01—Abstract
Summary
Summary of the 10-K filed October 6, 1998. Cited figures are marked; the original filing is the authoritative source.
Intuit's fiscal 1998 (year ended July 31, 1998) was a mixed year.
Revenue was essentially flat at $592.7 milliona, down 1% from $598.9 million, but this comparison is distorted by the August 1997 sale of Parsons; excluding Parsons, revenue grew about 13%. The company swung to a GAAP net loss of $12.2 million versus net income of $68.3 million in fiscal 1997, which included a $71.2 million gain on the sale of Intuit Services Corp. The loss was driven by a $53.8 million in-process R&D charge tied to the Lacerte acquisition and a $16.2 million AOL-related selling and marketing charge. Management says that excluding one-time items, net income would have improved about 38%, driven by lower cost of sales and customer service costs.
The balance sheet was transformed by the $400 millionb Lacerte purchase, funded by a public offering of 10 million shares at $47.375 (net proceeds about $456 million). Total assets rose to $1.50 billion from $664 million, and stockholders' equity to $1.09 billion. Cash, cash equivalents and short-term investments reached $383 million, and the company holds large marketable securities, mainly Checkfree and Excite stakes worth $499 million at July 31, 1998.
These holdings create significant exposure: Checkfree fell roughly $158 millionc in value after year-end, and Excite is restricted from sale until December 1998. Investors should weigh strong franchise positions (QuickBooks, TurboTax and Quicken are leaders in their markets) against rising Internet investment, an international division that disappointed, a lower-margin service mix ahead, litigation over Year 2000 issues in Quicken online banking, and a possible Microsoft entry into personal tax software. Future amortization of acquisition intangibles is projected to reduce after-tax net income by roughly $78.5 million in fiscal 1999.
02—Key points
Key Highlights
- Revenue of $592.7 million, down 1% reported but up about 13% excluding the divested Parsons subsidiary; Internet commerce was only 8% of revenue (6% Internet products, 2% electronic distribution).
- GAAP net loss of $12.2 million (-$0.24 per share) versus net income of $68.3 million in fiscal 1997, including a $53.8 million in-process R&D charge for Lacerte and a $16.2 million AOL agreement charge.
- Lacerte Software acquired June 1998 for about $400 million cash, adding roughly $75.6 million in annual revenue (FY ended March 1998) and $28.9 million in operating income; $358.2 million allocated to intangibles and goodwill amortized over 3 to 5 years.
- Balance sheet strengthened: total assets $1.50 billion and stockholders' equity $1.09 billion, with $383 million in cash and short-term investments after a ~$456 million net equity offering.
- Large concentrated equity holdings: Checkfree (about 19% ownership, $262 million at July 31, 1998) and Excite (about 11%, $226 million), with Checkfree shares down about $158 million after year-end.
- Operating cash flow was $68.3 million, but net cash used in investing was $473.2 million, mainly for the Lacerte acquisition.
- Key risks include intensifying personal tax competition and possible Microsoft entry, Quicken competition from Microsoft Money, weak international results, rising Internet investment, and six Year 2000 class action lawsuits over Quicken online banking.
03—Questions
Frequently Asked Questions
Why did Intuit report a net loss in fiscal 1998 after a profitable fiscal 1997?
The fiscal 1998 loss of $12.2 million was driven mainly by a $53.8 million one-time charge for in-process R&D from the Lacerte acquisition and a $16.2 million charge tied to the AOL agreement. Fiscal 1997 net income of $68.3 million was boosted by a $71.2 million gain on the sale of Intuit Services Corporation to Checkfree. Management says that excluding one-time items, net income would have risen about 38% year over year.
How is Intuit paying for its Lacerte acquisition, and how does it affect shareholders?
Intuit paid about $400 million in cash for Lacerte, funded by a public offering of 10 million common shares at $47.375 per share, which raised roughly $456 million net. The offering adds shares outstanding (to about 59.5 million) and expands the cash base, but Lacerte also brings roughly $358 million of intangible amortization over three to five years, which will weigh on reported earnings.
What is the risk from Intuit's holdings in Checkfree and Excite?
Intuit held marketable securities of $499 million at July 31, 1998, mostly Checkfree (about $262 million) and Excite (about $226 million). Checkfree's share price fell from $24.75 to $9.875 by September 30, 1998, a decline of about $157.7 million. Excite shares cannot be sold until December 1998. Declines judged permanent would be charged to the income statement, so these holdings add earnings and balance sheet volatility.
Is Intuit's Internet strategy generating meaningful revenue yet?
Not yet. Internet commerce accounted for only about 8% of fiscal 1998 revenue, while Quicken.com page views grew from 16 million to 90 million per month. Management states it cannot predict if or when Internet commerce will produce meaningful profits, and Internet-related spending will keep rising, including the new online payroll service that is expected to be unprofitable at first.
What are the main competitive threats to Intuit's core products?
The main threats are Microsoft, which could enter the personal tax software market and already competes with Microsoft Money against Quicken, and Block Financial's TaxCut, which priced aggressively in fiscal 1997. Intuit also faces Peachtree in small business accounting, and retailer consolidation is increasing pressure on shelf space and terms. Management expects competition to intensify through fiscal 1999.
04—Continue