Still image from a promotional video for QuickBooks Payroll. Image source: Intuit.
Intuit's (INTU 2.45%) fiscal fourth-quarter and full-year 2016 earnings report, issued Tuesday, revealed results as well as guidance for the coming year which indicate steady, if not scintillating growth. Yet management was quick to reassure shareholders that longer-term opportunities abound. Let's review key highlights from the filing, as well as management's thoughts on its broader strategic intentions in fiscal 2017 and beyond.
Fourth-quarter and full-year targets met
Intuit booked revenue of $754 million in the fourth quarter along with an operating loss of $56 million. Both numbers slightly exceeded the company's guidance issued last quarter. Full-year revenue of $4.7 billion marked a 12% increase over 2015. Operating income in 2016 reached $1.24 billion, versus $738 million in the prior year. Diluted earnings per share of $3.69 outpaced the high end of management's projected range by $0.04.
Reviewing subscription metrics, QuickBooks Online (QBO), Intuit's flagship small business accounting software, reached the 1.5 million subscriber milestone in Q4, finishing 2016 at 1.513 million paying customers, an increase of 41% over the prior year. QuickBooks Self-Employed, the newest product in the QBO ecosystem, added 10,000 subscribers, for a year-end total of 85,000 paying customers.
In the company's post-earnings call with analysts, management noted that QBO's non-U.S. subscriber growth reached 45% in 2016. While this may seem like rapid expansion -- and it is -- it still counts as something of a disappointment for Intuit. The global market represents QBO's next frontier of growth, and management acknowledged that it could and should grow non-U.S. subscriptions at a substantially higher rate than the comparatively saturated domestic market -- a point we'll return to below.
2017 guidance and operating margin
As is its custom at year's end, Intuit offered its initial guidance for the next fiscal year. Management expects revenue of $5.0 to $5.1 billion, which translates to 7% to 9% top-line growth, a deceleration from 2016. Operating income margin is projected at $1.33 billion to $1.38 billion, equaling 7% to 11% growth.
You're not far off the mark if it occurs to you that the earnings outlook seems a bit tepid. Hitting the midrange of both revenue and operating income next year means that Intuit will achieve an operating income margin of 26.7%. That's just a slight gain from fiscal 2016's operating margin of 26.4%.
As I discussed in my earnings preview, 2015 was somewhat of a transition year for Intuit, in which operating income fell to 17.6%. This year's rebound to over 26% marks significant progress back toward an operating margin of at least 30%, which the company had achieved in the four years leading up to 2015.
During the company's earnings call, CEO Brad Smith was asked about the rather static margin expansion penciled in for 2017. Smith pointed out that the shift to ratable revenue recognition (i.e., recognizing certain software revenue when services are provided, rather than upfront when monies are received) in 2015 makes quick margin leaps more challenging, since revenue is now more uniform from quarter to quarter. Yet he emphasized that current investments in widening the customer base within segments such as consumer tax would pay off with future margin gains. Smith also affirmed that the company's long-term goal is to raise margins to the mid-30s level.
Share repurchases cease, at least for now
After buying back $2.3 billion of its own shares in fiscal 2016, the company hit the pause button in the fourth quarter, and opted not to repurchase any shares. This is likely for two reasons. First, Intuit undertook a huge repurchase program in fiscal 2016, taking advantage of an uncharacteristically weakened stock price in the weeks following Q4 2015 results last August. Considering that the 2016 share repurchase consumed all of Intuit's $1.4 billion in operating cash flow, and added leverage to the balance sheet, it makes sense for the company to slow its purchases to replenish liquid assets such as cash and investments.
Perhaps more pertinently, management was able to fill its orders at an average price of $91 per share. That's a discount of more than 17% from the stock's current trading level. With the stock now relatively high, the executive team may be inclined toward patience over the next few quarters when adding shares back to the treasury account.
But it will keep its powder dry nonetheless. Intuit announced a new repurchase authorization Tuesday of $2.0 billion, bringing the total current board-approved repurchase limit to $2.4 billion.
Addressing the addressable market
Perhaps to allay concerns over margin expansion and revenue growth, Smith took the opportunity during Intuit's earnings call to reaffirm the organization's years-long strategy to broaden its total addressable market (TAM) for cloud-based products, especially within the QBO ecosystem. Scaling up TAM versus simply gaining more share within a static market can add years to a company's growth curve.
Smith delineated three primary ways the company is expanding its TAM. First, Intuit seeks to take advantage of the shift to cloud and mobile services, and aims to be a first option as more customers give do-it-yourself accounting software a try. Second, Intuit is linking up its products with the products of wide-reaching payments corporations like PayPal and American Express for exposure to a wider audience. The third method is to push further into promising global regions such as Asia Pacific and Europe.
This last line of expansion is perhaps the most important, since the company's software labels have much smaller penetration internationally versus the United States, and thus more opportunity. Smith stated that attacking global TAM "has opened up tens of millions of more prospects to our products that we couldn't have served a couple of years ago."
That it's gunning for foreign QBO accounts won't surprise many veteran Intuit investors. Still, the company's revenue growth direction was worth reiterating to those who felt uneasy about the light 2017 projections. Intensifying this plan, with its high probability of success, seems a logical step in the never-ending quest to increase shareholder returns.
