Tax and accounting software provider, Intuit (NASDAQ:INTU) fell short of analyst expectations in Q3 FY2023 quarter, with revenue up 6.85% year on year to $6.02 billion. Intuit made a GAAP profit of $2.09 billion, improving on its profit of $1.79 billion, in the same quarter last year.
Intuit (INTU) Q3 FY2023 Highlights:
- Revenue: $6.02 billion vs analyst estimates of $6.09 billion (1.23% miss)
- EPS (non-GAAP): $8.92 vs analyst estimates of $8.49 (5.01% beat)
- The company lifted revenue guidance for the full year, from $14.1 billion to $14.3 billion at the midpoint, a 1.1% increase
- Free cash flow of $3.16 billion, up from $229 million in previous quarter
- Gross Margin (GAAP): 84.4%, down from 86.1% 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).
As you can see below, Intuit's revenue growth has been strong over the last two years, growing from quarterly revenue of $4.17 billion in Q3 FY2021, to $6.02 billion.
Intuit's quarterly revenue was only up 6.85% year on year, which might disappoint some shareholders. We can see that the company increased revenue by $2.98 billion quarter on quarter re-accelerating up on $444 million in Q2 2023.
Ahead of the earnings results the analysts covering the company were estimating sales to grow 9.8% over the next twelve months.
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 84.4% in Q3.
That means that for every $1 in revenue the company had $0.84 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is a great 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 $3.16 billion in Q3, roughly the same as last year.
Intuit has generated $3.99 billion in free cash flow over the last twelve months, an impressive 28.3% 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 Q3 Results
Sporting a market capitalization of $127 billion, more than $4.27 billion in cash and with positive free cash flow over the last twelve months, we're confident that Intuit has the resources it needs to pursue a high growth business strategy.
We like that Intuit raised its full year guidance for revenue, non-GAAP operating profit and EPS, all of which were above expectations. We also liked that EPS beat this quarter and gross margins improved. On the other hand, it was unfortunate to see that Intuit missed analysts' revenue expectations. Overall, it seems to us that this was a mixed but overall good quarter for Intuit. The company is flat on the results and currently trades at $448 per share.
Is Now The Time?
Intuit may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think Intuit is a good business. We would expect growth rates to moderate from here, but its revenue growth has been solid, over the last two years. On top of that, its very efficient customer acquisition hints at the potential for strong profitability, and its bountiful generation of free cash flow empowers it to invest in growth initiatives.
The market is certainly expecting long term growth from Intuit given its price to sales ratio based on the next twelve months is 8.2x. There is definitely a lot of things to like about Intuit and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.The Wall St analysts covering the company had a one year price target of $481.9 per share right before these results, implying that they saw upside in buying Intuit even in the short term.
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