carep...all i could find is this:INTUIT INC FILES FORM 10-Q
EDGAR Online SEC Filings - May 19, 2000 12:40
The EDGAR Online Glimpse is an extraction of the Management's
Discussion and Analysis section contained in the full 10-Q, available
from EDGAR Online
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All SEC Filings for INTUIT INC from EDGAR Online
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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CAUTIONS ABOUT FORWARD LOOKING STATEMENTS AND INVESTMENT CONSIDERATIONS
This Form 10-Q contains forward-looking statements about events and
circumstances that have not yet occurred. For example, statements with words
like "expect," "anticipate," or "believe" and statements in the future tense,
are forward-looking statements. Investors should be aware that actual results
may differ materially from our expectations because of risks and uncertainties
about the future. We will not necessarily update information in this Form 10-Q
if any forward-looking statement later turns out to be inaccurate. Risks and
uncertainties that may affect our future results and performance include, but
are not limited to the following:
- Our revenue and earnings are highly seasonal and our quarterly and annual
financial results fluctuate significantly.
- We face intense competition from many companies in all of our business
areas.
- Competition in the personal tax preparation software business is
particularly intense, with Microsoft having entered the market during the
1999 tax season. We are seeing increasing price competition during the
remainder of the tax season (including free products from Microsoft), and
this could have a material negative impact on revenue, profitability and
market position for our personal tax business.
- In our online mortgage and insurance businesses, we face competition from
many newly public companies that have a narrower business focus, increasing
financial resources and less demanding earnings expectations.
- We must continue to establish and maintain important distribution
relationships for our Internet-based products and services and successfully
market and promote these products and services.
- We must maintain high reliability for our server-based Web services. In
particular, our web-based tax preparation and electronic filing services
must handle extremely heavy customer demand during the peak tax season.
- If we fail to provide responsive customer service and technical support, we
could lose customers.
- Our Internet businesses face risks relating to customer privacy and
security and increasing regulation.
- Our Internet businesses require significant research and development and
marketing expenditures.
- Page views and reach statistics for our Quicken.com site can vary
significantly from month to month due to seasonal trends, site performance,
the timing of launches, competitors' activities and other factors. Adverse
changes in page view and reach statistics could adversely affect our
ability to earn advertising revenue from our Quicken.com site.
- In order to succeed in the payroll services business, we must continue to
improve the integration of the operations of our payroll processing
subsidiary, streamline customer activations for our online payroll
processing service and focus our traditional payroll service on existing
distribution channels.
- The technology and services of certain alliances for our QuickBooks
Internet Gateway initiative still need to be completed and integrated with
QuickBooks, and are subject to risks and uncertainties involved in the
product development process, including technological difficulties, possible
delays, and availability of financial resources. Significant delays in
implementing key services, or failure to implement, could delay or
eliminate our ability to recognize contractually committed revenues.
- The anticipated benefits of certain proposed small business services to
Intuit (including the Site Builder website creation tool, Site Solutions
services and QuickBooks Internet Gateway services) will depend on a number
of variables, including the rate at which customers upgrade to QuickBooks
2000 and future versions of the product, customer acceptance of new and
proposed services, and, the level of satisfaction of third party
participants.
- The success of the small business alliances will depend on establishing and
maintaining a number of important business relationships, and there can be
no assurance that key relationships will continue.
- Our Tax and Quicken Internet Gateway initiatives, and related new services
to be offered in these areas, are in very early stages. Success of these
initiatives will depend on establishing and maintaining business
relationships with key participants and completing necessary technology
development and integration, as well as achieving broad customer
acceptance of the services to be offered.
- We offer electronic bill payment and bill presentment services, and the My
Finances web-based personal finance management service, through licensing
arrangements with a joint venture in which we are a participant. The
success of these services for Intuit will depend on a number of factors,
including timely and cost-effective completion of ongoing development
efforts, customer and biller adoption and participation rates, and the
status of the relationship with the joint venture. Intuit has an option to
purchase the interests in the joint venture that it does not currently own
between May 2000 and May 2002, at a formula-driven price that could exceed
$100 million. If we do not exercise the purchase option, our rights to
use the technology developed by the joint venture will be subject to
future negotiation.
- We face increasing competition for access to retail and OEM distribution
channels.
- The integration of acquired companies poses ongoing operational challenges
and risks. In addition, our recent acquisitions have resulted in
significant acquisition-related expenses.
- Our mortgage business is subject to interest rate fluctuations, and the
impact of interest rates on Intuit's operating results has become more
significant since the acquisition of Rock Financial was completed.
- Our recent acquisition
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of Rock Financial could have a negative impact on Intuit's relationships
with other lenders that participate in the online mortgage service.
- We hold investments that have been very volatile.
Additional information about factors that could affect future results and events
is included in our fiscal 1999 Form 10-K/A and other reports filed with the
Securities and Exchange Commission.
OVERVIEW
Intuit's mission is to revolutionize the way individuals and small businesses
manage their finances. As we execute our mission, we have embarked on a strategy
to greatly expand the world of electronic finance. "Electronic finance"
encompasses three types of products and services: (1) desktop software products,
such as Quicken(R), QuickBooks(R) and Quicken TurboTax(R), that operate on
customers' personal computers to automate financial tasks; (2) online products
and services, such as Quicken.com(SM), QuickenLoans(SM), QuickenInsurance(SM)
and Quicken TurboTax for the Web(SM), that are delivered via the Internet; and
(3) products and services, such as QuickBooks Online Payroll(SM) service, that
connect Internet-based services with desktop software to enable customers to
integrate their financial activities. Our revenues come primarily from the
United States, Japan, Canada and the United Kingdom, through retail distribution
channels, direct customer sales and via the Internet.
While desktop software and related products and services now provide most of our
revenue, our Internet-based revenue is growing rapidly. For the three months
ended January 31, 2000, Internet-based revenues grew by approximately 162%
compared to the same period last year and accounted for approximately 21% of
total revenue in the quarter ended January 31, 2000, compared to approximately
10% in the prior year quarter. We use the term Internet-based revenue to include
revenue from both Internet-enabled products and services as well as revenue from
electronic distribution. Internet products and services include activities where
the customer realizes the value of the goods or services directly on the
Internet or an Intuit server. Internet product revenues include, for example,
advertising revenues generated on our Quicken.com website, online tax
preparation and electronic tax filing revenues, online payroll service revenue
and transaction and processing fees from our online insurance and online
mortgage services. Electronic distribution includes revenues generated by
electronic ordering and/or delivery of traditional desktop software products and
financial supplies. We also use the Internet to host our technical support
website where we can quickly and cost-effectively provide patches for product
bugs and provide customers with answers to frequently asked questions.
While we believe that the Internet provides an opportunity to increase revenue
in fiscal 2000, we also anticipate continued increases in spending in an effort
to capitalize on new business opportunities. In particular, we continue to
expect increased research and development expenses due to investments in
Internet-based initiatives. We also anticipate increased selling and marketing
expenses related to these initiatives and because of more intense competition in
the personal tax market during fiscal 2000. While we have made significant
progress in our Internet-based businesses, investors should be aware many of
these businesses are in their initial stages, and are not yet generating
significant revenue or profit. Since Internet-based revenues and expenses cut
across all of our business divisions, we do not report results of our
Internet-based businesses as a separate business segment in our financial
statements. Instead, each of our business divisions reports Internet-based
revenues and expenses that are specific to its operations and are included in
its results.
Our business is highly seasonal. Sales of tax products are heavily concentrated
from November through March. Sales of consumer finance and small business
products are typically strongest during the year-end holiday buying season, and
therefore our major product launches usually occur in the fall to take advantage
of this customer buying pattern. These seasonal patterns mean that revenue is
usually strongest during the quarters ending January 31 and April 30. We
experience lower revenues for the quarters ending July 31 and October 31, while
our operating expenses to develop and manage products and services continue to
be incurred at relatively consistent levels during these periods. These seasonal
trends can result in significant operating losses, particularly in the July 31
and October 31 quarters when our revenues are lower. Operating results can also
fluctuate for other reasons,
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such as changes in product release dates, non-recurring events such as
acquisitions and dispositions, and product price cuts in quarters that have
relatively high fixed expenses. Acquisitions and dispositions in particular can
have a significant impact on the comparability of both our quarterly and yearly
results, and acquisition-related expenses have had a negative impact on
earnings.
RESULTS OF OPERATIONS
Set forth below are certain consolidated statements of operations data for the
three and six-month periods ended January 31, 1999 and 2000. Investors should
note that results for the three and six-month periods ended January 31, 2000
include activity for our CRI subsidiary, which was acquired in May 1999. The
corresponding year ago periods did not include results for CRI (see Note 4).
Results for all periods include results for Rock Financial Corporation, which we
acquired in December 1999. The acquisition of Rock has been accounted for as a
pooling of interests, so all prior periods have been restated to reflect
combined results of Rock and Intuit. The inclusion of Rock's results in the
comparison periods for both fiscal 1999 and fiscal 2000 had a significant impact
on our financial results. Rock's revenue declined approximately 50% between the
comparison periods, due to Rock's transition from a traditional mortgage
business to an online mortgage business and the closing of the majority of their
traditional mortgage branch offices, as well as rising interest rates. Although
Rock's operating expenses decreased in absolute dollars between the comparison
periods, they increased significantly as a percentage of revenue and resulted in
operating losses for Rock during the fiscal 2000 comparison periods (compared to
operating profits in the fiscal 1999 periods), which partially offset growth in
operating income for our other businesses as a whole.
Since the business of selling software and related services is considerably
different from our supplies business, we break them out separately for financial
reporting purposes.
NET REVENUE
Three Months Ended January 31, Six Months Ended January 31,
1999 Change 2000 1999 Change 2000
---------------------------- ----------------------------
(Dollars in millions; unaudited)
Software and other ................ $ 344.1 14% $ 392.7 $ 457.4 18% $ 541.7
% of revenue ...................... 92% 92% 90% 90%
Supplies .......................... $ 29.6 11% $ 32.8 $ 53.2 14% $ 60.7
% of revenue ...................... 8% 8% 10% 10%
Total ............................. $ 373.7 14% $ 425.5 $ 510.6 18% $ 602.4
The following revenue discussion is categorized by our business divisions, which
is how we examine results internally. Our domestic supplies business is
considered a part of our small business division while the international
supplies business is considered part of our international division (see Note 7).
Small Business Division. Small business division revenues come primarily from
the following sources:
- QuickBooks product line
- Supplies products (including checks, envelopes and invoices)
- Payroll services
- Support fees for the QuickBooks Support Network
Overall, revenue for the division was up 63% and 64% for the three and six-month
periods ended January 31, 2000, respectively, compared to the same periods a
year ago. The increases were primarily a result of revenue growth for our
QuickBooks products. In addition, CRI (acquired in May 1999) and our QuickBooks
Online Payroll Service (launched in October 1998) contributed to revenues during
the three-month and six-month periods
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ended January 31, 2000, but did not account for material revenue in the three
and six-month periods ended January 31, 1999.
Though they are a smaller component of small business division revenues, tax
tables service revenue and revenue from our QuickBooks Support Network also grew
in the three and six-month periods ended January 31, 2000 compared to the same
periods a year ago.
We launched our most recent version of QuickBooks (QuickBooks 2000) in December
1999. The increased revenue from our QuickBooks product line was attributable to
increased unit sales, as well as an increase in the average selling prices of
the QuickBooks product driven by consumer preferences toward higher priced,
greater functionality products. We believe a significant number of customers may
have upgraded earlier than they otherwise may have, due to Year 2000 concerns.
Accordingly, we expect that some of the fiscal 2000 second quarter strength in
QuickBooks revenue is a shift from the second half of the year, and we expect
the revenue growth rate to decline significantly as the year progresses.
QuickBooks 2000 features the QuickBooks Internet Gateway platform of connected
and integrated electronic services, that is designed to offer small businesses
direct access to services from third parties, such as electronic postage and
merchant account services, that can help them more easily and efficiently manage
their business. It also features QuickBooks Site Builder, a new web site
creation and domain name registration tool that enables small businesses to
quickly establish a presence on the Web. Although these new features are
strategically important for Intuit, it is too early to tell how successful these
services will be, or the extent to which they will generate increasing demand
for QuickBooks 2000.
Domestic supplies revenues, which are part of the small business division, grew
by 11% and 14% for the three and six-month periods ended January 31, 2000 as a
result of our increasing base of small business customers who use QuickBooks and
Quicken. In addition, in August 1999, we began charging for shipping and
handling for domestic supplies shipments which also contributed to our domestic
supplies revenue.
We offer different types of payroll services. Our QuickBooks Online Payroll
service, which is integrated with our QuickBooks products, handles all aspects
of payroll processing with our CRI subsidiary providing the processing services.
CRI also continues to provide traditional payroll processing services for its
customer base. We also offer QuickPayroll, a subscription-based payroll service
for customers who do not use QuickBooks, as well as a payroll tax table
subscription service for small business customers that need current tax tables
to prepare their own payroll. While the payroll processing business provides us
with a significant opportunity to generate revenue, there are business risks
associated with the payroll processing business and the continued integration of
CRI into our existing business model. For example, if we are unable to provide
accurate and timely payroll information, cash deposits or tax return filings,
that failure could be costly to correct and may have a significant negative
impact on our ability to attract and retain customers, who have a low tolerance
for payroll processing errors. Our ability to successfully operate CRI will
depend in part on retaining their existing customers and maintaining
relationships with certain banks and other third parties who we will rely on to
retain existing customers and attract new customers outside of our QuickBooks
customer base. If we are unable to do so, it could result in a negative impact
on our consolidated results. While the customer base for the QuickBooks Online
Payroll service continues to expand, the service is not yet generating material
revenues and we must continue to focus on streamlining the customer activation
process.
Tax Division. Tax division revenues come primarily from the following sources:
- Quicken TurboTax and MacInTax personal desktop tax preparation
products
- Professional tax preparation products (ProSeries and Lacerte
product lines)
- Quicken TurboTax for the Web electronic tax preparation services
and electronic filing services
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Overall, tax division revenues for the three and six-months ended January 31,
2000 declined by 8% and 6% respectively, compared to the same periods last year.
The declines in revenue were due primarily to an aggressive marketing and
pricing strategy for Quicken TurboTax in response to a very competitive market
for desktop personal tax software. We lowered average selling prices, and we
also bundled electronic filing and state tax products with certain versions of
Quicken TurboTax, which required us to defer recognition of approximately $30
million of revenue from the second quarter to the remainder of the fiscal year.
While we have experienced significant unit sales growth for the quarter ended
January 31, 2000, we continue to experience extreme pricing pressures from both
H&R Block's aggressively priced TaxCut product and from Microsoft's TaxSaver
product, including free product offerings from Microsoft. The increased
competition has resulted in lower average selling prices in response to these
pricing pressures.
It is currently too early to predict the final level of demand for the Quicken
TurboTax product line through our retail distribution channels. Although the
number of units sold is currently higher in the current fiscal year to date
compared to the same period a year ago, revenue is lower due to lower average
selling prices. We expect our reserves for returned products will be adequate to
cover retailers' returns of unsold products during the next three quarters,
though higher than expected returns could have a negative impact on revenue for
the season. Because of these and other uncertainties, revenues and operating
results for this tax season will be unknown until late in the fiscal year.
We have experienced significantly higher revenues and volume for Quicken
TurboTax for the Web and for electronic filing compared to last year, as an
increasing number of customers gain Internet access and become more accustomed
to processing transactions on-line. We expect that as the tax filing deadline
nears, we may experience a dramatic increase in demand for both Web tax
preparation and electronic filing services. To deal with the expected increases
in demand, we have increased our capacity and have developed a contingency plan
to provide additional capacity if necessary. However, the exact level of demand
is very difficult to predict, and we could experience significant negative
financial and public relations consequences if our capacity to serve our web tax
preparation and electronic filing customers is insufficient during the peak
filing period, or if the service is unavailable for other reasons such as
technical difficulties at our data center. We have not experienced any service
interruptions thus far in the current tax filing season. However, we did have
some interruptions in our electronic filing services in February 1999 and on
April 11-12, 1999. Although we do not believe those service outages prevented
customers from completing and filing their returns in a timely manner, or posed
a risk that customer data would be lost or corrupted, we did experience negative
publicity.
Revenues for our professional tax (ProSeries) products and products from our
Lacerte subsidiary increased by 10% for the three and six-month periods ended
January 31, 2000 compared to the same periods last year. This growth is
attributable to a combination of a continued shift to higher priced products and
growth in our customer base due in part to our acquisitions of Compucraft and
TaxByte during 1999. In addition, we continue to experience a high customer
renewal rate.
Consumer Finance Division. Consumer finance division revenues come primarily
from the following sources:
- Quicken product line
- Advertising and sponsorship fees from the consumer areas of our
Quicken.com website
- Implementation, marketing and transaction fees from financial
institutions (including marketspace participants) providing
services through Quicken and Quicken.com
- On-line consumer mortgage placement and servicing fees through
QuickenLoans
Overall, consumer finance division revenues were up 9% and 5% for the three and
six-month periods ended January 31, 2000 compared to the same periods a year
ago. The increases are due primarily to strong revenue growth for our Quicken
product line and growth in Internet-based revenues, offset in part by a
significant decline in revenues for Rock's mortgage business from the year-ago
periods. Quicken revenue increased compared to the same periods of the prior
year primarily due to strong consumer demand resulting from aggressive retail
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promotions with our tax products and lower than expected product rebate
redemptions related to Quicken 99. We believe some customers may have upgraded
during the second quarter, due to Year 2000 concerns. Accordingly, some of the
fiscal 2000 second quarter strength in Quicken revenue may be a shift from the
third quarter, and we expect the revenue growth rate may decline as the year
progresses.
Our Quicken product line faces many challenges in the desktop personal financial
software market. For example, we continue to face competition from Microsoft's
Money product. In addition, personal financial software functionality is
increasingly becoming available on the Internet at no cost, which has a negative
impact on desktop product sales. There is also an increasing emphasis on
packaging desktop software with original equipment manufacturers' personal
computers, which results in lower revenues per unit shipped.
Consumer division revenue growth also benefited from an increase in certain
Internet-based revenue compared to the same periods last year. This increase was
largely due to higher advertising, sponsorship and transaction-related revenue
through Quicken.com and Quicken. However, revenue growth was not uniform across
all of our Internet product and service offerings in the Consumer division. For
example, advertising revenue from our Quicken.com site has grown relatively
rapidly. However, revenue from QuickenLoans was substantially lower than in the
same periods a year ago. QuickenLoans now encompasses Intuit's online mortgage
business as well as the online and traditional mortgage businesses of Rock
Financial, which we acquired in December 1999. The decline in mortgage revenue
was primarily due to Rock's decision to close many of its traditional mortgage
branch offices in order to focus resources on Internet-based lending, as well as
increasing interest rates. Growth in mortgage transaction fees may continue to
be adversely impacted if interest rates continue to rise, and as we continue to
phase out Rock's traditional mortgage business. In addition, the acquisition of
Rock will continue to result in new business risks and integration challenges
common in all acquisitions. For example, our ability to successfully facilitate
the application, approval, and closing process in loan applications on a timely
basis will have a significant impact on our ability to attract customers to the
service. Our ability to successfully operate Rock will depend in part on
maintaining relationships with certain banks and other third parties who we will
rely on to provide access to capital, and later, service the loans. If we are
unable to do so, it could have a negative impact on our consolidated results.
The rapid growth we've experienced in our Internet products and services has
been generated in part by collaborating with third party online service and
content providers such as At Home Corporation (doing business as "Excite@Home")
and AOL, which have helped to increase traffic to our Quicken.com website. The
Excite@Home agreement calls for us to share revenue generated from our
Quicken.com site and the AOL agreement calls for us to make significant
guaranteed payments to AOL over the term of the agreement. While the Internet
provides a significant opportunity for revenue growth, our financial commitments
to these and other third party providers are significant and we must continue to
increase traffic and revenue in order for our Internet businesses to become
profitable. Our ability to maintain important relationships with Internet
portals, distributors and content providers will also have an impact on traffic
and revenues. If our website traffic and revenue expectations aren't met, there
could be a significant negative impact on our operating results.
International Division. International division revenues come primarily from the
following sources:
- Japanese QuickBooks and other small business products
- Canadian Quicken, QuickBooks and Tax products
- German Quicken, QuickBooks and Tax products
- United Kingdom Quicken and QuickBooks products
In addition to the above, we also operate in smaller European, Asian and Latin
American markets. Overall, international division revenues increased 37% for the
three and six-month periods ended January 31, 2000 compared to the same periods
last year. This increase is a result of stronger sales of Quicken and QuickBooks
in both Canada and the U.K., higher sales of the Yayoi small business product in
Japan, and favorable currency fluctuations in Japan. Partially offsetting these
increases were declines in revenues, but increased profitability in
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Germany due to a shift in our business model from direct participation in the
market to a third party distribution arrangement.
COST OF GOODS SOLD
Three Months Ended January 31, Six Months Ended January 31,
(Dollars in millions; unaudited) 1999 Change 2000 1999 Change 2000
-------------------------- ----------------------------
Product .................... $ 70.2 33% $ 93.1 $ 109.2 37% $ 149.5
% of revenue ............... 19% 22% 21% 25%
Amortization of purchased .. $ 1.9 32% $ 2.5 $ 3.7 32% $ 4.9
software & other
% of revenue ............... 1% 1% 1% 1%
Total ...................... $ 72.1 33% $ 95.6 $ 112.9 37% $ 154.4
% of revenue ............... 19% 22% 22% 26%
There are two components of cost of goods sold. The largest is the direct cost
of manufacturing and shipping products and offering services. The second
component is the amortization of purchased software, which is the cost of
products obtained through acquisitions. Total cost of goods sold increased to
22% and 26% of revenue for the three and six-months ended January 31, 2000
compared to 19% and 22% for the same periods of the prior year. These increases
are primarily attributable to two factors. First, consistent with our growing
Internet-based business, we are experiencing a significant increase in related
hardware and infrastructure costs as we purchase equipment to increase our
Internet capability. These costs are classified as cost of goods sold and, as a
percentage of revenue, are significantly higher than the costs of goods sold for
our traditional desktop software business. Second, our service businesses, such
as payroll processing and QuickBooks Support Network, generally have higher cost
of goods sold compared to the sale of packaged software. As these businesses
grow to a higher proportion of total revenue, we anticipate that our cost of
goods sold will continue to increase. Note that results from CRI, our payroll
processing subsidiary that we acquired in May 1999, are included in fiscal 2000
results but not in the fiscal 1999 comparison periods, which contributed to the
year-over-year increase in cost of goods sold.
OPERATING EXPENSES
Three Months Ended January 31, Six Months Ended January 31,
(Dollars in millions; unaudited) |
