The third quarter of Intuit's (NASDAQ:INTU) fiscal year is usually marked by high anticipation on the part of shareholders, as it covers the three crucial tax-season months of February, March, and April. This year's third-quarter run through the height of tax season easily outpaced last season's results, as revealed by Intuit's report, filed on May 22:

Intuit: The raw numbers

Metric Q3 2018 Q3 2017 Year-Over-Year Change
Revenue $2.93 billion $2.54 billion 15.3%
Net income  $1.2 billion $964 million 24.5%
Diluted earnings per share $4.59 $3.70 24.1%

DATA SOURCE: INTUIT.  

What happened with Intuit this quarter?

  • Intuit's consumer segment, which derives the majority of its top line from TurboTax products and services, improved revenue versus the comparable prior-year period by 15%, to $2 billion.

  • The company cited a 4% gain in TurboTax units sold, and a shift to higher-end services, as key drivers behind the success of the consumer business. 

  • Intuit announced that 5 million customers have registered for its new "Turbo" offering. Turbo combines user data gathered from Intuit's personal finance program, Mint, with IRS-verified income data via TurboTax, to help users gain a deeper understanding of their financial health. Intuit is also working with a small set of initial partners to offer competitive loan products to users of Turbo. Shareholders should expect to hear more about Turbo monetization opportunities in future quarters.

  • The organization's small-business ecosystem continued to win brisk acceptance in the marketplace. The small-business and self-employed segment achieved 16% year-over-year revenue growth, to $759 million. U.S. subscribers to QuickBooks Online (QBO), the segment's flagship product, jumped 40% against the third quarter of 2017, to end the quarter at 2.5 million users. 

  • QuickBooks Self-Employed subscribers nearly doubled from the prior-year quarter, to 683,000. As an example of amplified cross-selling opportunities between its major platforms, Intuit pointed out that 330,000 subscribers of QuickBooks Self-Employed have been referred from the TurboTax Self-Employed tax product.

  • Intuit failed to convert its top-line momentum into operating leverage, as operating margin dipped roughly 150 basis points to 55.2%. This can be traced to an increase of nearly 18% in the biggest line item on Intuit's income statement: selling and marketing expense. In addition, costs of services rose nearly 33% to $272 million, and research and development costs increased 20.3% to $296 million.

  • Given the above, it's important for investors to understand that Intuit has recently shifted away from a mindset of improving operating margin. During the company's post-earnings conference call with analysts on May 22, CEO Brad Smith cautioned shareholders against the expectation that management would continue "to get good operating leverage out of this company in terms of growing [our] operating income dollars." Smith elaborated by saying that Intuit has instead made a strategic decision to invest in new technologies to spur growth. Longer term, however, the organization does expect to grow revenue faster than total expenses.

What management had to say

In addition to the comments above, management provided insight on other aspects of Intuit's strategic direction. Reviewing the recently ended tax season, Smith discussed the company's approach to increasing the value of the TurboTax platform. While TurboTax is a do-it-yourself software offering, in the current fiscal year, Intuit extended the service's scope and introduced TurboTax Live, which connects TurboTax users to tax experts using one-way video.

This initiative helps capture customers who might forgo the DIY route and hire a tax expert, often simply for what Intuit management likes to refer to as a single "nagging question." In essence, TurboTax Live moves Intuit into the assisted preparation market. Smith explains the benefits as follows:

In the case of tax right now, you have very few people left on paper and pencil, about 5 million people in total. So, it means we are now converting people who [have] already adopted a method, and with TurboTax Live we are converting them from higher-priced alternatives. So, when they come into our category, we are getting three times the average revenue per customer, for those customers that come in with TurboTax Live.

Looking forward

With one quarter remaining in the fiscal year, management was able to confidently raise full-year guidance alongside third-quarter earnings. Intuit's revenue outlook for fiscal 2018 is now targeted to fall between $5.915 billion and $5.935 billion, from a prior range of $5.640 billion to $5.740 billion. Diluted earnings per share have moved several notches higher to an expectation of $4.50 to $4.52, against a prior band of $4.20 to $4.30. In sum, Intuit expects to finish out the year well ahead of its own initial forecasts of single-digit revenue and earnings expansion.

Asit Sharma has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Intuit. The Motley Fool has a disclosure policy.