INVESTMENT THESIS
Intuit Corp. (NGS: INTU) edged up less than 1% on 11/20/20 after the tax and small-business software company delivered well-above-consensus fiscal 1Q21 non-GAAP EPS and better-than-expected revenue in a quarter weighted to the QuickBooks business. Revenue in the first quarter of the July 2021 year rose 14% annually, while non-GAAP EPS of $0.94 more than doubled the $0.43 consensus call. Intuit also announced an 11% hike in its quarterly dividend, about double what we were modeling.
Intuit provided an update on its planned $7.1 billion acquisition of Credit Karma, which had been expected to close before year-end calendar 2020. At the time of the February 2020 deal announcement, Intuit forecast that the deal would be non-dilutive to non-GAAP EPS. Credit Karma is now expected to be modestly diluted in the first year post-acquisition, and we believe that pressured the shares on 11/20/20.
For this most seasonal of companies, Intuit’s fiscal 2020 was out of balance due to the extension of the federal income tax deadline to July 15, 2020, from April 5, 2020. Intuit was able to better leverage expenses across an elongated tax season, leading to doubled-digit revenue and non-GAAPP EPS for fiscal 2020. Assuming efficacy of vaccines and healthcare remediation, and a more normal tax season, Intuit could be facing some distorted top- and bottom-line comparisons as fiscal 2021 plays out.
The underlying strengths of Intuit’s two core franchises are evident in the solid and steady growth in TurboTax and QuickBooks Online. At the company’s virtual investor day, held in September, Intuit executives described how Intuit is evolving its business model to an AI-driven expert platform with synergies across personal and small-business finance software.
INTU has outperformed the market during the pandemic period, while lagging performance of a broad basket of cloud peers. Intuit’s two key growth engines are thriving amid the business transitions triggered by the pandemic.
RECENT DEVELOPMENTS
Year to date, a basket of Argus-covered cloud, internet and social media peers are up 68%. INTU rose 33% in 2019, while cloud, internet and social media peers advanced 51% and the iShares technology ETF rose 45%. A basket of cloud, social media, and internet companies in Argus coverage dropped 4% in 2018.
For fiscal 1Q21 (ended October 31, 2020), Intuit reported revenue of $1.32 billion. Reported revenue topped the $1.22 billion consensus estimate by $100 million; the company did not provide any financial guidance for the quarter. Intuit posted a non-GAAP profit of $0.94 per diluted share for 1Q21. Non-GAAP EPS in 1Q21 more than doubled the Wall Street consensus forecast of $0.43.
Intuit is by far the most seasonal company in Argus technology coverage, limiting the value of sequential comparisons. During fiscal 2020, the elongated tax season skewed annual as well as sequential comparisons. We are assuming that the federal government will restore the April 15 federal income tax filing deadline in calendar 2021 for the 2020 tax year, although the pandemic may be the final schedule-maker. If so, Intuit’s excessive seasonality will return to normal.
The company is excited by the velocity of its innovation, as detailed at the company’s virtual investor event held in September 2020.
In the beginning of what the company hopes is a more seasonally normal fiscal 2021, the twin engines of Intuit each grew in mid-teen-percentages. For 1Q21, Small business & self-employed (SB&SE) revenue of $1.18 billion rose 13% year-over-year and also increased 13% sequentially. Reflecting volume efficiencies, SB&SE operating income of $767 million was up 29%, and the SB&SE margin of 64.9% increased 825 basis points year-over-year and 1,290 basis points sequentially.
Within SB&SE, total online ecosystem revenue of $621 million increased 24% annually, led by 28% growth in online accounting products. Total desktop ecosystem revenue edged up 3% annually to $560 million, as Intuit continues to migrate its customer base online.
SB&SE represented a seasonally normal 89% of revenue in 1Q21 and drove overall revenue growth. Part of that is developing and further expanding QuickBooks live, built on an expert platform similar to the TurboTax Live expert platform. More than 600 experts are currently aiding customers on expert platforms. This offering grew nearly 30% in fiscal 1Q21.
After a federal income tax season that elongated across fiscal 3Q20 and fiscal 4Q20, Consumer revenue of $119 million (9% of total) slowed significantly on a sequential basis but was up 19% a year earlier. Consumer Group operating income of $4 million generated a segment margin of 3.4%; a year earlier, Consumer Group had an operating loss of $20 million and a negative margin of 20.0%.
ProConnect revenue (2% of total) was up 21% annually. In a low volume quarter, ProConnect cut its operating loss in half on a year-over-year basis.
On 9/23/20, Intuit held its investor day as a virtual event.
Intuit has been developing five ‘big bets’ or strategies for over a year. The five strategies within the platform immersion experience are led by the foundational strategy of accelerating innovation across the platform and revolutionizing speed to benefit. The foundational strategy supports four other strategies.
These include connecting people to tax and small business experts; unlocking smart-money decisions for customers. The final strategy is for QuickBooks Online to disrupt the small business mid-market (10-100 employees), currently underserved by the company.
By engaging in ongoing client interactions, Intuit has identified and is focused on what is important to its tax and small business accounting clients. Small business & self-employed clients want to grow their own customer bases, get paid by their customers, find access to capital, and ensure smooth employee payrolls.
To help clients reach these goals, Intuit is moving to a virtual model, enabling online and omni-channel commerce, accelerating its own money offerings such as Mint, and helping mid-market customers move to cloud. The company has ‘bold goals’ to help its clients reach new financial milestones by the year 2025. To drive customer prosperity, Intuit wants to help customers double their household savings rate and improve their small-business success.
Inuit also seeks to build its reputation and reach 200 million global customers, from a current 60 million or so. That would involve becoming the leading tax services provider in many more nations and also globally expanding its QuickBooks online platform from a largely domestic focus. It also assumes completing the Credit Karma acquisition, first announced in February 2020.
Founded in 2007, privately held Credit Karma has 1,300 employees and generates approximately $1 billion in annual revenue, 90% of which comes from existing members. Credit Karma has over 100 million members, including 37 million monthly active members that engage at least four times per month. Intuit believes it can use its platform to help members achieve better personalized outcome and credit scores, while connecting them with over 100 trusted financial partners.
With the addition of Credit Karma, Intuit’s addressable market grows to 800 million people with a dollar TAM of a quarter-trillion dollars. The combined company will look to grow its core business of consumer tax and SMB financial management software, connect the eco-system to get more people using more Intuit products, and expand globally.
Intuit provided two updates on Credit Karma. Intuit also forecast that the deal would be non-dilutive to non-GAAP EPS. Credit Karma has been negatively impacted as lenders tightened access to credit due to the pandemic. Credit Karma is now expected to be modestly diluted in the first year post-acquisition. The underlying logic of the deal remains in place, however.
Intuit’s two key growth engines are thriving amid the business transitions triggered by the pandemic. With strong growth ahead for the company, INTU trades at attractive valuations based on historical comparable analysis, peer valuation, and our two- and three-stage discounted free cash flow models.
EARNINGS & GROWTH ANALYSIS
Intuit posted a non-GAAP profit of $0.94 per diluted share for 1Q21, compared with $0.41 per diluted share a year earlier. Non-GAAP EPS in 1Q21 more than doubled the Wall Street consensus forecast of $0.43.
Intuit has restored issuing financial guidance on a quarterly basis and also guided for fiscal 2021. For fiscal 2Q21, Intuit guided for annual revenue growth of 8%-9%, implying revenue $1.83-$1.85 billion. Non-GAAP EPS was forecast at $1.31-$1.34, consistent with mid-teens annual percentage growth.
For the full year, Intuit guided for revenue of $8.27-$8.42 billion, which would be up 8%-10% annually from FY20 sales. Non-GAAP EPS was forecast in a range of $8.40-$8.55, for growth of 7%-9%.
We have also raised our non-GAAP forecast for FY22 to $9.39.
FINANCIAL STRENGTH & DIVIDEND
The Credit Karma acquisition is now expected to close early in calendar 2021. The following discussion does not include any potential acquisition impacts. The total consideration is comprised of half stock and half cash; the cash portion will come from assets on hand and the existing unsecured line of credit. Intuit issued about $3.5 billion in new debt to fund the balance of the purchase price.
Debt totaled $2.36 billion at the end of 1Q21.
Intuit, which is an opportunistic stock repurchaser, has suspended buybacks pending the Credit Karma acquisition.
The November 2020 hike was about double our expectations. We are now modeling annual dividends of $2.30 for FY21 and $2.43 for FY22.
MANAGEMENT & RISKS
Alex Chriss succeeded CEO Goodarzi as EVP and general manager of the Small Business & Self-Employed group. Marianna Tessel, former SVP and chief product development officer for SB&SEG, became chief technology officer, succeeding Tayloe Stansbury.
CEO Goodarzi has worked at Intuit since 2004. Before taking over SB&SEG in 2016, he served as EVP and GM of the consumer tax group; he has also served as chief information officer. Despite considerable C-level movement, we believe that investor confidence in the new team is high, given that all of the new leaders are seasoned Intuit employees.
We see some risk that the winter 2020 spike in unemployment could cause the tax business to decline in FY21; QuickBooks also faces some risks related to small business closures. Nonetheless, Intuit has exceeded expectations in other challenging periods, including during the Great Recession.
The COVID-19 pandemic represents risk for all companies. We believe that Intuit, as a key participant in and enabler of the digital economy, will be a long-term beneficiary of key trends. These include enabling small businesses to find a trusted and secure partner to help in their growth. Tactically, we look for beleaguered companies to move to QuickBooks to provide expertise and other tools for survival.
Acquiring Credit Karma represents numerous risks, including potential for culture clash, disappointing returns in the acquired business, and potentially overpaying. We believe the rich deal price is validated by the complementary nature of Credit Karma’s assets, the widening in TAM, and Intuit’s ability to offer an enhanced suite of products and services to its consumer and small-business clients.
VALUATION
Intuit trades at premiums to peers on multiple metrics. We believe INTU warrants a premium to the peer group given its demonstrated ability to grow faster than peers while expanding its TAM.
INTU has outperformed the overall market but represents good value relative to cloud peers.
On November 20 at midday, BUY-rated INTU traded at $352.13, down $9.32.
Source: Argus
