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Morningstar | Intuit Reports Good Start to Fiscal 2019; Online Growth Continues to Impress; Shares at a Premium

Intuit reported a good start to fiscal 2019 with sales growing in the low-double digits. The sales performance was bolstered by good growth in the small business & self-employed segment, which continues to reap the benefit of Intuit’s shift to cloud-based products like QuickBooks Online, or QBO. To that end, QBO subscribers grew to 3.59 million from 2.55 million a year ago and helped to support year-over-year total online ecosystem revenue growth of 42%. The first quarter of the fiscal year tends to be an unremarkable affair with Intuit’s massively seasonal consumer business in its quiet period. That said, Intuit remains heavily focused on ramping for the upcoming tax season. We believe the firm is in a strong position in this market and has favorable secular tailwinds associated with the growing do-it-yourself software category. We think this wide-moat company will continue to post healthy online subscriber growth over the midterm, while reinforcing the switching costs associated with its integrated product portfolio. Despite CEO Brad Smith’s upcoming departure from the firm, we don’t have any notable concerns over the capable and deep management team at Intuit. Management reiterated its full-year outlook and we maintain our $170 fair value estimate for the firm. With shares trading at a premium, we’d seek a wider margin of safety before investing new capital in the name.

For the quarter, revenue rose 12% year over year to $1.02 billion. Small business & self-employed revenue grew 11% to $908 million, while consumer revenue increased 22% to $90 million. The shift to Intuit’s online ecosystem remained apparent as online subscribers grew 41% year over year to 3.59 million in contrast to the 5% decline in desktop unit sales. The consumer group metrics weren’t meaningful for the quarter given the off-peak season, but we are expecting a strong performance from the business over the full year.

On the margin front, total segment operating margins improved about 200 basis points year over year to 39%. There’s a lot of lumpiness around this though given the swings in the consumer and strategic partner margins. However, small business & self-employed operating margin, which is the main contributor in the quarter, held reasonably steady at 51%. We continue to forecast modest operating margin expansion over the medium term due to the maturing of the online business.