Intuit: Down 7.5% After Q3 FY23 Results, Despite Raised Guidance

Company Update (INTU US) (Buy)

Highlights

• Intuit is one of the fastest-growing and most resilient businesses

• Q3 FY23 was another strong quarter, with EBIT growing 16%

• A strong SBSE more than offset temporary weakness elsewhere

• Non-GAAP P/E is 30x, FCF Yield is 2.0%, Dividend Yield is 0.8%

• At $415.92, we see 48% upside (13.8% p.a.) by July 2026. Buy

Introduction

Intuit shares fell 7.5% on Wednesday (May 24) after the company released Q3 FY23 results the evening before.

Q3 FY23 results were strong in aggregate. EBIT grew by 16% year-on-year in both GAAP and Non-GAAP terms. Good cost control helped margin expand significantly, and Non-GAAP EPS is now up 18.4% year-to-date. Small Business & Self-Employed revenues grew 21.2%, more than offsetting weak growth in Consumer and a decline in Credit Karma. The latter two were impacted by external factors – the number of tax filings has normalized downwards after COVID-19, and higher interest rates have reduced the volume of lending products.

Full-year guidance for the group was raised, with revenue growth now expected to be 12-13% and Non-GAAP EPS growth now expected to be approximately 20%. The macro environment remains broadly stable.

At $415.92, shares have a 30.0x P/E (on Non-GAAP EPS) and a 2.0% Free Cash Flow Yield. We believe they will continue to trade at a premium valuation, but reduce our assumed P/E. Our updated forecasts show a total return of 48% (13.8% annualized) by January 2026. Buy.

As this is our first Intuit article on Substack, we start with a longer recap of its investment case. Readers familiar with our research can jump one section ahead to “Intuit Q3 FY23 Results Headlines”.

Intuit Investment Case Recap

Intuit provides financial management, compliance and marketing solutions to consumers and small businesses. The company reports in 4 segments:

• Small Business & Self-Employed (“SBSE”) – provides software and services related to accounting, payroll, payment, marketing, etc., as well as financing for small businesses; key products are QuickBooks and Mailchimp

• Consumer – provides DIY and assisted tax preparation software and services; key product is TurboTax

• Credit Karma – provides personalized recommendations on lending, savings and insurance products, and access to credit scores and related reports

• ProConnect – provides software to accountants for their accounting and tax work

Intuit Revenue & EBIT By Segment (FY22)

Source: Intuit results release (Q4 FY22).

The U.S. contributed 92% of Intuit’s revenues as of FY22, and the Consumer segment only serves the U.S. market.

Most of Intuit’s products and services ae mission-critical to their customers, and generate recurring subscription-based revenues. Intuit is also structured as a platform, where data can flow across different products for their customers, and is includes apps developed by third-party providers, creating a powerful ecosystem of apps, data analytics and cross-selling. As a result, Intuit has strong economies of scale and operational leverage, and is one of the fastest-growing and most resilient businesses in our coverage.

Intuit has historically targeted and delivered double-digit revenue growth and an expanding EBIT margin. Since FY18, when the move to a subscription-based model was substantially completed, revenue growth has averaged 14%:

Intuit Revenue Growth (FY14-22)

NB. FY21 and FY22 revenue growth rates exclude Credit Karma and Mailchimp. Source: Intuit company filings.

Between FY18 and FY22, Non-GAAP EBIT margin has risen by 150 bps from 33.9% to 35.4%, which means Non-GAAP EBIT has grown faster than revenues, with an average Non-GAAP EBIT growth rate of 18%:

Intuit EBIT Margins (FY14-22)

Source: Intuit company filings.

However, GAAP EBIT margin has declined materially in FY20-21, largely due to Share-Based Compensation costs (excluded from Non-GAAP EBIT) rising faster than revenues, from 5.7% of revenues in FY18 to 10.3% in FY22. As of Q4 FY22 results, management expects this to “flatten over the next few years”. We believe the this margin may even shrink over time, with cost efficiency now a common theme among Technology companies.

At its 2022 investor day, management reaffirmed its traditional growth algorithm and set out revenue growth targets of 15-20% for SBSE, 8-12% for Consumer and 20-25% for Credit Karma, driven by both users and revenue per user:

Intuit Long-Term Revenue Growth Expectations By Segment

Source: Intuit investor day presentation (Sep-22).

We have followed Intuit and its peers for more than a decade, and first published a Buy rating online in September 2019. Since then Intuit shares have returned nearly 60% in less than 4 years, outperforming the S&P 500 by 22 ppt. However, Intuit shares reached an all-time high of $697.27 (or 71.6x FY21 Non-GAAP EPS) in November 2021, before falling back by 40%, and returns have been disappointing in the past two years:

Intuit Share Price (Last 5 Years)

Source: Google Finance (24-May-23).

Now that Intuit shares have de-rated significantly, we believe future earnings growth will once again translate directly into share price gains. Q3 FY23 results were strong in aggregate, in line with our investment case.

Intuit Q3 FY23 Results Headlines

Q3 FY23 results were strong in aggregate, with EBIT growing by 16% year-on-year in both GAAP and Non-GAAP terms:

Intuit P&L (Q3 FY23 vs. Prior Year)

Source: Intuit results materials (Q3 FY23).

Total revenues grew 6.9% year-on-year. SBSE revenues grew 21.2% year-on-year, more than offsetting a weak 3.1% growth in Consumer and a 12.4% decline in Credit Karma.

EBIT margin expanded significantly in both GAAP and Non-GAAP terms, thanks to good cost control, as CFO Michelle Clatterbuck explained on the call:

“When we were going through our three- and one-year planning process, we assumed that there would be economic uncertainty this year … (and) made lists of the levers that we had that we could pull as we went throughout the year to be able to maintain our earnings power. And those are some of the discretionary things we had, which were whether it's travel or advertising or moderating hiring. And so, our lower tax units also this year did result in lower expenses for that segment, specifically in customer success.”

For Q3 year-to-date, total revenues grew 13.0% year-on-year, including SBSE revenues growing 25.9% and Consumer revenues growing 6.3%. Non-GAAP EBIT grew 29.3% and Non-GAAP EPS grew 18.4%:

Intuit P&L (Q3 YTD FY23 vs. Prior Year)

Source: Intuit results materials (Q3 FY23).

We review trends in each of the three main segments in more detail.

SBSE: Strong Trends Mostly Continuing

Strong revenue growth has continued in SBSE, both on a year-on-year basis and relative to pre-COVID FY19:

Intuit SBSE Revenue Growth by Quarter (Since FY20)

NB. Q2 FY22 to Q1 FY23 figures exclude Mailchimp acquisition (completed 01-Nov-21). Source: Intuit company filings.

SBSE Online Ecosystem revenue growth decelerated from 24% in Q2 FY23 to 20%, offset by Desktop Accounting revenue growth accelerating from 10% to 16%, as the latter transitions to a subscription model.

Mailchimp’s revenue growth has accelerated “several points” sequentially in Q3 FY23, from “low-teens” last quarter, “driven by higher effective prices and customer growth”.

International Online Ecosystem revenue growth decelerated again to 12% this quarter, continuing a trend since FY22:

Intuit International Online Revenue Growth (ex-Currency) (Since FY21)

NB. Q2 FY22 to Q1 FY23 figures exclude Mailchimp acquisition (completed 01-Nov-21). Source: Intuit company filings.

This deceleration is a concern. Among Intuit’s competitors, Growth has remained strong at Xero, and has reaccelerated at Sage in recent years. However, International is likely only around 15% of SBSE total revenues, and its deceleration has so far not impacted the segment’s growth. Intuit has been executing a “refreshed” international strategy since Q1 FY23, “which includes leading with Mailchimp”, and we will continue to monitor their progress there.

Consumer: Post-COVID Normalization

Consumer’s weak growth has been due to the number of tax filings normalizing downwards after COVID-19, as people who started filing because of pandemic stimulus and tax credits no longer need to file. Intuit estimates that:

• Total industry filings will decline by 2% in FY23

• DIY category share of filings will decline nearly 75 bps

• Intuit’s share of total tax filings will decline approximately 80 bps

Management expects Intuit will be disproportionately impacted because it had won a “majority” share of the new filers.

Intuit expects the full impact to be felt in FY23, with none in FY24, though people who started trading stocks and cryptocurrencies during the pandemic had also been a growth area, and this may reverse in future years.

In addition, the number of filers who secured extensions to file at a later date outside FY23 is another headwind, but not considered “material” to Intuit.

Credit Karma: Interest Rate Headwinds

Credit Karma revenues fell 12.4% year-on-year but rose 9.3% sequentially, reversing a sequential decline that began after Q4 FY22 (ending July 2022) (the Fed started raising U.S. interest rates in March 2022):

Credit Karma Revenues By Quarter (Since Q3 FY21)

Source: Intuit company filings.

The year-on-year revenue decline is largely due to the impact of higher interest rates on the volume of lending products, as CFO Michelle Clatterbuck stated on the call:

“The decline was driven primarily by headwinds in personal loans, home loans, auto loans and auto insurance, partially offset by growth in Credit Karma Money and credit cards … In both credit cards and personal loans, we continued to see some partners tighten eligibility, while some expanded eligibility … In personal loans, we continue to see partners facing funding constraints.”

Intuit now expects Credit Karma revenues to decline by 11% in FY23 (was 15-10%), but the long-term target of growing Credit Karma revenues by 20-25% annually remains unchanged.

Full Year Guidance Updated

Intuit raised its 2023 guidance on the group level:

• Revenue growth to be 12-13% (was 10-12%)

• Non-GAAP EBIT growth to be around 21% (was 17-19%)

• Non-GAAP EPS growth to be around 20% (was 15-17%)

This included raising its segment revenue guidance for SBSE and Credit Karma, but cutting it for Consumer:

• SBSE revenue growth to be 24% (was 19-20%)

• Consumer revenue growth to be 5-6% (was 9-10%)

• Credit Karma revenue decline to be 11% (was 15-10%)

• ProTax revenue growth to be 2-3% (was 3%)

Macro Environment is Broadly Stable

Intuit has observed that the macro environment remains broadly stable. Small businesses are still growing in aggregate, though with some sectors facing profit pressure. Most of Intuit’s more-tenured customers continue to have larger cash reserves than before the pandemic, providing a key buffer, though newer businesses generally have less.

These observations are similar to what we have seen from other companies, with Mastercard executives also referring to resilient consumer spending in May so far and JPMorgan executives also seeing healthy customer cash balances.

Intuit Valuation: 2% FCF Yield

At $415.92, relative to LTM (ending April 30), Intuit has a 30.0x P/E on Non-GAAP EPS and a 52.6x P/E on GAAP EPS.

Relative to the mid-point of the FY23 outlook, the P/E is 29.2x on Non-GAAP EPS and 53.3x on GAAP EPS.

The LTM Free Cash Flow (“FCF”) Yield is 2.0%. Our definition of FCF deducts non-cash SBC costs.

The current Dividend Yield of 0.8%, from a dividend of $0.78 per quarter ($3.12 annualized), 15% higher year-on-year.

Intuit has repurchased $1.495bn of its shares in Q1-3 (including $483m in Q3), and $2.0bn remains in its authorized buyback program. Each $2bn is worth 1.7% of the current market capitalization.

Intuit has $2.3bn of net debt (excluding operating leases and restricted cash) on its balance sheet, or 0.4x FY22 EBITDA.

Intuit Stock Forecasts

We have updated our assumptions with the latest guidance, increasing our FY23 EPS but reducing our FY24 EPS. We have also reduced our assumed P/E. Our key assumptions now include:

• FY23 EPS of $14.23 (was $13.74)

• In FY24, Net Income growth of 10% (was 15.5%)

• In FY25 and FY26, Net Income growth of 12.5% (unchanged)

• FY23 share count of 281m (unchanged)

• From FY24, share count reduction of 1.0% each year (unchanged)

• From FY24, dividend on a Payout Ratio of 23% (unchanged)

• P/E of 30x at July 2026 (was 35x)

Our new FY26 Non-GAAP EPS forecast is $20.41, 1.4% lower than before ($20.70):

Illustrative Intuit Return Forecasts

Source: Librarian Capital estimates.

With shares at $415.92, we expect an exit price of $612 and a total return of 48% (13.8% annualized) by July 2026.

With our exit P/E assumption reflecting a flat P/E from the present, forecasted returns will be driven by earnings growth.

Ends

Stocks mentioned: INTU 0.00%↑ MA JPM. We are long all three.

Disclaimer: This article consists of personal opinions, based on information believed to be correct at the time of writing, but not guaranteed. We undertake no responsibility in updating content in this article. Nothing published here should be taken as financial advice.