Accounting and tax software leader Intuit Inc (INTU 0.28%) reports quarterly earnings after the markets close on Tuesday, May 24. Will fiscal Q3 2016 turn out to have been a taxing quarter?
If shareholders' desires are fulfilled, the answer will unequivocally be yes, as the third quarter encompasses the bulk of tax season -- traditionally Intuit's biggest revenue generator each year.
A refresher on company guidance
Intuit issued third-quarter guidance in its last earnings release in February, and also updated full-year 2016 forecasts. Below is a brief overview of what the company suggests investors should expect:
| Metric | Q3 2016 | Full Year 2016 |
|---|---|---|
| Revenue | $2.21-$2.26 billion | $4.525-$4.600 billion |
| Operating income range | $1.20-$1.22 billion | $1.115-$1.145 |
| Diluted earnings per share | $2.95-$3.00 | $2.55-$2.60 |
| QBO subscribers | 1.38 million | 1.475-1.500 million |
Source: Intuit Inc. "8-K" SEC Q2 2016 quarterly filing. "QBO" is an abbreviation for the company's flagship small-business software product, "QuickBooks Online."
Let's make a few general observations on the above. First, the Q3 targets imply a quarterly revenue growth rate of 4%-6%, and operating income growth of 13%-14%. Earnings per share, or EPS, will benefit from comparisons to the prior year, in which the company undertook accounting changes and booked a goodwill impairment charge. Should Intuit hit its targets, EPS will rise between 66%-68% versus last year.
Finally, notice that the third quarter and full-year targets for operating income and EPS aren't very different from each other. In other words, most of the company's profits for fiscal 2016 will be earned this quarter. Through the first six months of the year, Intuit booked a loss of $7 million.
Raised expectations for tax season
Intuit certainly appears to be on track to make its projected numbers. On April 26, the organization upped its guidance for fiscal 2016 consumer tax revenue growth -- a subset of total revenue -- from a range of 5%-7% to 8%-9%. However, the company didn't revise any of the overall numbers found in the chart above.
In the same press release, Intuit noted that TurboTax Online units grew 15%. Overall TurboTax unit growth of 12% indicates that customers who have dropped the desktop version of TurboTax are migrating to the cloud-based product. Desktop sales have declined slightly, while the online software shows relative health:
Chart: Intuit.com.
During April, Intuit also announced that it's combining all professional products and services aimed at tax practitioners under a new banner, "Intuit ProConnect."
A new banner, literally. Source: Intuit.com.
This rebranding may make it easier for Intuit to cross-sell different cloud-based services among its tax-professional clients, similar to a strategy the company has successfully implemented within its QuickBooks Online (QBO) suite of products.
As always, zero in on QBO U.S. and non-U.S. subscriptions
As the core of Intuit's "Small Business Ecosystem," QBO is central to the company's future. Executives believe that expanding QBO's total addressable market, or TAM, will enable QBO to continue to scale up for several years. QBO subscriber growth is so critical that the company now consistently issues guidance on it, as per the first chart in this article.
As well as watching for the 1.38 million total subscribers predicted by quarter three, keep your eye on these two important subsets: non-U.S. QBO subscribers, and growth in QuickBooks Self-Employed, or QBSE, the newest iteration of the company's cloud-based accounting software.
Both of these products will help the company widen its TAM. Global QBO subscriber growth has cooled, yet still advanced by 80% during the last-reported quarter. QBSE boasts 50,000 current subscribers, and is growing at a sequential quarterly rate in excess of 40%. Impressively, in a recent investor presentation, management asserted that QBSE has an incremental subscriber opportunity of 4 million subscribers in the United Kingdom alone.
Will Intuit top up its cash balances?
In the last two business quarters, Intuit has been on an acquisition binge -- not of other companies, but of its own shares. Management has clicked buy on $1.8 billion of INTU stock during this six-month period, and there's yet another $900 million left on the current repurchase authorization.
As a result, Intuit's liability balances have expanded rapidly as it borrows to reduce its outstanding shares. As I discussed in my review of last quarter's earnings, total debt -- including current portion -- has increased 2.5 times since November of last year.
The third quarter is one in which Intuit typically generates vigorous cash flow. So it will be interesting to see to what extent the company takes a breather from share repurchases and replenishes bank balances, which ended last quarter at their lowest point in nearly three years, at $334 million.
It's reasonable to assume that the company held on to more cash this quarter, and possibly used some excess dollars to decrease borrowings a bit. After all, following a rare plunge last fall, Intuit stock has recovered, along with investors' confidence. Management went "all in" when the shares became a relative bargain; but it must recognize that they're cheap no longer.
