Morningstar | Intuit Reports Good 2Q; Remains Well Positioned for Busy Upcoming Tax Season; Shares Overvalued
Intuit had a good second quarter with the firm outperforming its quarterly guidance for revenue, operating income, and EPS. The result was bolstered by strong continued Total Online Ecosystem revenue growth and healthy ongoing momentum for the consumer business. The shift of users to the firm’s online products such as QuickBooks Online, or QBO, and strong position in the tax space’s secularly growing do-it-yourself software category is expected to propel healthy long-term growth for the business. We think this wide-moat company will continue to deliver good online subscriber growth over the midterm, while reinforcing the switching costs associated with its integrated online product portfolio. Although the firm outperformed its expectations in the quarter, they kept their full-year guidance intact, indicating some seasonality. As it comes to seasonality, the third quarter is Intuit’s most important and we expect the firm to retain its flagship tax position and deliver total revenue in the range of $3.21 billion-$3.26 billion, in line with guidance. With our expectations unchanged after the quarter, we reiterate our $170 fair value estimate and see the company as overvalued. Therefore, we think prospective investors should wait for a larger margin of safety before investing new capital in the name.For the quarter, revenue rose 12% year over year to $1.5 billion. Small business & self-employed revenue grew 17% to $833 million, consumer revenue increased 11% to $461 million, and strategic partner revenue (expectedly) fell 1% to $208 million.
QBO Online subscribers surged 38% year over year to 3.9 million users, which illustrates Intuit’s value proposition for these new and migrating users. We think the firm’s additional products around payments, payroll, and capital will continue to strengthen this sticky business too.
Within the consumer business, the company noted that total IRS e-files through Feb. 8 were down 7.1%. The company cited new U.S. tax legislation and the extended U.S. government shutdown as contributing to a slower start to the season. Still, the company weathered the volatility and we believe the firm is selling higher value tax solutions to users through initiatives like TurboTax Live.
On the margin front, total operating segment margins remained flat year over year at 43%. Still, we remain mostly focused on the third quarter where the firm typically makes about 60%-65% of its full-year total segment operating income. We continue to forecast modest operating margin expansion over the medium term due to the maturing of the online business.
Intuit helps consumers, small businesses, and the self-employed prosper by delivering financial management and compliance products and services. The company also provides tax products to accounting personnels, who are main partners that help the company serves small business customers. The company organizes its businesses into three reportable segments: Small Business and Self-Employed, which provides QuickBooks financial management solutions to solve financial and compliance problems; Consumer, which includes TurboTax products and services to prepare and file income tax returns; and Strategic Partner, which includes professional tax offerings and serve professional accountants in United States and Canada.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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