EUR 850.00 For Business Accounts Only

Morningstar | Intuit Reports Good 3Q; Online Momentum Propels Healthy Midterm Outlook; Shares at a Premium

Intuit reported a good third quarter, with better-than-expected revenue, margin, and EPS growth. As such, it modestly increased its full-year outlook, and we’ve slightly adjusted our midterm growth expectations, given the firm’s ongoing momentum in its important small business and self-employed segment. The shift of users to the firm’s online products, such as QuickBooks Online, and market-leading position in the tax space’s secularly growing do-it-yourself software category (via is consumer business segment) 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. With the third quarter seeing the bulk of tax return revenue for the year ($2.15 billion in the quarter), Intuit’s tax business performed admirably. Within the tax business, we think that share gains and pricing power associated with add-on features such as TurboTax Live will buoy high-single-digit midterm growth for this lucrative business. After adjusting our financial model, we are raising Intuit’s fair value estimate to $183 from $170. Even so, we believe the market is pricing the firm at a considerable premium, and we would seek a wider margin of safety before considering it for investment.

For the quarter, total revenue rose 12% year over year to $3.27 billion. A good tax season saw the consumer business grow 10% to $2.15 billion. Within this business, TurboTax Online units grew 7%, overall units rose 5%, and TurboTax Live users tripled. We think the firm’s ongoing investment in ease of use in the DIY software category will benefit both the company and its customers, and we are encouraged by improving net promoter scores around Intuit’s tax preparation software.

On the small business and self-employed side of the business, Intuit posted strong QuickBooks Online subscriber numbers, with 32% year-over-year growth to 4.2 million users. U.S. subscribers grew 25% to 3.1 million, while international subscribers increased 55% to 1.1 million. We believe the rapid shift to Intuit’s online tools illustrates the firm’s value proposition for new and migrating QuickBooks customers. Also, we think the firm’s additional products around payments, payroll, and capital will continue to strengthen this sticky business.

In terms of margin, Intuit’s total segment operating margin was flat year over year at 69%. Within this, small business and self-employed margins improved 500 basis points to 42%, consumer margins dipped 200 basis points to 78%, and strategic partner margins rose 300 basis points to 83%. We continue to forecast modest operating margin expansion over the medium term due to the maturing of the online business.