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TurboTax and QBO Help Intuit Book a Brisk Third Quarter

By Asit Sharma - May 26, 2016 at 4:25PM

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The tax and accounting software innovator reports healthy revenue and earnings, and increases its full-year forecast.

Image source: Intuit.

Intuit, Inc. (INTU 1.17%) released third-quarter 2016 earnings Tuesday, and results vibrantly reflected the company's investments of resources, time, and management attention in two flagship products: TurboTax, and QuickBooks Online, or QBO. Intuit's revenue reached $2.3 billion, above the top-end of management's projected range of $2.21 billion-$2.26 billion. Operating income of $1.285 billion also exceeded an internal forecast of between $1.20 billion-$1.22 billion.

The software giant closed the quarter with diluted earnings per share (EPS) of $3.94. Of this total, $0.68 was attributed to discontinued operations.

In the third quarter, Intuit completed the sale of its DemandForce, QuickBase, and Quicken product lines, and the EPS boost of $0.68 reflects a $176 million gain from the sale of these businesses. Still, EPS from continuing operations of $3.26 handily exceeds management's guidance of between $2.95-$3.00.

TurboTax and QuickBooks Online are gaining market share

As the company had already disclosed in an interim update, TurboTax online units grew 15% this tax season, and TurboTax units, in general (i.e. including desktop units) grew 12%. These numbers are worth bragging about, but the company's market-share gains within the consumer tax market seem to be the more important story. TurboTax increased total share of online tax preparation -- i.e. the "do it yourself" tax category -- by three percentage points, to 65%, according to CEO Brad Smith.

TurboTax continues to succeed at tax time due to the company's relentless drive to evolve the software. If you follow technology companies closely, you've probably noticed a trend in which those that have quickly transitioned primary applications to mobile devices are starting to see returns on their investments.

This certainly appears to be the situation with Intuit's primary consumer tax offering. TurboTax mobile downloads increased 85% versus the 2015 tax season, and returns finished through mobile devices doubled. CEO Smith also mentioned on the company's earnings call that this season, customers uploaded 5 million photos through mobile devices, representing one-quarter of all tax documents uploaded to TurboTax.

The small-business ecosystem also came in beyond projected ranges. QuickBooks Online added 140,000 subscribers, bringing its total to 1,397,000 total subscribers. Global QuickBooks online subscribers increased by 60,000, to 85,000 -- a 45% increase. 

QuickBooks Self-Employed, which is aimed at workers in the "gig economy," and serves as a great example of innovation within the QBO platform, continued to rapidly widen its base. The service added 25,000 subscribers to finish the quarter at 75,000 total. This sequential growth of 50% is an acceleration over the previous quarter's growth rate of 42%.

Other relevant highlights

As I discussed in my earnings preview, most of Intuit's profit for the year was projected to be earned during the third quarter. Through the first nine months of the year, Intuit has achieved an operating income margin of 33%, which is eight percentage points ahead of last year's comparable operating margin for the same period, and closer to historical levels.

Below is a breakdown provided by the company of each segment's operating margin (before application of some common corporate overhead items). Note that the small business segment's quarterly margin is beginning to show the consistency projected by management when it changed its accounting method for desktop and cloud subscriptions last year. Also, the company's tax services aimed at accounting firms have been renamed the ProConnect Group:

Source: Intuit Q3 2016 Investor Fact Sheet.

Intuit took advantage of these profits and the resulting positive cash flow, which typically accompanies tax season, to replenish its cash balances in Q3. As of the previously reported quarter, which ended January 31st, the company had no current investments on hand, and only $334 million in cash and cash equivalents. This was due to Intuit's massive share repurchases during the first-two quarters of fiscal 2016.

As of April 30th, the end of Q3, Intuit held $324 million in current investments and $1.29 billion in cash and cash equivalents. Adding back the roughly $1.3 billion in investments helps restore some weight to the balance sheet.

But this doesn't mean Intuit stopped buying back its own shares, as it repurchased $465 million worth of "INTU" stock during the quarter. This brings the nine-month total of the company's repurchases to a mammoth $2.3 billion. The company also raised its dividend to $0.18 per share, which represents an increase of 20%. 

Management looks ahead

To punctuate its positive quarter, Intuit raised financial guidance for Q4 and the entire year. For the fourth quarter, management now expects revenue of $720 million to $740 million, along with a loss of $80 million to $100 million, with roughly breakeven earnings per share.

For the full year, the company upped its revenue goal to a band of between $4.660 billion-$4.680 billion. That's a pretty tight range, but it's nonetheless a higher outlook versus the full-year guidance provided last quarter, which stood at $4.525 billion-$4.600 billion. Essentially, this raises the bottom part of the range by 3% and the top of the range by less than 2%.

Hitting the full-year goals won't translate into breakneck growth, but doing so will certainly ensure that 2016 closes on much-stronger and more-profitable footing than 2015.

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