million of pre-tax income, which pushed it to a net loss of $20.7 million.
What is the CheckFree transaction and why does it matter?
Intuit agreed to sell its banking and bill payment processing subsidiary, Intuit Services Corp., to CheckFree in exchange for 12.6 million CheckFree shares (about 23% of CheckFree after issuance), valued at roughly $227.6 million as of September 13, 1996. Intuit will exit direct back-end bill-pay processing, keep the Investor Insight and IntelliCharge revenue, and expect royalties and connectivity fees. The deal still requires regulatory and CheckFree shareholder approval and is expected to close by early 1997. Intuit has said it plans to sell about two million of the CheckFree shares.
What are the main risks to Intuit's core tax and software business?
Tax software is seasonal and tied to annual tax law changes, which concentrates revenue in November through March and makes calculation errors costly; the company took charges of $1.3 million in fiscal 1995 and $1.2 million in fiscal 1996 for such errors. Competition from Microsoft Money, which is aggressively promoted with free offers, and from lower-priced or free Windows 95 products could pressure pricing and margins. A shift from packaged software toward the Internet could also reduce product sales. Distributor concentration is also notable, with Ingram at 13% and Merisel at 5% of fiscal 1996 revenue.
How is Intuit's balance sheet and cash position?
The balance sheet is solid. At July 31, 1996, the company held $198.0 million of cash and short-term investments, total assets of $418.0 million and stockholders' equity of $299.2 million, with only $5.6 million of long-term notes payable. Operating cash flow was $61.5 million, but capital spending was high at $69.3 million, largely for new Mountain View facilities and infrastructure. Management believes its cash will cover seasonal working capital and capital expenditure needs for at least the next twelve months.
What should investors watch in the coming year?
Key items include whether Quicken and tax product launches proceed on schedule amid the Trio injunction motion, the timing and approval of the CheckFree deal, progress of the Internet and electronic financial services strategy (InsureMarket, NETworth, OpenExchange), and the impact of rising amortization and R&D spending on fiscal 1997 earnings. The company also warned of possible quarterly volatility, a seasonal loss pattern in the July and October quarters, and the risk that the German subsidiary's execution problems recur.

04—Continue

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