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Intuit's (NASDAQ:INTU) Q1 Sales Top Estimates But Full Year Guidance Underwhelms


Full Report / November 29, 2022
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Tax and accounting software provider, Intuit (NASDAQ:INTU) announced better-than-expected results in the Q1 FY2023 quarter, with revenue up 29.3% year on year to $2.59 billion. On the other hand, guidance for the full year missed analyst expectations with revenues guided to $14.1 billion at the midpoint, or 2.76% below analyst estimates. Intuit made a GAAP profit of $40 million, down on its profit of $228 million, in the same quarter last year.

Intuit (INTU) Q1 FY2023 Highlights:

  • Revenue: $2.59 billion vs analyst estimates of $2.49 billion (3.88% beat)
  • EPS (non-GAAP): $1.66 vs analyst estimates of $1.20 (38.6% beat)
  • The company dropped revenue guidance for the full year, from $14.5 billion to $14.1 billion at the midpoint, a 3.08% decrease
  • Free cash flow of $251 million, down 28.2% from previous quarter
  • Gross Margin (GAAP): 75.5%, down from 79.9% 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 $1.32 billion in Q1 FY2021, to $2.59 billion.

Intuit Total Revenue

This quarter, Intuit's quarterly revenue was once again up a very solid 29.3% year on year. On top of that, revenue increased $183 million quarter on quarter, a strong improvement on the $3.21 billion decrease in Q4 2022, and a sign of acceleration of growth, which is very nice to see indeed.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 12.2% 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 75.5% in Q1.

Intuit Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.75 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop, 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 $251 million in Q1, up 143% year on year.

Intuit Free Cash Flow

Intuit has generated $3.88 billion in free cash flow over the last twelve months, an impressive 29.1% 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 Q1 Results

Sporting a market capitalization of $108 billion, more than $2.72 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.

It was good to see Intuit outperform Wall St’s revenue expectations this quarter. And we were also glad to see good revenue growth. On the other hand, it was unfortunate to see that Intuit's revenue guidance for the full year missed analysts' expectations and gross margin deteriorated a little. Overall, this quarter's results were not the best we've seen from Intuit. The company is down 2.26% on the results and currently trades at $372.49 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 solid business. We would expect growth rates to moderate from here, but its revenue growth has been strong, 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 7.2x. There are definitely things to like about Intuit and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

The Wall St analysts covering the company had a one year price target of $505.1 per share right before these results, implying that they saw upside in buying Intuit even in the short term.

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