Intuiting a Recession

• Email
• Share
• Print

On yet another disastrous day for the markets overall, shares of financial software maker Intuit (Nasdaq: INTU) showed real resilience yesterday, bucking the downturn and even eking out a small gain. Clearly, Wall Street was impressed with Intuit's Q1 performance.

I am not.

Press reports tell us that Intuit "beat" Wall Street's expectations for the fiscal first quarter 2009, turning in an "adjusted loss" of only $0.09 per share versus last year's loss of a dime. Well, bully for Intuit. But adjust the numbers all you want -- it was still a pretty lousy quarter. Consider:

• Under GAAP accounting standards, Intuit lost not $0.09, but $0.16 per share.
• From a cash accounting perspective, Intuit burned $266.9 million in Q1 versus last year's $226.7 million -- an 18% increase in negative free cash flow for the quarter.

Additionally, management walked back its guidance for the rest of this fiscal year. Whereas previously, we were looking for the firm to post double-digit revenue growth, we're now told that revenue growth for the year will approximate the 8% growth posted in Q1. However, according to Intuit, profits expectations aren't changing much at all -- about $1.42 per share for the year.

But isn't that good news?
Sure, if that's the way things play out. Based on the most recent share count, Intuit seems to be telling us it will net about $460 million. On a posited $3.32 billion in revenue, that would work out to a 13.8% net margin for Intuit. On the one hand, that would be bad news, since it would mark the fifth year in a row of declining margins for Intuit. On the other hand, it would be good news, in that such a net margin would still eclipse rivals H&R Block (NYSE: HRB) and Jackson Hewitt (NYSE: JTX), match ADP (NYSE: ADP), and lag only Paychex (Nasdaq: PAYX). But on the third hand ...

There's a third hand?
Yep. On the third hand, I'm not convinced Intuit will manage to achieve even the 13.8% net it seems prepared to accept this year. You see, Intuit has three main businesses these days -- QuickBooks, Payroll, and Tax. Leave Tax aside, since this seasonal business isn't really relevant in Q1.

Focus instead on the other two businesses, and while you'll notice that Payroll performed admirably, QuickBooks flubbed the quarter, turning in only 6% growth, with 7% predicted for the year. In this Fool's view, QuickBooks acts as a proxy for the small business sector of the U.S. economy -- often described as our "growth engine." Intuit's Q1 results tell me that this engine is running on fumes right now. Call it a hunch, but I suspect as the year progresses, we're going to see weakness here spread into other sectors of Intuit's business -- and the economy at large.

Check out how well Intuit's been doing recently in:

• Intuit This: You're Fired
• Intuit's Perfect Intuition
• Intuit's Secret Weapon