Market news and our thoughts on results from Intuit.

Market News

Stocks sold off and Treasuries treaded water after resuming a decline Thursday as traders await Jerome Powell’s Jackson Hole speech for clues on the interest-rate outlook. The dollar strengthened, while gold trades at $1,915 an ounce. Equity markets declined in the US last night – S&P 500 (-1.4%); Nasdaq (-1.9%) – and in Asia this morning: Nikkei 225 (-2.1%); Hang Seng (-1.2%); Shanghai Composite (-0.6%). The FTSE 100 is currently trading 0.2% higher at 7,334.

China issued rules to facilitate access to mortgages. More home buyers will be able to qualify for the better terms currently on offer to first-time buyers. Separately, Goldman slashed its targets for the MSCI Asia Pacific ex Japan Index, warning China's property market stress would spill over. It also cut its regional growth forecasts. Morgan Stanley lowered its predictions for China and Hong Kong equities for a second time in three months on the heels of cutting the country's GDP outlook. China’s securities regulator is planning a meeting with global firms including Fidelity and Goldman in a bid to shore up confidence.

UK consumer confidence rebounded somewhat after signs inflation is cooling. The GfK survey tracks consumers’ outlook on their finances and the wider economy for the next 12 months. Although the reading for August of -25 was better than the -29 expected, it is still well into negative territory. One in three British homeowners is due to re-mortgage in the next year. Energy regulator Ofgem said the new price cap will be £1,923 for the average household in the fourth quarter. It represents a small decline from the previous quarter but is still c.£600 above the level before Russia’s invasion of Ukraine. Sterling fell back $1.2585 and €1.1664.

Brent Crude trades at $83.50 a barrel and is headed for a second weekly loss. ING expects an upside for prices on a continued drawdown in inventories. Iron ore is on track for its biggest weekly gain since June, as Chinese mills began restocking. Uranium rose past $58 per pound in August, extending gains for a sixth week to levels last seen in April of 2022 amid persistent supply risks and bullish long-term demand.

Source: Bloomberg

Company News

Last night, Intuit released results for the financial year to 31 July 2023 which highlighted a strong end to the year. The group also issued guidance for the new financial year which slightly underwhelmed the market. In response, the shares were down 2% during after-hours trading.

Intuit supplies finance software to individuals, small companies, and accountants. With its strong brands (Quickbooks and TurboTax), the company is the de facto standard for consumer tax preparation software and small business financial management software in the US, and increasingly overseas. The company is focused on expanding its share in DIY, transforming the assisted tax preparation category, and expanding beyond tax with a consumer platform. Growth prospects remain attractive, with large cross-selling opportunities in the US as the group migrates its customer base to the cloud, while underpenetrated international markets provide a growth opportunity. The group also owns Credit Karma (consumer credit) and Mailchimp (marketing automation platform) taking it deeper into personal finance and small business marketing services.

In the near term, there is some risk of customer churn if business failures pick up and from increased bad debts from working capital loans made by the company. However, over the medium term, with its suite of online products, Intuit believes it has an addressable market of $300bn+ driven by the shift to virtual solutions, the acceleration to online and omnichannel capabilities, digital money offerings, and the need to help consumers improve their financial health. The group is aiming to grow its revenue by double-digits in organic terms and expand its operating margin.

In the year to 31 July 2023, total revenue grew by 13% to $14.4bn, a touch ahead of the company guidance of $14.3bn. During the final quarter, growth was 12% to $2.71bn, versus the consensus forecast of $2.64bn.

In the Small Business & Self-Employed division, revenue grew 21% in the final quarter to $2.1bn, split between Online Ecosystem (21% to $1,551m) and Desktop Ecosystem (19% to $581m). Within the Online Ecosystem, QuickBooks Online Accounting grew 22%, driven primarily by customer growth, mix-shift, and higher effective prices. Online Services grew 20%, driven by growth in payroll, Mailchimp, and payments. Total international online revenue grew by 12% on a constant currency basis.

In the Consumer division, revenue fell by 12% to $128m. ProTax grew from $25m to $28m. TurboTax Online units fell 5% and total TurboTax units also declined by 5% for the year. The company believes this was driven by taxpayers who filed in order to receive pandemic-era stimulus and tax credits during the past several years but did not file taxes this season.

Credit Karma, the consumer credit business, is treated as a separate division. During the final quarter, the unit generated revenue of $424m, down 11%, driven by macro-economic headwinds in personal loans, auto insurance, home loans, and auto loans, partially offset by growth in credit cards and Credit Karma Money.

Full-year operating income grew by 22% to $5.5bn, while adjusted EPS rose 22% to $14.40, above the top end of the company guidance of $14.00-$14.25. In the final quarter, EPS was up 50% to $1.65, well ahead of the $1.44 consensus forecast.

The business is highly cash generative and ended the year with net debt of only $2.4bn. Around $4.2bn of gross debt is maturing over the next 15 months and management are evaluating refinancing opportunities, subject to market and other conditions. Intuit takes a disciplined approach to capital management, investing cash in opportunities that yield an expected return on investment greater than 15%. The group repurchased $2.0bn of shares during the financial year and has $3.8bn remaining of a new authorisation. A quarterly dividend of 90c has been declared, 15% higher than last year.

The company issued guidance for the financial year to July 2024. Revenue is expected to grow by 11%-12% to c. $16bn, while adjusted EPS is expected to grow by between 12% and 14% to $16.17-$16.47. For the current quarter, the group is targeting revenue growth of 10% to 11% and EPS of $1.94-$2.00.

On the call, the group highlighted that it is taking a prudent approach with guidance, given the continued macroeconomic uncertainty. The group has previously highlighted that 80% of Small Business and Self-Employed Group revenue is subscription-based and mission critical. The other 20% transaction-based portion includes revenue from QuickBooks payments, capital, and per employee pricing for time tracking and payroll. In a mild recessionary environment, the group believes it may see an impact on these transactional businesses.

In a couple of weeks, the company is hosting an innovation day to unveil how it is harnessing the power of data and generative AI to transform its products and services for consumers and small businesses.

Source: Bloomberg