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Intuit Inc. (INTU - Snapshot Report) reported third quarter 2013 adjusted earnings per share of $2.87, surpassing the Zacks Consensus Estimate of $2.85.

Revenues

Intuit reported revenues of $2.19 billion in the third quarter, up 13.1% from the prior-year quarter and 125.0% from the previous quarter. Reported revenues were within management’s guidance range and were in line with the Zacks Consensus Estimate. The improvement was mainly due to broad-based strength in all the segmental revenues.

Product revenues increased 6.7% year over year to $638.0 million, while Services and Other revenues jumped 16.0% from the prior-year quarter to $1.54 billion.

Segment-wise, Small Business Group posted 17.0% year-over-year growth based on the strength of the group’s sub-segments and the synergies from the acquisition of Demandforce in May 2012. Financial Management Solutions revenues increased 24.0%, driven by higher subscription for QuickBooks Online, QuickBooks Enterprise and contribution from Demandforce. Employee Management Solutions revenues were up 11.0%, led by growth in Intuit Online Payroll subscribers. Payment Solutions revenues increased 13.0%, aided by customer growth for Intuit’s GoPayment mobile payment solution.

The Consumer Tax segment posted 14.0% revenue growth due to higher TurboTax unit sold and a revenue shift (roughly $140.0 million) from the second quarter. Despite a challenging tax season, Intuit managed to acquire new customers and boost mobile adoption. Financial Services revenues were up 9.0% from the year-ago quarter, led by higher revenues in online and mobile banking, and addition of the Mint business. This was partially offset by the sale of the corporate banking business in Mar 2012. Accounting Professionals segment revenues increased 9.0%. Other Businesses revenues increased 3.0% due to the growth in global business, partially offset by shift of the Mint business.

Operating Results

Reported gross margin increased 160 basis points (bps) from the year-ago quarter to 91.4%. Operating margin in the quarter was 57.3% versus 57.7% in the year-ago quarter. Total operating expenses increased 20.4% year over year.

GAAP net income from continuing operations was $822.0 million or $2.71 per share, compared with $736.0 million or $2.43 per share delivered in the year-ago quarter. The quarter’s result was lower than the company’s guided range. Excluding one-time expenses but including stock-based compensation expenses, adjusted net income in the quarter was $2.87 per share versus $2.43 in the year-ago quarter.

Balance Sheet & Cash Flow

Intuit ended the quarter with cash, equivalents and investments of $2.0 billion, significantly up from $678.0 million in the previous quarter. Accounts receivables were $312.0 million compared with $541.0 million in the previous quarter. Long-term debt remained flat sequentially at $499.0 million.

Intuit generated $1.45 billion of operating cash in the third quarter as against $256.0 million cash used in the prior quarter. Capital expenditure was $32.0 million. During the quarter, Intuit repurchased shares worth $92.0 million. The company paid a quarterly cash dividend of 17 cents per share amounting to $51.0 million.

Outlook

For the fourth quarter of fiscal 2013, the company expects revenues in the range of $702.0 million to $727.0 million. GAAP operating loss is expected in the range of $51.0 million to $31.0 million. Non-GAAP operating income is estimated in the $14.0 million to $34.0 million range. GAAP loss per share is projected in the range of 11 cents to 7 cents. The company also expects non-GAAP EPS in the 3 cents to 7 cents range.

For fiscal 2013, the company expects revenues in the $4.495 billion to $4.520 billion range (previously $4.55–$4.65 billion), representing growth of 8.0% to 9.0%. GAAP operating income is estimated between $1.23 billion and $1.25 billion (previously $1.315–$1.345 billion), reflecting growth of 5.0% to 6.0%. Non-GAAP operating income is projected in a range of $1.51–$1.53 billion (previously $1.57–$1.60 billion), representing growth of 8.0% to 9.0%. GAAP EPS is expected to grow in the range of 7.0%–8.0% to $2.77–$2.81 (previously $2.960–$3.022). Non-GAAP EPS is expected between $3.31 and $3.35 (previously $3.40–$3.46), indicating growth of 11.0% to 13.0%.

Intuit expects revenues from TurboTax to grow roughly 4.0% for the fiscal 2013.

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 better-than-expected third quarter earnings driven by revenue growth. Intuit’s first and fourth quarters are seasonally weak; hence the guidance was not unexpected. However, the lowering of fiscal 2013 guidance, which reflects lackluster Consumer Tax business given lower online tax filings, disappoints us.

We are positive on Intuit’s growing SMB (small & medium business) exposure and believe that the Demandforce acquisition will continue to provide support to the segment. However, stiff competition from the leading payroll solution provider Paychex Inc. (PAYX - Snapshot Report) in the SMB arena, seasonality of Intuit’s tax business and the ongoing uncertainty in the economy concern us.

Currently, Intuit has a Zacks Rank #4 (Sell). But not all software stocks are performing as badly as Intuit. Investors can have a look at Pegasystems Inc. (PEGA - Snapshot Report) and Progress Software Corp. (PRGS - Snapshot Report), which have Zacks Rank #1 (Strong Buy) and are worth buying.

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