Morning Note: Market news and updates from Intuit and CrowdStrike.

Market News

The yield on the US 10-year Treasury has fallen to 4.26%, well below the October high of 5%, while 2-year yields dropped to below 4.7% as the latest speeches by Federal Reserve officials reinforced the view that the US central bank will start cutting rates next year. Fed Board Member Waller said he’s “increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%”. The dollar weakened for fifth straight day and gold rallied to $2,044 an ounce. The S&P/ASX All Ordinaries Gold Index rose by 4.3%.

Bill Ackman is betting the Fed will begin lowering rates as soon as the first quarter. “I think there’s a real risk of a hard landing if the Fed doesn’t start cutting rates pretty soon,” he said, noting that he’s seen evidence of a weakening economy. The swaps market is fully pricing in a Fed move in June.

US equity markets moved up a touch last night – S&P 500 (+0.1%); Nasdaq (+0.32) – while this morning in Asia, markets moved lower: Nikkei 225 (-0.3%); Hang Seng (-2.1%); Shanghai Composite (-0.6%). The FTSE 100 is currently trading 0.5% lower at 7,418. Sterling trades at $1.2698 and €1.1557.

The COP 28 climate conference starts today in Dubai. The oil price steadied at $81.63 a barrel. OPEC+ members have yet to resolve a dispute over output quotas for some African members, according to delegates. Copper climbed to a 10-week high after First Quantum was ordered to shut its Panama mine and as workers at an MMG mine in Peru began a strike.

Source: Bloomberg

Company News

Last night, Intuit released results for the three months to 31 October, the first quarter of its financial year to July 2024. The group highlighted strong momentum and reiterated its full-year guidance.

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. With data and AI core to its strategy, the group is accelerating innovation across its global financial technology platform to power the prosperity of consumers and small businesses.

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. During the latest quarter, total revenue grew by 15% to $2.98bn, a touch ahead of the consensus forecast of $2.88bn.

In the Small Business & Self-Employed division, revenue grew 18% to $2.3bn, split between Online Ecosystem (20% to $1.6bn) and Desktop Ecosystem (14% to $726m). Within the Online Ecosystem, QuickBooks Online Accounting grew 19%, 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 16% on a constant currency basis.

In the Consumer division, revenue fell by 25% to $187m, reflecting a strong finish to the tax extension season. ProTax grew by 24% to $42m. Credit Karma, the consumer credit business, is treated as a separate division. During the quarter, the unit generated revenue of $405m, down 5%, 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.

Operating income grew by 45% to $960m, while adjusted EPS rose 49% to $2.47, well above the $1.98 consensus forecast. The business is highly cash generative and ended the year with net debt of $3.6bn. 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 $603m of shares during the quarter and has $3.2bn remaining of a new authorisation. A quarterly dividend of 90c has been declared, 15% higher than last year.

The company reiterated its 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 11% to 12% and EPS of $2.25-$2.31.

On the call, the group highlighted once again 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.

Source: Bloomberg

Last night, CrowdStrike Holdings released strong results for the third quarter of its financial year ended 31 January 2024 and raised its guidance for the full year. However, in response the highly-rated shares dipped by 2% in after-hours trade.

CrowdStrike is a US-listed cybersecurity technology company with annual revenue of more than $2.2bn. The CrowdStrike Falcon platform protects customers against cyber-attacks across on-premise, virtualised, and cloud-based environments running on a variety of endpoints such as laptops, desktops, servers, virtual machines, and Internet of Things devices.

The CrowdStrike Threat Graph aggregates security data across its customer base, using advanced AI techniques to create a security solution able to constantly adapt to new threats and attacks. As the company grows, its access to security data will also grow, enhancing its competitive position. The AI-native Falcon XDR platform has become the cybersecurity consolidator of choice.

The business is well placed to benefit from secular trends, such as digital and security transformation, cloud adoption, and a heightened threat environment, which the current geopolitical uncertainty has clearly exacerbated. The CrowdStrike 2023 Threat Hunting Report revealed a massive increase in identity-based intrusions and growing expertise by adversaries targeting the cloud. However, at present, Cloud Security Spend is only around 1% of Cloud IT Spend, well below what is considered necessary.

The group offers more than 20 cloud modules via a software as a service (SaaS) model that spans multiple large security markets, including corporate workload security, security and vulnerability management, managed security services, IT operations management, and threat intelligence services. The group continues to add new modules organically and via M&A. The success of the group’s platform strategy and its growing brand leadership have led to a groundswell of customers turning to CrowdStrike as their trusted security platform of record.

In the three months to 31 October 2023, total revenue grew 35% to $786m, a touch ahead of the company’s guidance range of $775m-$778m and the market forecast of $777m. Subscription revenue grew by 34% to $734m, while professional services grew 57% to $53m. Annual Recurring Revenue (ARR) increased 35% to $3.15bn as of 31 October, of which $233m was added in the quarter, driven by accelerating year-over-year growth. The company’s vision is to reach $10bn in ARR over the next five to seven years.

The company announced a new release of CrowdStrike Falcon Go, delivering the cybersecurity protection that small and medium businesses need to stop ransomware attacks and prevent data breaches. Gross retention rates remain high, while the number of subscription customers that have adopted five or more modules, six or more modules, and seven or more modules increased to 63%, 42%, and 26%, respectively, as of 31 October.

The business has strong operating leverage, with subscription gross margin moving up from 78% to 80% in the quarter. The group achieved its target model range for operating margin for the first time in its history, well ahead of its planned timeline. The group achieved vastly improved operating profitability, rising from $90m to a record $176m. EPS rose from 40c to 82c, well above the 74c market forecast. The group generated record free cash flow of $239m (up 37%) and ended the quarter with cash and cash equivalents of $3.17bn.

CrowdStrike has nudged up its guidance for FY24, with the estimates reflecting the group’s technology advantage and strong industry tailwinds combined with a pragmatic view of current macroeconomic conditions. Revenue is now expected to be $3,046m-$3,050m, versus $3,031m-$3,043m previously. EPS guidance has been raised from 280c-284c to 295c-296c.

Source: Bloomberg