01—Abstract
Summary
Summary of the 10-K filed September 12, 2008. Cited figures are marked; the original filing is the authoritative source.
Intuit's fiscal 2008 (year ended July 31, 2008) showed top-line growth driven largely by the February 2007 acquisition of Digital Insight.
Total net revenue rose 15% to $3.07 billiona, with management estimating about 11% organic growth excluding acquisitions and the sale of certain outsourced payroll customers to ADP. Operating income from continuing operations was roughly flat at $650.8 million (up 2%), as higher costs from Digital Insight, a 37% increase in share-based compensation (about $37 million), a $23 million restructuring charge and heavier R&D and marketing spend absorbed nearly all of the revenue gain. Diluted EPS from continuing operations rose 6% to $1.33, helped by a 27.2 million share buyback ($800 million) that reduced the average share count.
The balance sheet and liquidity picture weakened somewhat. Cash, cash equivalents and investments fell 37% to $827.8 millionb, partly because $285.3 million of municipal auction rate securities (valued at par but illiquid after auctions began failing in February 2008) were reclassified to long-term investments. Working capital dropped to $306 million from $792 million, and the current ratio fell to 1.2:1.
Management stated these securities are not expected to materially affect liquidity, and it expects operating cash flow to remain sufficient for at least 12 months. Goodwill of $1.7 billionc and net intangibles of $273 million represent a large share of total assets of $4.67 billion, creating impairment risk.
The filing also highlights structural considerations for investors: strong seasonality (most profit is earned in the November–April tax season, with losses in the first and fourth fiscal quarters), dependence on the Consumer Tax segment (about 30% of revenue, with 64% segment margins), and ongoing regulatory and competitive threats from government-provided free tax filing and Microsoft's free small-business offerings. Capital expenditures more than doubled to $306 milliond for a new Washington state data center, with management guiding to roughly $200 million in fiscal 2009.
02—Key points
Key Highlights
- Total net revenue grew 15% to $3.07 billion; management estimates ~11% growth excluding acquisitions (Digital Insight, Homestead, ECHO) and the ADP payroll transition.
- Operating income from continuing operations was nearly flat at $650.8 million (+2%) as cost growth, including Digital Insight's higher cost structure, a $37M increase in share-based compensation and a $23M restructuring charge, offset revenue gains.
- Diluted EPS from continuing operations increased 6% to $1.33, aided by repurchases of 27.2 million shares for $800 million.
- Cash, cash equivalents and investments declined 37% to $827.8 million; $285.3 million of municipal auction rate securities were reclassified to long-term investments after auctions began failing in February 2008.
- Financial Institutions (Digital Insight) revenue more than doubled to $298.6 million, but its segment operating margin fell to 19% from 26%.
- Consumer Tax, the largest segment at $929 million in revenue with a 64% operating margin, drove growth (TurboTax Online units +37%) but faces risk from government free-filing programs such as the Free File Alliance.
- Capital expenditures rose to $306 million to fund a new Washington state data center, with fiscal 2009 capex guided to about $200 million; goodwill of $1.7 billion creates ongoing impairment risk.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Intuit kept $0.16.
- Revenue$2.99B100.0%
- Cost of revenue−$154.0M5.1%
- Gross profit$2.84B94.9%
- Operating costs−$2.19B73.3%
- Operating income$644.0M21.5%
- Interest, other & tax−$167.0M5.6%
- Net income$477.0M15.9%
Where FY2008 revenue went
$2.99B- Other operating costs: $1.60B, 54% of revenue
- R&D: $593.0M, 20% of revenue
- Net income: $477.0M, 16% of revenue
- Cost of revenue: $154.0M, 5.1% of revenue
- Interest, other & tax: $167.0M, 5.6% of revenue
Kept 16% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed September 12, 2008Financial Statements
| Revenue | $2.99B |
| Cost of Revenue | $154.00M |
| Gross Profit | $2.84B |
| R&D Expenses | $593.00M |
| Operating Expenses | $2.35B |
| Operating Income | $644.00M |
| Interest Expense | $52.00M |
| Net Income | $477.00M |
| EPS (Basic) | $1.45 |
| EPS (Diluted) | $1.41 |
| Shares Outstanding (Basic) | 329.00M |
| Shares Outstanding (Diluted) | 339.00M |
05—Questions
Frequently Asked Questions
Why did operating income barely grow despite a 15% revenue increase?
Most of the revenue growth was offset by higher costs. Digital Insight carries a heavier cost structure than Intuit's other businesses, share-based compensation rose about $37 million, a $23 million restructuring charge was recorded in Q4, and product development and selling and marketing spending increased, especially for Consumer Tax advertising.
How concerned should investors be about the auction rate securities?
The $285.3 million in municipal auction rate securities is carried at par and management believes fair value is substantially equal to par, with no impairment recorded. However, the securities are illiquid because auctions have failed since February 2008. Management says the holdings will not materially affect its ability to meet liquidity needs, and broker-dealers announced settlement plans in August 2008, though details were still being finalized.
What makes Intuit's earnings seasonal and how does that affect quarterly results?
Revenue is concentrated in the tax season from November through April, so the second and third fiscal quarters (ending January 31 and April 30) generate most of the revenue and profit. The first and fourth quarters (ending October 31 and July 31) typically show losses. In fiscal 2008, Q1 and Q4 had net losses from continuing operations of $47.6 million and $61.9 million, respectively, while Q3 alone contributed $444.2 million.
What are the main threats to the Consumer Tax business?
The segment faces competition from H&R Block and 2nd Story Software's TaxACT, and from government-provided free filing. About 20 states have Free File Alliance agreements, while roughly 20 others, including California, offer direct government filing services. The current Free File agreement expires in October 2009, and changes or non-renewal could significantly reduce revenue. Microsoft's free small-business accounting offering also presents a risk to QuickBooks.
Is the dividend policy or buyback program likely to continue?
Intuit has never paid cash dividends and does not expect to in the foreseeable future, retaining earnings for operations and repurchases. At July 31, 2008, the Board had authorized up to $600 million in repurchases through May 15, 2011, and the company repurchased no shares in the fourth quarter of fiscal 2008.
06—Continue