3 Big Takeaways From Intuit's Fourth Quarter

Intuit is a company on the right side of several macro trends, but is it worth the premium valuation the market is giving its shares?

Matthew Cochrane
Matthew Cochrane
Aug 30, 2018 at 8:45AM
Technology and Telecom

Intuit Inc. (NASDAQ:INTU), the company behind the small-business accounting platform QuickBooks and the do-it-yourself tax software TurboTax, reported its fourth-quarter earnings earlier this month. And once again, the results powered the stock to new all-time highs.

In the quarter, revenue grew to $988 million, a 17% increase year over year, and non-GAAP earnings per share rose to $0.32, a 60% increase year over year.  The results continued Intuit's trend of beating expectations and raising guidance. It's no coincidence the company's shares have advanced 60% in the past 12 months, more than tripling the market's returns over the same period. 

But there is much more to Intuit's earnings release than the headline numbers. The company announced a big change at the top. And there are continuing transitions in some of the business' flagship platforms that, if executed well, might drive growth for years to come. Let's look at the three biggest takeaways from Intuit's latest quarter.

User is using Intuit's QuickBooks' program on a laptop computer.

The One Intuit Ecosystem grew 40% year over year this fiscal year. The cloud-based platform makes it easier for the company to bundle and cross-sell its services to customers.

1. Change at the top

The biggest announcement this quarter was that, at the end of the 2018 calendar year, longtime CEO Brad Smith will step down. Taking his place will be the current executive vice president of its Small Business and Self-Employed Group, Sasan Goodarzi.  

The company highlighted Smith's impressive 11-year tenure as CEO, which included doubling Intuit's customer base to 50 million users and tripling its EPS. Under Smith's watch, the company's share price appreciated almost 600%, an incredible return in just over a decade. 

While anxiety is inevitable for shareholders when they see a proven, successful leader leave, Intuit appears to be in more than capable hands. Smith is stepping down as CEO but will continue as the executive chairman of the board of directors.

And Goodarzi has probably served in every aspect of the company's business during his 13-year tenure, including chief information officer and executive vice president of the Consumer Tax Group. And he was a key architect of the One Intuit Ecosystem strategy. If there is anyone qualified to take over for Smith, Goodarzi appears to be that person.

2. A growing ecosystem

One of the hallmarks of Intuit's growth in recent years has been its transition to a cloud-based platform, which brings in recurring revenue and makes it easier to bundle and cross-sell its services to customers. In the company's fourth-quarter conference call, management made it clear that the transition was still powering the company's strong growth. For the full year, online ecosystem revenue grew 40% year over year, blowing away the company's own internal goal of 30% growth.

In the conference call's opening comments, Smith said:

Putting a bow around fiscal year 2018, we're one year into our refreshed One Intuit Ecosystem strategy, with our business gaining momentum and significant opportunity ahead. We're activating our ecosystem by connecting our customers, our partners, and our products across product lines through value-creating solutions. This includes offerings such as our ProAdvisor matchmaking platform, TurboTax Live, and our TurboTax Self-Employed bundle. We see many more opportunities to connect our ecosystem with newer offerings, such as QuickBooks Capital and Turbo, as well as others on the horizon.

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3. A solution goes live

One innovative feature Intuit has begun offering with TurboTax is TurboTax Live, which allows customers to fill out their tax information on one side of the screen while consulting with a certified public accountant or estate attorney on the other side. The tax expert can review returns and suggest changes before the customer files.

During the conference call, Smith said TurboTax Live was launched in response to two hypotheses: that the company could keep customers who go through a big life change, like having a baby or selling a large stock position, and that it could attract more customers away from assisted tax-preparation methods. Smith said that TurboTax loses about 3 million customers per year when they experience a life-changing event, and that there are more people who use tax-assistance methods than those who do it themselves. Smith concluded, "Both hypotheses proved to be true."

While he did not give exact numbers, he did say retention rates were up and TurboTax Live helped capture 10% more customers who had been using alternative assisted tax prep method versus the traditional TurboTax product.

However, what the company did not expect was that TurboTax Live would help pull what Smith called "a disproportionate share of first-time filers into the franchise." In other words, TurboTax Live helped the company keep its own customers, win market share in the tax preparation space, and capture new tax filers. That sounds like a winning platform!

Final thoughts

The market loves software-as-a-service (SaaS) business models that feature sticky ecosystems and lots of recurring revenue. This is exactly the business model Intuit is quickly transitioning to. With its online ecosystem revenue growing 40% year over year, Intuit looks positioned to benefit from the decline of legacy financial services like accounting and bookkeeping.

Yet, with all that's going right with the company, Intuit's shares just always seem too expensive. The company projected full-year guidance for non-GAAP EPS of $6.50 to $6.60. The midpoint of this range gives the company a forward P/E ratio of 33.6. On the surface, that seems especially steep for a company projecting to grow revenue next year by 8% to 10% and EPS by 11% to 12%.

While it is entirely possible that the company exceeds this guidance, I just can't ignore that nagging voice inside my head telling me that Intuit is a wonderful company priced to perfection. For now, I am passing on owning shares.