Intuit Q4 & FY '96
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Intuit Q4 & FY '96
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(FOOL CONFERENCE CALL SYNOPSIS)* By Dale Wettlaufer (MF Raleigh)
INTUIT INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %> ALEXANDRIA, VA., Sept. 17, 1996/FOOLWIRE/ -- Intuit Inc. yesterday announced financial results for the quarter and year ended July 31, 1996 and discussed the Company's expectations for fiscal 1997, including the impact of its new Internet initiatives and its plans to acquire a stake of approximately 23% in CheckFree Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CKFR)") else Response.Write("(Nasdaq: CKFR)") end if %> in exchange for the Company's interest in its bill payment processing subsidiary, Intuit Services Corp. (ISC), acquired in July 1994.
Twelve Month Financial Review
Net revenue for the fiscal year ended July 31, 1996 was $552.9 million, compared to $419.2 million for the twelve months ended July 31, 1995. The year ago period included revenue from Parsons Technology, Inc. after September 27, 1994, the date it was acquired by Intuit. On a pro forma basis, including Parsons revenues for a full twelve months in both periods, fiscal 1996 twelve-month revenue increased 30% from pro forma revenue of $426.6 million for the twelve months ended July 31, 1995.
The Company reported a net loss of $20.7 million, or $0.46 per share, during the fiscal year ending July 31, 1996, compared with a net loss of $44.3 million, or $1.07 per share, for the fiscal year ended July 31, 1995. The 1996 loss includes total acquisition related charges of $48.7 million including a one-time charge of $8.0 million for the write-off of in process research and development acquired in connection with the Company's acquisition of Interactive Insurance Services Corp. (IIS) on May 31, 1996. The 1995 loss includes total acquisition related charges, partially offset by a merger termination fee from Microsoft Corporation, of $71.7 million.
Excluding acquisition-related charges, the Company would have reported net income of $28.0 million, or $0.59 per share, for the fiscal year ended July 31, 1996 compared with net income excluding acquisition-related charges and the gain from the Microsoft termination fee, of $27.5 million, or $0.63 per share, for the twelve month period ended July 31, 1995. The earnings per share before acquisition-related charges for this fiscal year reflect approximately 4.0 million higher equivalent shares outstanding in the fiscal 1996 period, due to the sale of 2.2 million shares in a secondary offering in June 1995, shares issued to acquire Personal News Inc. (now Investor Insight) and IIS, and stock options exercised and granted under the Company's employee equity incentive plans. All earnings (loss) per share amounts are calculated after giving effect to the Company's two-for-one stock split declared effective August 4, 1995.
July Quarter Financial Review
For the fourth quarter ended July 31, 1996, net revenue increased 26% to $91.1 million, compared to $72.4 million reported for the same period in fiscal 1995. Reflecting the seasonal nature of the Company's business and the one-time charge of $8.0 million in connection with the acquisition of IIS, the Company reported a net loss of $22.0 million, or $0.48 per share, during the quarter ended July 31, 1996 compared with a net loss of $1.4 million, or $0.03 per share, for the corresponding year ago quarter. Excluding acquisition-related charges, the Company would have reported a net loss of $7.7 million or $0.17 per share, for the quarter ended July 31, 1996, compared with a net loss excluding acquisition-related charges and the gain from the Microsoft termination fee of $6.6 million or $0.15 per share, for the quarter ended July 31, 1995.
Fiscal 1996 Business Review
Scott D. Cook, Chairman of the Board, commented, "On a pro forma basis, revenue grew 30% for the fiscal year ended July 31, 1996 versus the prior year. We are particularly pleased that this increase was achieved through strong revenue growth across a broad base of our core businesses, including Business Products, Personal Tax, Parsons, and Supplies. "Strong growth in these businesses allowed us to achieve 30% overall revenue growth despite the fact that revenue from the Personal Finance Group (PFG) was relatively unchanged from last year. Results from PFG were depressed in part by our aggressive OEM strategy. Our OEM strategy continues to drive overall Quicken. Windows unit growth, which increased 44% over the prior year.
"OEM units sell at substantially lower revenue per unit than units sold at retail, producing only a small amount of current revenue. International revenues increased 31% on a pro forma basis for the year. Although we experienced difficulties executing two product launches in Germany midyear, the problems there have now been corrected."
In line with expectations discussed in February, net income excluding acquisition related charges was $28 million for the year, essentially flat with last year. Operating income excluding acquisition related charges for the fiscal year ended July 31, 1996 was $37.5 million. This compares to operating income, excluding acquisition related charges and the gain from the Microsoft termination fee, of $40.6 million for the fiscal year ended July 31, 1995. In addition to the factors described above, operating results in fiscal 1996 reflect increased expenditures in customer service and technical support. These investments significantly improved customer service and technical support levels over last year's results but contributed to the lower operating income. Finally, operating results were negatively impacted by start-up expenses in bill payment processing at ISC, which is being transferred to CheckFree.
Cook added, "During the year, the product teams in our businesses have produced some real accomplishments. We had another successful tax season, winning more industry awards than any other personal tax software product. In addition, our Business Products Group achieved an extraordinary 58% growth in revenue, benefiting from the introduction of our QuickBooks Pro version. "We introduced an extensive set of on-line financial services in Quicken for '96, including Investor Insight, a powerful investment and portfolio management tool, on-line banking and bill payment services and the inclusion of Internet access via a built-in Netscape browser. "We accelerated our international expansion, entering the Japanese market with the acquisition of Milkyway KK in January, 1996. Japanese revenues now account for about half of Intuit's international revenues. "In addition, we focused on identifying and acquiring promising Internet based companies, completing the acquisition of IIS in May, 1996. IIS is the developer of an Internet-based system that gives consumers personalized insurance information from major carriers via its InsureMarketSM site on the World Wide Web.
"Just this month, we completed the acquisition of GALT Technologies and launched our BankNow product. GALT Technologies' NetWorth. website helps consumers select the right products for their investment needs by providing information and prospectuses on more than 70 mutual fund companies. "BankNow is Intuit's new on-line banking software, designed for convenience-oriented PC users who want to conduct on-line banking and payment transactions with great speed and ease of use, but who don't use personal finance software like Quicken. Today we are announcing initiatives that allow us to focus on building even more Internet based solutions."
Internet Strategic Initiatives
Intuit announced three Internet related strategic initiatives in separate press releases today. First, Intuit has announced plans to open our software products, including Quicken, to financial service providers so they can connect directly through the Internet to their customers. This capability will arrive in stages beginning with investment data connectivity expected in the spring of 1997.
Second, Intuit announced plans for OpenExchange, a series of specifications that will be licensed for free and without restriction to financial service providers. OpenExchange will give financial service providers full control over their electronic communications with customers. Secure, open, and Internet based, OpenExchange will enable the exchange of banking and investment data, bill payment and other financial transactions and services. The comprehensive specifications will support a full range of financial interactions between financial service providers and their customers, unlike other approaches that focus primarily on checking account transactions. OpenExchange will be designed around top industry security methods such as RSA encryption for secure communications and message authentication.
Third, Intuit announced plans to acquire 12.6 million shares of CheckFree common stock, approximately 23% of the resulting 54 million CheckFree shares outstanding, in exchange for Intuit's bill payment processing subsidiary, ISC. This move allows Intuit to reallocate management and financial resources to important Internet opportunities and to its successful core businesses. Based upon Friday's closing price of $18 1/16 for CheckFree, the CheckFree stock to be exchanged in this transaction is currently valued at $227.6 million, a substantial return on Intuit's investment in ISC. Subject to regulatory and shareholder approval, the transaction is expected to close by the end of the calendar year 1997. Intuit intends to account for its investment in CheckFree using the cost method of accounting. Accordingly, Intuit intends to sell approximately 2 million shares of CheckFree acquired in the transaction. ISC's revenues accounted for less than 3% of Intuit's revenues in fiscal 1996.
The Company disclosed that, in anticipation of the completion of the CheckFree transaction, the August 1996 acquisition of GALT Technologies, which was originally intended to be accounted for as a pooling of interests, will now be accounted for as a purchase transaction, under the requirements of APB 16. The Company will amortize intangibles arising from the GALT transaction of approximately $9 million over a period of three years beginning September 3, 1996.
Fiscal Year 1997 Guidance
With regard to FY 1997, three factors will impact the year's performance. 1) The company had been cautious in its projections for the consumer software side of the business and expects to see lower revenue growth for that segment. 2) The Intuit Services Corporation (ISC) -- Checkfree transaction will result in a gain being booked. In addition, ISC revenues and expenses for FYs 95 and 96 will be restated as discontinued operations upon the close of the deal. 3) They continue to see long-term high-growth opportunities in delivering electronic financial services over the internet and in the small business marketplace. The company plans to maintain a high level of investment in these areas. Net revenues for the full fiscal year 1997 are expected to be in the mid $600 million range. Above-average growth is expected for the business products group for Parsons, international, and for supplies. Non- banking automated financial services. GALT, the interactive insurance business, and Investor Insight will grow 2-300%. Personal finance and tax software, the primary consumer products lines, will see slower growth. Pro Tax is an entry in a more mature market where they will see relatively little growth. They do expect to see sizable improvement in operating income over FY 1996 and is expected to be in the mid $50 million range, up from $37.5 million.
The addition to operating income will result from gross profit improvement, product cost improvement, improved inventory management across geographies, greater mix of higher ASP (average selling price) versions of products, and the mix impact of eliminating the bill-paying costs of sales (with ISC). Operating expenses in total will be comparable, in percentage, with a mix change. The mix change will come in shifting expenses from customer service, tech support, and general and administrative expense, to marketing and R&D. The former group will decline by 2-3 percentage points because investment in capacity, systems, people, facilities, and customer service and technical support are paying off. The improvements allow Intuit to fund additional demand generation efforts in the consumer software businesses, marketing investments in the insurance and investment businesses and other automated financial services activities, and additional marketing in the small business markets and internet efforts.
Average cash balance should increase due to higher operating income and lower capital outlays. Net interest income should increase depending on interest rates, but the cash balances are highly seasonal. Tax rate should be 38%, but may be lower depending on tax legislation. Share count will be roughly 48.5 million. Seasonality in sales should increase, with the peak occurring in Qs 2 and 3, partially as a result of the decrease in processing revenues. Sales of Quicken in Q1 1996 were quite robust -- the company expects to see lower sales in Q1 due to the difficult comparison. Sales will be more careful about sell-in during the first quarter, where OEM business was busy as well. There was a BPG (business products group) launch in July 1995, which influenced Q1 1996. They expects a 2-3 percentage point sales shift from Q1 to Q2.
CEO Remarks
"First, a principle that I think will be true across the internet area. As the web moves beyond its current main use, which is paid display or brochure vending (the mere showing of pages of text and photos), to doing actual work, the success of the web will be driven by software and customer bases. As we do actual work on the net, we need to have top software engines to make that happen. Success is driven by the quality and investment in those engines." Sites such as C-Net or StarWave succeed because people are actually manipulating applications and data, causing the information to work and change in front of users. This is particularly applicable to financial services.
"Getting in early is really important to success." Getting in early means low entry costs, higher opportunity for profitability, and maximum upside opportunity. Intuit will continue to invest in the web -- in fact, there are so many good possibilities for using Intuit products on the web that the company believes that it should be moving on some of them: "In some cases, we were slow-moving or not moving at all." The ICS rationalization will free up resources and management's attention to take advantage rapidly of some of the markets the company believes to exist. Small business is a highly valuable customer base for the company -- Intuit has over three million customers in this market. Intuit has a fundamental architectural lead on the competition here and wants to extend those design and engineering advantages. One opportunity exists in vertical software integration, specifically tailoring software packages for each industry. Small business services present opportunities in areas such as retirement/401(k) packages.
Intuit wants to stake out "market spaces," for instance, in areas such as their mutual fund website. Consumer behavior here is very clear: consumers are very brand loyal with financial institutions. The other side of market space is helping financial institutions gain and server more new customers. There is customer traffic on the Net Worth mutual fund website -- over one million hits per day, making it the most popular fund website. 72 mutual fund companies are presently on the Net Worth site. Based on what Intuit has heard from customers -- the funds -- costs per customer acquired is excellent. It costs less to generate a lead and the customer conversion rate is higher than through traditional marketing means. The quality of customers is better than tradition customers, as measured in portfolio size/customer.
Q&A
Insurance and mortgages are two pieces of financial business that the company is targeting due to the sheer size of these markets. Many small businesses feel that they are not being well served by financial services companies, which presents an opportunity for Intuit to create a market. The cost structure here is fixed at a low level relative to market size, which means that there is a tremendous amount of leverage available to the information provider that succeeds.
The business model for financial services software is different than for operating systems or many other international businesses that offer non-customized products. Intuit's products must be customized for each country due to language, cultural, regulatory, and various other differences. With exacting market research, though, Intuit has achieved market share leads in countries such as England, France, and in Germany, which is Intuit's largest European market. In Japan, Intuit acquired a company called Milky Way KK. Competing products on foreign markets are inferior, creating opportunities for Intuit to come in and present higher quality products to the market. Rapid share gains are the norm in many markets where they operate. International results did not match revenue or profitability targets despite the solid growth the company has seen in these markets. International sales were up 37% and represented $57 million in sales. That is split 50% between Japan and 50% in rest-of-world. Germany and the UK and Canada are the largest markets in the rest-of--world category.
In the future, the company will unbundle access and support fees for bill payment processing and receive payments from financial institutions. The costs of bill payment processing will be paid directly to the processor by the financial institutions, not Quicken. Tech support costs can continue to come down, adding to profitability. Essentially, then, Quicken will be focused on the front-end software, sales and marketing, and tech support for services such as those which they are planning for the internet. The financial institutions will pay Intuit to be a part of market spaces. Over time, Intuit will participate in revenues flowing from transaction volume.
Open Exchange is designed from the ground-up to be international. In the UK, for example, the system can handle standing-orders for inter-account transfers as well as VAT (value added tax) reporting, both of which are not issues in the US. As in the United States, Intuit is moving to augment their reporting and calculation functions with transaction-based capabilities. Open exchange offers this kind of end-to-end capabilities across geographies.
CheckFree has committed to support the protocols that ISC customers operate under. While CheckFree has been a competitor with ISC, Intuit and CheckFree have also partnered on bill payment services within the Quicken application since 1990. The arrangement between CheckFree and Intuit is not exclusive. The financial institutions will demand choice of service providers, so the level of mutual support will extend to Open Exchange and also to Intuit's support on transaction volume over the next year. Intuit will not be dependent upon CheckFree for implementing other online services. All of their new online services will be based on secure internet protocols and will run off Intuit's servers. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |