Tax and accounting software provider, Intuit (NASDAQ:INTU) reported Q2 FY2023 results beating Wall St's expectations, with revenue up 13.8% year on year to $3.04 billion. Guidance for the full year was also close to analyst expectations with revenues guided to $14.1 billion at the midpoint. Intuit made a GAAP profit of $168 million, improving on its profit of $100 million, in the same quarter last year.
Intuit (INTU) Q2 FY2023 Highlights:
- Revenue: $3.04 billion vs analyst estimates of $2.91 billion (4.43% beat)
- EPS (non-GAAP): $2.20 vs analyst estimates of $1.44 (52.6% beat)
- The company reconfirmed revenue guidance for the full year, at $14.1 billion at the midpoint
- Free cash flow of $229 million, roughly flat from previous quarter
- Gross Margin (GAAP): 75.9%, down from 80.4% same quarter last year
Created in 1983 when founder Scott Cook watched his wife struggle to reconcile the family's checkbook, Intuit provides tax and accounting software for small and medium-sized businesses.
For many small and medium sized businesses, managing accounting, payroll, and taxes are difficult and time consuming and often are handled by an accountant which is an unnecessarily expensive use of resources, or Excel-like spreadsheets which don’t have sufficient functionality.
Intuit is the originator of easy to use tax and accounting software, from the first version of Quicken in the mid-1980s to today’s suite of well known cloud-based SaaS offerings including TurboTax and Quickbooks that run the spectrum of small business accounting software. In recent years, Intuit has made acquisitions extending its functionality into personal finance through the acquisitions of Mint.com and Credit Karma, and email marketing with Mailchimp.
The company has long held a significant market share of software aimed at individuals and SMBs. TurboTax accounted for a third of total IRS tax returns in 2020, including the majority of those that submitted do-it-yourself returns. With an installed base of over 6m users which accounts for over 1/3rd of global SMBs with fewer than 20 employees. The huge installed base has allowed Intuit to build a recognizable brand over the decades, with the vast majority of customers coming directly to Intuit through digital marketing channels.
The demand for easy to use, integrated cloud based finance software that integrates tax and accounting operations continues to rise in tandem with the difficulty workers find trying to use existing accounting tools like spreadsheets given the growing volume of finance data littered across a multitude of enterprise applications. A related demand driver is the secular increase of e-commerce and rising adoption of modern point of sales and payments platforms which easily integrate with backend financial software.
Intuit’s main competitors are a mix of accounting software providers like Microsoft’s Dynamics (NASDAQ:MSFT), Sage Group (LSE: SGE), Xero (ASX:XRO) and payroll processors such as ADP (NASDAQ:ADP), Paychex (NASDAQ:PAYX), and Paycom (NYSE:PAYC).
Sales Growth
As you can see below, Intuit's revenue growth has been very strong over the last two years, growing from quarterly revenue of $1.58 billion in Q2 FY2021, to $3.04 billion.
This quarter, Intuit's quarterly revenue was once again up 13.8% year on year. We can see that the company increased revenue by $444 million quarter on quarter. That's a solid improvement on the $183 million increase in Q1 2023, so shareholders should appreciate the re-acceleration of growth.
Ahead of the earnings results the analysts covering the company were estimating sales to grow 8.26% over the next twelve months.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Intuit's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 75.9% in Q2.
That means that for every $1 in revenue the company had $0.76 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still a good gross margin that allows companies like Intuit to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.
Cash Is King
If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Intuit's free cash flow came in at $229 million in Q2, up year on year.
Intuit has generated $4.09 billion in free cash flow over the last twelve months, an impressive 29.9% of revenues. This robust FCF margin is a result of Intuit asset lite business model, scale advantages, and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.
Key Takeaways from Intuit's Q2 Results
With a market capitalization of $114 billion, more than $2.07 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
It was good to see Intuit outperform Wall St’s revenue expectations this quarter. That feature of these results really stood out as a positive. Zooming out, we think this was a decent quarter, showing the company is staying on target. The company is flat on the results and currently trades at $412.03 per share.
Is Now The Time?
When considering Intuit, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although we have other favorites, we understand the arguments that Intuit is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been strong, over the last two years. And on top of that, its very efficient customer acquisition hints at the potential for strong profitability.
The market is certainly expecting long term growth from Intuit given its price to sales ratio based on the next twelve months is 7.8x. There are things to like about Intuit and there's no doubt it is a bit of a market darling, at least for some. But we are wondering whether there might be better opportunities elsewhere right now.
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