Intuit's 3Q
Intuit's 3Q
| Welcome & Introduction |
Whereas dozens of companies have garnered multi-million dollar market capitalizations based on hope for future online business, the dominant franchise in personal finance and tax software is building an online business now. So why have they been dogged in the last few months over short term profit concerns as they build this online business? We try to answer these questions here in the 3Q Earnings section. Transmitted: 5/30/96 |
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Welcome & Introduction
This Special Section focuses on Intuit's third quarter earnings release and the subsequent conference call. We bring together the best of the Motley Fool and AOL's Personal Finance area to deliver this collection to you. Glossary
FW = FoolWire (a Fool News product) Enjoy, |
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FOOL TAKE---ONE FOOL'S OPINION*
(FOOL EQUITY RESEARCH) ALEXANDRIA, Va., May 30, 1996/FOOLWIRE/ --- Intuit reported earnings of $0.14 EPS yesterday before a one-time charge relating to the acquisition of Interactive Insurance Services. The company's revenues increased 30% to $136 million, giving the company a little more than half a billion in trailing earnings. Operating margins slipped in the quarter as they continued to ramp up service and support functions for their emerging online financial services and tax products. Let's look for a minute at the value of just the franchise inherent in Intuit. Who is number one in personal tax software? Intuit. Who is number one in personal finance software? Intuit. Who is number one in tax preparation software? Intuit. Who is number one in small business accounting software? Intuit. Who will soon be number one in online financial services and online banking if they hit their subscriber projections for the final quarter of their fiscal year-end? Intuit. What kind of value can be put on a franchise? The first that springs to mind is the value an acquirer might find. When Microsoft made its bid for Intuit a little over a year ago, they offered a split adjusted $40 per share. It is also important to realize when Microsoft made this offer Intuit had not even started the Intuit Financial Services unit that offers its most exciting growth prospects going forward. Intuit's accounting software unit and Family Laywer products haad also not really come to fruition when Microsoft made its original bid, either. Two years ago in the pre-Digital World, Intuit was a set of nice software franchises that generated a significant annuity stream of upgrade revenues. The portfolio of products would have probably only interested someone who wanted to get into the software business and who would have liked to leverage the Intuit brand, or a company looking to build a software empire and set up Intuit as one of its crown jewels. In the Digital World, however, all sorts of possibilities are open for Intuit. An aggressive and forward looking banking, financial servivces or electronic transaction concern could all take a partial or full equity stake to realize all sorts of strategic plans. Intuit is a company that has consistently grown revenues at a 30% pace for the past five years while maintaining a number one position now in four separate core businesses. The company has consistently developed entirely new lines of business where they have managed to attain number one market position, saying a lot about the management team's ability and the value inherent in the brand. In nine months, for instance, they are estimating that they will have three to four hundred thousand subscribers for their online banking services, surpassing the current giant in the field CheckFree. These numbers do not include America Online's planned Banking Center, where many of Intuit's 35 partners will be offering online banking services in the not too distant future. Although America Online has not specified yet when the Banking Center will kick off except to say in the second half of the year, my own personal estimate is that the penetration from this alone will be tremendous. Grabbing 5% to 10% of America Online's six million subscribers would give Intuit the abillity to double its number of online banking customers in the first half of the fiscal year. Compare Intuit for a moment to many of its potential competitor's across the online banking arena. Checkfree (NASDAQ: CYBE) was worth $775 million at the close of trading today and simply is a financial back-end of comprable size to Intuit's recently started Intuit Financial Services Unit. CyberCash (NASDAQ: CYBE), which is attempting to offer electronic bill payment over the Internet in much the same way that Intuit's two agreements with financial services networks yesterday do, is worth $400 million. Despite the fact that the Intuit Financial Services unit was only started in mid-1995, I believe that if it were traded publicly by itself it would be worth somewhere between $500 million and $1 billion dollars by itself. If you except this sum-of-the-parts logic, then the balance of Intuit's highly profitable network of businesses is selling at about $1.4 to $1.9 billion. Factoring out the $330 million in liquid assets that Intuit currently has, the company is somewhere between two to three times sales. This compares to four times sales for a franchise like Broderbund (NASDAQ: BROD) or eight times sales for Microsoft (NASDAQ: MSFT). Once the online banking business begins to come through to the bottom line in the next fiscal year, I believe that $50 a stub will appear to be a bargain basement price. * A Fool Take represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Fool's thoughts. Transmitted: 5/30/96 |
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(FOOL CONFERENCE CALL SYNOPSIS)* By Randy Befumo (MF Templar) ALEXANDRIA, Va., May 30, 1996/FOOLWIRE/ --- Intuit Inc. (NASDAQ:INTU) today announced financial results for its third fiscal quarter ended April 30,1996. Net revenue for the third quarter of fiscal 1996 increased 30% to $136.5 million from $104.8 million in the year ago fiscal quarter. The Company reported a net loss of $0.3 million, or $0.01 per share, during the three month period ending April 30, 1996, as compared with a net loss of $3.8 million, or $0.09 per share, for the corresponding prior year quarter. These results include acquisition-related charges, net of taxes, of $7.0 million and $10.0 million for the respective quarters. (See Tables A and E). Excluding acquisition-related expenses, the Company would have earned a profit of $6.7 million, or $0.14 per share, for the most recent quarter compared with a profit of $6.2 million, or $0.14 per share, for the quarter ended April 30, 1995. These results were in line with expectations set in the last call, with revenues increasing 30%, hitting a number $2 million about the Street consensus of $134 million. The company reported its net loss including acquisition charges related to the acquisition of Internet Insurance Services. GUIDANCE ON HOW TO COMPARE THIS QUARTER TO LAST QUARTER. The fiscal third quarter has been historical the second largest quarter in terms of revenues. Due to the seasonal nature of the tax business, the January and April quarters get a significant blip of business. The comprables for these two quarters compared to last year are somewhat distorted due to the delay of 500,000 consumer tax products into the third quarter. This was as a result of some process problems. This year there was improvement in their processing ability, eliminating the backlog they had last year. The inclusion of Milky Way KK in this quarter also distorts the comparison to last year. FY 1996 includes Parson's for the entire period, whereas last year Parson's was only including from September. TAX BUSINESS UNIT PERFORMANCE. The company is pretty much through the tax season. The company is very pleased with the indications on sell-through for the products, although they will not know for sure how well they did until later in this quarter when all the excess product has been returned. To assure wide availability for the tax product in the retail channel as tax season approached, Intuit shipped more product into the sales channel but also established significant reserves for returned product for that reason. Year to date revenues have grown 40% in this unit. This is attributable to higher unit shipments as well as a higher mix of CD-ROM Deluxe sales, which have a higher price point. TurboTax received more industry awards this year than any other tax software. According to PC Data, the company maintained their significant retail share through March despite aggressive marketing from Kiplinger's. This season Intuit believes it fulfilled shipments and performed better on service than last year. The company took advantage of the Internet to provide state tax products as well as a 1040 EZ filing service through the Intuit Financial Services network. Pro-Tax, their professional tax preparer set of products, increased revenues in high teens. A number of customers migrated up to higher priced products and a price increase on the 1040 product. Also, a number of Best customers who were not charged last year were charged this year. Despite a modest price increase, the company ended the year with an 80% customer renewal rate and Windows preparers now represent 33% of their base. This is an important advantage given that most competitors are only beginning to offer Windows version. PERSONAL FINANCE UNIT PERFORMANCE. Quicken unit growth continued to grow apace with the expansion of Original Equipment Manufacturer (OEM) sales. (When Quicken is bundled with a computer as it is sold, it is sold by an OEM.) OEM sales are strategic important and a channel to acquire new customers for their electronic financial services and tax products. However, they cannabilize retail sales in the short term and are causing modest revenue gains. During the quarter, Quicken revenues were up modestly, with Windows growing well and Macintosh and DOS versions not quite as well. They expect only modest Quicken revenue growth for the full year. Market share remains strong and has changed very little from a year ago. The company introduced Quicken Financial Planner 2.0, an update to the product that led this category last year. ACCOUNTING UNIT PERFORMANCE. Revenues continued to grow at a rapid pace, more than doubling in the third quarter over last year. On a year to date basis, revenues are up to 70%. The comparison in next quarter will be unfavorable, however, due to the launch of QuickBooks 3.0 last year in the fourth quarter. Small business owners account for much of the growth in envelopes and invoice products. Parson's grew as well, with the increase in revenues attributable from the tax and professional/legal products. AUTOMATED FINANCIAL SERVICES PERFORMANCE. Revenues, although small, grew at 250% in the third quarter. Growth accelerated in the quarter and year to date they are up 180%. This growth is attributable to the wave of customers that signed up with the initial 22 banking partners. They are estimating 300,000 to 400,000 customers by the fiscal year end in July. Financial institution partners include seven of the top ten banks and fourteen of the top twenty. The company incurred significant expenses to build customer service and processes here, but this has improved service significantly. They are also improving the network itself, streamling bill pay services and increasing electronic transactions. INTERNATIONAL PERFORMANCE. The German subsidiary, which had problems last quarter, has made significant progress in the quarter. The company also launched QuickBooks in Germany and a small business accounting product in the Japanese market this month. PROFIT & LOSS SHEET ANALYSIS. For the third quarter, operating income was 6.4% of revenues compared to 8.9% of revenues last year. Gross profit margins decreased 1.9% from last year's 74.3%. This is attributible to the OEM mix shift in Quicken, higher cost of sales and electronic services, and international costs. Supplies revenues also increased, which have lower gross but a higher pre-tax profit. Customer service costs were up two points to 20.9% in the quarter. The company made significant investments ahead of revenues to support electronic services. QuickBooks customers also use customer more than other customers. They also increased levels of staffing for the tax products. Interest income was $2 million, primarily due to higher average cash balances. The company has 47.4 million shares currently outstanding. BALANCE SHEET. Cash balances increased $20 million in January reflected strong retail collections. Accounts receivable decreased due to the normal seasonal reduction after the tax season. Property, plant and equipment is up $48 million due to higher capital outlays to expand the call center and build infrastructure for the online businesses. Accrued liabilities decreased as well. Deferred revenue is up, double from last year, due to an increase in Milky Way service revenue and higher revenue from the Tax Table which they defer and amortize over the year. PURCHASE OF INTERACTIVE INSURANCE SERVICES CORP (IIS). This is an online service that gives customers personalized insurance information from major insurance carriers. The majority of PC-owning households and businesses buy a lot of insurance. The goal here is very similar to the Galt Technologies web site, a mutual fund service. They want to become the most popular source of information for these services on the Web. Galt currently has 60 mutual fund companies on the NetWorth web site. They are buying IIS for 172,000 shares, or about 8.6 million. The fourth quarter will include a one-time charge of $7 to $8 million for the write-off of in-process research and development. IIS is still in the process of building their service and has not launched yet. The Web site will include information about the policies as well as an agent locater for the top ten insurance providers. What this will do for the insurance firms and agents is that it will cut down on their expense for finding qualified leads. This service will generate significant qualified needs because it is targeted on customers who want to buy insurance right now. Intuit will get paid as a marketing service ... and they are willing to pay to get qualified leads. INTUIT FINANCIAL SERVICES ANNOUNCES TWO KEY AGREEMENTS. Intuit Services Corp. and two of the financial services premier processing company will now work together to enable 1,900 institutions to offer online banking, bill payment and other services through existing relationships with these companies. The first deal with with EPS, the largest electronic transaction concern in the U.S., which owns the MAC Network and are largely bank-owned. M&I Data Services, which processes for about 600 banks, does demand deposit account processing as well as being a leading provider of electronic fund transfer processing. Both companies either already do online banking with companies or have facilities that would facilitate this. These agreements would kick in later this year and these are just the first two processers that Intuit is working with. THE COMPETITIVE ENVIRONMENT. Electronic banking and online services are in the early stages of development and significant revenues are not expected this year. Significant investment in engineering, marketing and technical support continues. * MICROSOFT CORP. Microsoft continues to do new and different stuff. In spite of this, Quicken continues to maintain its marketshare. Microsoft Money 5.0 will most likely include links to Internet banks using Visa's ADMS standard. Microsoft is making it clear they are not a middleware company or a processing company. They are basically selling Web site tools and money and saying banks must link up with other companies to do the processing. Third parties are using at least four different methods that they are supporting. Intuit has announced connections to brokerage firms and they expect Microsoft to follow. * VISA. They are another player and began in this arena through an acquisition. They have had many announcements including support of PDAs, screen phones, but currently do not have a lot of customers live. They do not see a lot of momentum in the business but do expect more announcements. * MANAGING YOUR MONEY. The group of banks that owns this product is releasing a new version for Windows and that there will not be another retail release of the Mac product and stop upgrading. They are considering abandoning the retail channel entirely and will distribute through their member banks. Nationsbank charges $16 for the software, free during an intro period, banking data is free and electronic bill payment is $5.95 a month. The software only connects to Nationsbank and Intuit is glad to see that move. They believe that approach might have initial popularity, but over the long term consumers will want a system that hooks up to multiple financial providers. The front-end investment for a bank for this is larger than with Quicken. * I-NET. IBM and some other banks are going to form a separate company to create a family of services to enable online banking. The banks are basically the major banks that Intuit does not already have. It appears that Nationsbank and Bank of America might be throwing Managing Your Money into this mix. * CHECKFREE. Intuit remains confident that in the first nine months they will surpass Checkfree's efforts over the last five years. Checkfree continues to grow and has added a lot of customers due to the Cervantis acquisition. * AUTOMATED DATA PROCESSING & PEACHTREE. ADP is pursuing the small business segment of the electronic transaction market. This company competes with Intuit in the accounting arena. They are owned by ADP and their Windows version has not done too well. * BANK WEB SITES. Many have invested quite a bit in Web sites that they need to get traffic to and value out. Intuit believes that this will be useful to them long term because they believe they can drive traffic to banks online service and develop tools that can shared with out institutions. Intuit's approach is to develop a complete solution and not a peicemeal one. * KIPLINGER'S. The founding engineering team has exited, something that Intuit is quite happy about it. FOREWARD LOOKING STATEMENTS. Intuit continues to believe that they can grow revenues at a 30% rate and have an operating margin of between 10% to 13%, weighted toward the lower number throughout their period of investment in online services. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Transmitted: 5/30/96 |
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