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Intuit Inc. (INTU - Snapshot Report) reported second quarter 2012 adjusted earnings of 42 cents per share, beating the Zacks Consensus Estimate of 36 cents. Shares increased 3.44% in the after-hour trade. The outperformance came on solid consumer tax revenue as well as effective management of marketing, sales, and employee expenses.

Revenue

Intuit reported revenues of $1.02 billion in the second quarter, up 16.1% from $878.0 million in the prior-year quarter. Reported revenue was in line with the higher end of management’s guidance range of $1.0 billion to $1.02 billion and slightly above the Zacks Consensus Estimate of $1.01 billion.

Product revenues decreased 2.6% year over year to $419.0 million, while Services and Other revenues climbed 33.9% from the prior-year quarter to $600.0 million.

Segment-wise, the company’s Small Business Group posted a 9.0% year-over-year growth based on the strength of the group’s sub-segments. Financial Management Solutions revenue increased 6.0%, driven by higher subscription for QuickBooks Online and QuickBooks Enterprise. Employee Management Solutions revenue was up 9.0%, led by growth in Intuit Online Payroll and Enhanced Payroll subscribers and improved adoption of direct deposit services. Online payroll subscribers grew 22.0%. Payment Solutions revenue increased 17.0%, with 11.0% growth in merchant customers.

Consumer Tax, being the best performing segment during the quarter, posted 44.0% revenue growth. Apart from seasonality, lower revenue recognized in the comparable quarter last year due to a problem in IRS (Internal Revenue Service) favored the comps.

The Financial Services revenue increased 9.0% driven by the growing popularity of Intuit’s online and mobile solutions. Accounting Professionals segment revenue increased 8.0%. Other Businesses revenue declined 5.0% due to lower Quicken revenue. Intuit’s global business grew revenue 8.0%.

Operating Results

Reported gross margin fell 10 basis points (bps) from the year-ago quarter to 79.4%.

Operating margin in the quarter jumped 620 bps year over year to 18.8% on better cost management. Though total operating expenses increased 5.1%, the percentage on total revenue contracted.

GAAP net income was $118.0 million or 39 cents per share, compared with $73.0 million or 23 cents per share delivered in the year-ago quarter. Excluding amortization expenses but including stock-based compensation expenses, the adjusted net income in the quarter stood at $127.3 million or 42 cents per share versus a loss of $80.9 million or 25 cents per share in the year-ago quarter.

Balance Sheet & Cash Flow

Intuit ended the quarter with cash, equivalents and investments of $959.0 million, down from $1.05 billion in the previous quarter. Accounts receivables were $592.0 million compared with $166.0 million in the previous quarter. As of January 31, 2011, long-term debt was $999.0 million, up from $499.0 million in the prior quarter.

Intuit had $260.0 million of operating cash in the second quarter versus $110.0 million in the prior quarter. Capital expenditure was $48.0 million. During the quarter, Intuit repurchased shares worth $331.0 million and paid $44.0 million as dividend.

Outlook

For the third quarter of fiscal 2012, the company expects revenues in the range of $1.95 billion to $1.99 billion. GAAP operating income is expected in the range of $1.095 billion to $1.125 billion. Non-GAAP operating income is estimated in the $1.14 billion to $1.17 billion range. GAAP diluted EPS is projected in the range of $2.36 to $2.40. The company also expects non-GAAP diluted EPS in the $2.47 to $2.51 range.

For fiscal 2012, the company still expects revenues in the $4.185 billion to $4.285 billion range, representing growth of 9.0% to 11.0%. But management has guided for better operating margin and earnings for fiscal 2012. GAAP operating income is estimated between $1.190 billion and $1.215 billion (previously $1.185–$1.210 billion), reflecting growth of 18% to 21%. Non-GAAP operating income is projected at $1.405– $1.430 billion (previously $1.4–$1.425 billion), representing growth of 12.0% to 14.0%. GAAP diluted EPS is expected to grow in the range of 22.0–25.0% to $2.43–$2.50 (previously $2.38 to $2.47). Non-GAAP diluted EPS is expected between $2.90 and $2.97 (previously $2.85 to $2.94), indicating a growth of 16.0% to 18.0%.

Our Take

Intuit is a leading provider of business and financial management solutions to small and medium-sized businesses, consumers, accounting professionals and financial institutions. The company delivered impressive second quarter results, beating the Zacks Consensus Estimates both on top and bottom lines. Though revenue expectation for the upcoming quarter was kept unchanged, the company was prudent enough to raise its operating margin and EPS guidance.

We are encouraged by the company’s recent data that shows 10% year-over-year increase in Turbo Tax units till February 18. The improvement was mainly due to the vast popularity of the Web-based version of the product.

However, we remain concerned due to the seasonality of Intuit’s tax business and ongoing uncertainty in the economy at large. Moreover, we think that Intuit is going to face stiff competition from the leading payroll solution provider Paychex Inc. (PAYX - Snapshot Report) in the SMB (small and medium business) sector as the latter introduced certain tools that aim at solving certain tax credit related problems for SMBs.

Currently, Intuit has a Zacks #4 Rank, which translates into a short-term Sell rating.

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