XNAS:INTU Intuit Inc Quarterly Report 10-Q Filing - 1/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________
FORM 10-Q
R
 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the quarterly period ended January 31, 2012
OR
o
 
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the transition period from ____________ to ____________ .

Commission File Number 0-21180
INTUIT INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
 
77-0034661
(IRS employer identification no.)
 
2700 Coast Avenue, Mountain View, CA 94043
(Address of principal executive offices)
 
 
 
 
 
(650) 944-6000
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes R No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer R
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 294,908,350 shares of Common Stock, $0.01 par value, were outstanding at February 22, 2012.
 



INTUIT INC.
FORM 10-Q
INDEX

 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-10.01
 EX-10.02
 EX-10.03
 EX-10.04
 EX-31.01

 EX-31.02
 EX-32.01
 EX-32.02
 EX-101.INS XBRL Instance Document
 EX-101.SCH XBRL Taxonomy Extension Schema
 EX-101.CAL XBRL Taxonomy Extension Calculation Linkbase
 EX-101.LAB XBRL Taxonomy Extension Label Linkbase
 EX-101.PRE XBRL Taxonomy Extension Presentation Linkbase
 EX-101.DEF XBRL Taxonomy Extension Definition Linkbase

Intuit, the Intuit logo, QuickBooks, TurboTax, Lacerte, ProSeries, Quicken and Mint, among others, are registered trademarks and/or registered service marks of Intuit Inc., or one of its subsidiaries, in the United States and other countries. Other parties’ marks are the property of their respective owners.

2


PART I
ITEM 1
FINANCIAL STATEMENTS

INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Three Months Ended
 
Six Months Ended
(In millions, except per share amounts)
January 31,
2012
 
January 31,
2011
 
January 31,
2012
 
January 31,
2011
Net revenue:
 
 
 
 
 
 
 
Product
$
419

 
$
430

 
$
641

 
$
646

Service and other
600

 
448

 
972

 
764

Total net revenue
1,019

 
878

 
1,613

 
1,410

Costs and expenses:
 
 
 
 

 

Cost of revenue:
 
 
 
 

 

Cost of product revenue
52

 
46

 
84

 
78

Cost of service and other revenue
154

 
129

 
290

 
252

Amortization of acquired technology
4

 
5

 
8

 
9

Selling and marketing
344

 
330

 
580

 
550

Research and development
168

 
158

 
335

 
314

General and administrative
95

 
88

 
187

 
178

Amortization of other acquired intangible assets
10

 
11

 
31

 
22

Total costs and expenses
827

 
767

 
1,515

 
1,403

Operating income
192

 
111

 
98

 
7

Interest expense
(16
)
 
(15
)
 
(31
)
 
(30
)
Interest and other income, net
3

 
6

 
14

 
14

Income (loss) before income taxes
179

 
102

 
81

 
(9
)
Income tax provision (benefit)
61

 
29

 
27

 
(12
)
Net income
$
118

 
$
73

 
$
54

 
$
3

 
 
 
 
 


 


Basic net income per share
$
0.40

 
$
0.24

 
$
0.18

 
$
0.01

Shares used in basic per share calculations
297

 
308

 
298

 
312

 
 
 
 
 


 


Diluted net income per share
$
0.39

 
$
0.23

 
$
0.18

 
$
0.01

Shares used in diluted per share calculations
306

 
318

 
307

 
322

 
 
 
 
 


 


Dividends declared per common share
$
0.15

 
$

 
$
0.30

 
$

See accompanying notes.


3


INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

(In millions)
January 31,
2012
 
July 31,
2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
277

 
$
722

Investments
682

 
699

Accounts receivable, net
592

 
171

Income taxes receivable
81

 
72

Deferred income taxes
121

 
94

Prepaid expenses and other current assets
91

 
82

Current assets before funds held for customers
1,844

 
1,840

Funds held for customers
330

 
414

Total current assets
2,174

 
2,254

Long-term investments
59

 
63

Property and equipment, net
564

 
561

Goodwill
1,886

 
1,886

Acquired intangible assets, net
134

 
180

Long-term deferred income taxes
41

 
55

Other assets
104

 
111

Total assets
$
4,962

 
$
5,110

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
500

 
$
500

Accounts payable
212

 
129

Accrued compensation and related liabilities
167

 
215

Deferred revenue
586

 
406

Other current liabilities
258

 
141

Current liabilities before customer fund deposits
1,723

 
1,391

Customer fund deposits
330

 
414

Total current liabilities
2,053

 
1,805

Long-term debt
499

 
499

Other long-term obligations
187

 
190

Total liabilities
2,739

 
2,494

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock and additional paid-in capital
2,975

 
2,886

Treasury stock, at cost
(4,752
)
 
(4,316
)
Accumulated other comprehensive income
9

 
15

Retained earnings
3,991

 
4,031

Total stockholders’ equity
2,223

 
2,616

Total liabilities and stockholders’ equity
$
4,962

 
$
5,110


See accompanying notes.

4


INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

(In millions, except shares in thousands)
Shares of
Common
Stock
 
Common
Stock and
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
Stockholders'
Equity
Balance at July 31, 2011
300,597

 
$
2,886

 
$
(4,316
)
 
$
15

 
$
4,031

 
$
2,616

Components of comprehensive net income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 
54

 
54

Other comprehensive loss, net of tax

 

 

 
(6
)
 

 
(6
)
Comprehensive net income
 
 
 
 
 
 
 
 
 
 
48

Issuance of treasury stock under employee stock plans
5,590

 
(39
)
 
150

 

 
(5
)
 
106

Stock repurchases under stock repurchase programs
(11,411
)
 

 
(586
)
 

 

 
(586
)
Cash dividends declared ($0.30 per share)

 

 

 

 
(89
)
 
(89
)
Tax benefit from share-based compensation plans

 
45

 

 

 

 
45

Share-based compensation expense

 
83

 

 

 

 
83

Balance at January 31, 2012
294,776

 
$
2,975

 
$
(4,752
)
 
$
9

 
$
3,991

 
$
2,223


(In millions, except shares in thousands)
Shares of
Common
Stock
 
Common
Stock and
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
Stockholders'
Equity
Balance at July 31, 2010
313,861

 
$
2,728

 
$
(3,315
)
 
$
11

 
$
3,397

 
$
2,821

Components of comprehensive net income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 
3

 
3

Other comprehensive income, net of tax

 

 

 

 

 

Comprehensive net income
 
 
 
 
 
 
 
 
 
 
3

Issuance of treasury stock under employee stock plans
9,583

 
(29
)
 
216

 

 

 
187

Stock repurchases under stock repurchase programs
(18,459
)
 

 
(860
)
 

 

 
(860
)
Tax benefit from share-based compensation plans

 
48

 

 

 

 
48

Share-based compensation expense

 
73

 

 

 

 
73

Balance at January 31, 2011
304,985

 
$
2,820

 
$
(3,959
)
 
$
11

 
$
3,400

 
$
2,272



See accompanying notes.

5


INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
 
Six Months Ended
(In millions)
January 31,
2012
 
January 31,
2011
 
January 31,
2012
 
January 31,
2011
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
118

 
$
73

 
$
54

 
$
3

 Adjustments to reconcile net income to net cash provided by
 operating activities:

 

 

 

Depreciation
44

 
41

 
88

 
78

Amortization of acquired intangible assets
17

 
20

 
45

 
39

Share-based compensation expense
43

 
38

 
83

 
73

Deferred income taxes
(12
)
 
(9
)
 
(17
)
 
16

Tax benefit from share-based compensation plans
15

 
16

 
45

 
48

Excess tax benefit from share-based compensation plans
(14
)
 
(14
)
 
(43
)
 
(41
)
Other
8

 
6

 
2

 
11

Total adjustments
101

 
98

 
203

 
224

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
(426
)
 
(333
)
 
(421
)
 
(345
)
Prepaid expenses, income taxes receivable and other assets
60

 
19

 
(18
)
 
(115
)
Accounts payable
45

 
41

 
84

 
46

Accrued compensation and related liabilities
27

 
23

 
(47
)
 
(59
)
Deferred revenue
207

 
214

 
182

 
185

Income taxes payable

 

 
1

 
(13
)
Other liabilities
128

 
123

 
112

 
121

Total changes in operating assets and liabilities
41

 
87

 
(107
)
 
(180
)
Net cash provided by operating activities
260

 
258

 
150

 
47

Cash flows from investing activities:
 
 
 
 
 
 
 
Purchases of available-for-sale debt securities
(146
)
 
(295
)
 
(343
)
 
(723
)
Sales of available-for-sale debt securities
130

 
777

 
266

 
1,415

Maturities of available-for-sale debt securities
48

 
87

 
89

 
221

Net change in money market funds and other cash equivalents held
 to satisfy customer fund obligations
(9
)
 
52

 
84

 
26

Net change in customer fund deposits
9

 
(26
)
 
(84
)
 

Purchases of property and equipment
(48
)
 
(84
)
 
(92
)
 
(135
)
Acquisitions of intangible assets

 

 

 
(3
)
Other
1

 
8

 
15

 
3

Net cash (used in) provided by investing activities
(15
)
 
519

 
(65
)
 
804

Cash flows from financing activities:
 
 
 
 
 
 
 
Net proceeds from issuance of treasury stock under
 employee stock plans
61

 
61

 
106

 
187

Purchases of treasury stock
(331
)
 
(530
)
 
(586
)
 
(860
)
Cash dividends paid to stockholders
(44
)
 

 
(89
)
 

Excess tax benefit from share-based compensation plans
14

 
14

 
43

 
41

Net cash used in financing activities
(300
)
 
(455
)
 
(526
)
 
(632
)
Effect of exchange rates on cash and cash equivalents
(1
)
 
(1
)
 
(4
)
 

Net (decrease) increase in cash and cash equivalents
(56
)
 
321

 
(445
)
 
219

Cash and cash equivalents at beginning of period
333

 
112

 
722

 
214

Cash and cash equivalents at end of period
$
277

 
$
433

 
$
277

 
$
433


See accompanying notes.

6


INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.
Description of Business and Summary of Significant Accounting Policies
Description of Business
Intuit Inc. provides business and financial management solutions for small and medium-sized businesses, consumers, accounting professionals and financial institutions. Our flagship products and services, including QuickBooks, TurboTax and Quicken, simplify small business management including payment and payroll processing, tax preparation and filing, and personal finance. Lacerte and ProSeries are Intuit’s tax preparation offerings for professional accountants. Our Financial Services business provides online banking solutions and services to banks and credit unions. Incorporated in 1984 and headquartered in Mountain View, California, we sell our products and services primarily in the United States.
Basis of Presentation
These condensed consolidated financial statements include the financial statements of Intuit and its wholly owned subsidiaries. We have eliminated all significant intercompany balances and transactions in consolidation. We have included all adjustments, consisting only of normal recurring items, which we considered necessary for a fair presentation of our financial results for the interim periods presented. These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2011. Results for the three and six months ended January 31, 2012 do not necessarily indicate the results we expect for the fiscal year ending July 31, 2012 or any other future period.
Seasonality
Our QuickBooks, Consumer Tax and Accounting Professionals businesses are highly seasonal. Revenue from our QuickBooks software products tends to be highest during our second and third fiscal quarters. Sales of income tax preparation products and services are heavily concentrated in the period from November through April. Seasonal patterns mean that our total net revenue is usually highest during our second quarter ending January 31 and third quarter ending April 30. We typically report losses in our first quarter ending October 31 and fourth quarter ending July 31, when revenue from our tax businesses is minimal while operating expenses continue at relatively consistent levels.
Significant Accounting Policies
We describe our significant accounting policies in Note 1 to the financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2011. There have been no changes to our significant accounting policies during the first six months of fiscal 2012.
Computation of Net Income (Loss) Per Share
We compute basic net income or loss per share using the weighted average number of common shares outstanding during the period. We compute diluted net income per share using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares include shares issuable upon the exercise of stock options and upon the vesting of restricted stock units (RSUs) under the treasury stock method.
We include stock options with combined exercise prices, unrecognized compensation expense and tax benefits that are less than the average market price for our common stock, and RSUs with unrecognized compensation expense and tax benefits that are less than the average market price for our common stock, in the calculation of diluted net income per share. We exclude stock options with combined exercise prices, unrecognized compensation expense and tax benefits that are greater than the average market price for our common stock, and RSUs with unrecognized compensation expense and tax benefits that are greater than the average market price for our common stock, from the calculation of diluted net income per share because their effect is anti-dilutive. Under the treasury stock method, the amount that must be paid to exercise stock options, the amount of compensation expense for future service that we have not yet recognized for stock options and RSUs, and the amount of tax benefits that will be recorded in additional paid-in capital when the awards become deductible are assumed to be used to repurchase shares.
In loss periods, basic net loss per share and diluted net loss per share are the same since the effect of potential common shares is anti-dilutive and therefore excluded.

7


The following table presents the composition of shares used in the computation of basic and diluted net income per share for the periods indicated.
 
Three Months Ended
 
Six Months Ended
(In millions, except per share amounts)
January 31,
2012
 
January 31,
2011
 
January 31,
2012
 
January 31,
2011
Numerator:
 
 
 
 
 
 
 
Net income
$
118

 
$
73

 
$
54

 
$
3

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Shares used in basic per share amounts:
 
 
 
 
 
 
 
Weighted average common shares outstanding
297

 
308

 
298

 
312

 
 
 
 
 
 
 
 
Shares used in diluted per share amounts:
 
 
 
 
 
 
 
Weighted average common shares outstanding
297

 
308

 
298

 
312

Dilutive common equivalent shares from stock options
 
 
 
 
 
 
 
and restricted stock awards
9

 
10

 
9

 
10

Dilutive weighted average common shares outstanding
306

 
318

 
307

 
322

 
 
 
 
 
 
 
 
Basic and diluted net income per share:
 
 
 
 
 
 
 
Basic net income per share
$
0.40

 
$
0.24

 
$
0.18

 
$
0.01

Diluted net income per share
$
0.39

 
$
0.23

 
$
0.18

 
$
0.01

 
 
 
 
 
 
 
 
Weighted average stock options and restricted stock units excluded from calculation due to anti-dilutive effect
3

 

 
3

 
1

Concentration of Credit Risk and Significant Customers
No customer accounted for 10% or more of total net revenue in the three or six months ended January 31, 2012 or January 31, 2011. Due to the seasonality of our small business, consumer tax and personal finance offerings, at January 31, 2012 the account of one retail customer represented approximately 13% of total accounts receivable. No customer accounted for 10% or more of total accounts receivable at July 31, 2011.
Recent Accounting Pronouncements
ASU 2011-04, “Fair Value Measurement (Topic 820)”
On May 12, 2011 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs" (ASU 2011-04). This update amends Accounting Standards Codification (ASC) Topic 820, “Fair Value Measurement and Disclosure.” ASU 2011-04 clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 is effective for annual and interim reporting periods beginning on or after December 15, 2011, which means that it will be effective for our fiscal quarter beginning February 1, 2012. The new guidance is to be adopted prospectively and early adoption is not permitted. We do not believe that adoption of ASU 2011-04 will have a significant impact on our consolidated financial statements.
ASU 2011-05 and ASU 2011-12, “Comprehensive Income (Topic 220)”
On June 16, 2011 the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (ASU 2011-05) and on December 23, 2011 the FASB issued ASU No. 2011-12, "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05." These updates amend ASC Topic 220, “Comprehensive Income” to provide that total comprehensive income will be reported in one continuous statement or two separate but consecutive statements of financial performance. Presentation of total comprehensive income in the statement of stockholders'

8


equity or the footnotes will no longer be allowed. The calculation of net income and basic and diluted net income per share will not be affected. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2011, which means that it will be effective for our fiscal year beginning August 1, 2012. Retrospective adoption is required and early adoption is permitted. We do not believe that adoption of ASU 2011-05 will have a significant impact on our consolidated financial statements.
ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350)”
On September 15, 2011, the FASB issued ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (ASU 2011-08)." This update amends ASC Topic 350, “Intangibles – Goodwill and Other” to give companies the option to perform a qualitative assessment that may allow them to skip the annual two-step test and reduce costs. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011, which means that it will be effective for our fiscal year beginning August 1, 2012. Early adoption is permitted. We are in the process of evaluating this update and therefore have not yet determined the impact that adoption of ASU 2011-08 will have on our consolidated financial statements.


2.
Fair Value Measurements
The authoritative guidance defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, we consider the principal or most advantageous market for an asset or liability and assumptions that market participants would use when pricing the asset or liability. In addition, we consider and use all valuation methods that are appropriate in estimating the fair value of an asset or liability.
The authoritative guidance establishes a fair value hierarchy that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities. In general, the authoritative guidance requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the measurement of its fair value. The three levels of input defined by the authoritative guidance are as follows:
Level 1 uses unadjusted quoted prices that are available in active markets for identical assets or liabilities.
Level 2 uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data for substantially the full term of the assets or liabilities.
Level 3 uses one or more significant inputs that are supported by little or no market activity and that are significant to the determination of fair value. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.

9


Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes financial assets and financial liabilities that we measured at fair value on a recurring basis at the dates indicated, classified in accordance with the fair value hierarchy described above.

 
January 31, 2012
 
July 31, 2011
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents, primarily money market funds
$
283

 
$

 
$

 
$
283

 
$
854

 
$

 
$

 
$
854

Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds

 
391

 

 
391

 

 
434

 

 
434

Municipal auction rate securities

 

 
54

 
54

 

 

 
59

 
59

Corporate notes

 
342

 

 
342

 

 
288

 

 
288

U.S. agency securities

 
124

 

 
124

 

 
152

 

 
152

Total available-for-sale debt securities

 
857

 
54

 
911

 

 
874

 
59

 
933

Total assets measured at fair value on a recurring basis
$
283

 
$
857

 
$
54

 
$
1,194

 
$
854

 
$
874

 
$
59

 
$
1,787

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior notes (1)
$

 
$
1,077

 
$

 
$
1,077

 
$

 
$
1,084

 
$

 
$
1,084

______________________________
(1)
Carrying value on our balance sheets at January 31, 2012 and July 31, 2011 was $999 million. See Note 5.

The following table summarizes our cash equivalents and available-for-sale debt securities by balance sheet classification and level in the fair value hierarchy at the dates indicated.

 
January 31, 2012
 
July 31, 2011
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In cash and cash equivalents
$
128

 
$

 
$

 
$
128

 
$
615

 
$

 
$

 
$
615

In funds held for customers
155

 

 

 
155

 
239

 

 

 
239

Total cash equivalents
$
283

 
$

 
$

 
$
283

 
$
854

 
$

 
$

 
$
854

Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In investments
$

 
$
682

 
$

 
$
682

 
$

 
$
699

 
$

 
$
699

In funds held for customers

 
175

 

 
175

 

 
175

 

 
175

In long-term investments

 

 
54

 
54

 

 

 
59

 
59

Total available-for-sale debt securities
$

 
$
857

 
$
54

 
$
911

 
$

 
$
874

 
$
59

 
$
933



We value our Level 1 assets, consisting primarily of money market funds, using quoted prices in active markets for identical instruments. Financial assets whose fair values we measure on a recurring basis using Level 2 inputs consist of municipal bonds, corporate notes and U.S. agency securities. We measure the fair values of these assets using quoted prices in active markets for similar instruments. Financial liabilities whose fair values we measure using Level 2 inputs consist of debt. See Note 5. We measure the fair value of our senior notes based on their trading prices and the interest rates we could obtain for other borrowings with similar terms. Financial assets whose fair values we measure using significant unobservable (Level 3)

10


inputs consist of municipal auction rate securities that are no longer liquid. These securities are included in long-term investments on our balance sheets at January 31, 2012 and July 31, 2011 based on the maturities of the underlying securities. There were no significant transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the six months ended January 31, 2012.
The following table presents a reconciliation of activity for our Level 3 assets for the six months ended January 31, 2012.

 
Six Months
 
Ended
(In millions)
January 31,
2012
Beginning balance
$
59

Settlements at par
(5
)
Ending balance
$
54


We estimated the fair values of these municipal auction rate securities at January 31, 2012 and July 31, 2011 using a discounted cash flow model that we prepared. Using our discounted cash flow model we determined that the fair values of the municipal auction rate securities we held at January 31, 2012 were approximately equal to their par values. As a result, we recorded no decrease in the fair values of those securities for the six months then ended. We do not intend to sell our municipal auction rate securities and it is not more likely than not that we will be required to sell them before recovery at par, which may be at maturity. Based on our expected operating cash flows and our other sources of cash, we do not believe that the reduction in liquidity of our municipal auction rate securities will have a material impact on our overall ability to meet our liquidity needs.


3.
Cash and Cash Equivalents, Investments and Funds Held for Customers
We consider highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist primarily of AAA-rated money market funds in all periods presented. Investments consist of available-for-sale investment-grade debt securities that we carry at fair value. Funds held for customers consist of cash and cash equivalents and available-for-sale investment-grade debt securities. Long-term investments consist primarily of municipal auction rate securities that we carry at fair value. See Note 2. Except for direct obligations of the United States government, securities issued by agencies of the United States government, and money market funds, we diversify our investments by limiting our holdings with any individual issuer.
The following table summarizes our cash and cash equivalents, investments and funds held for customers by balance sheet classification at the dates indicated.

 
January 31, 2012
 
July 31, 2011
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Classification on balance sheets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
277

 
$
277

 
$
722

 
$
722

Investments
681

 
682

 
698

 
699

Funds held for customers
330

 
330

 
413

 
414

Long-term investments
59

 
59

 
63

 
63

Total cash and cash equivalents, investments, and funds
held for customers
$
1,347

 
$
1,348

 
$
1,896

 
$
1,898



11


The following table summarizes our cash and cash equivalents, investments and funds held for customers by investment category at the dates indicated.

 
January 31, 2012
 
July 31, 2011
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Type of issue:
 
 
 
 
 
 
 
Total cash and cash equivalents
$
432

 
$
432

 
$
961

 
$
961

Available-for-sale debt securities:
 
 
 
 
 
 
 
Municipal bonds
391

 
391

 
434

 
434

Municipal auction rate securities
54

 
54

 
59

 
59

Corporate notes
341

 
342

 
287

 
288

U.S. agency securities
124

 
124

 
151

 
152

Total available-for-sale debt securities
910

 
911

 
931

 
933

Other long-term investments
5

 
5

 
4

 
4

Total cash and cash equivalents, investments, and funds
held for customers
$
1,347

 
$
1,348

 
$
1,896

 
$
1,898



We use the specific identification method to compute gains and losses on investments. We include realized gains and losses on our available-for-sale debt securities in interest and other income, net in our statements of operations. Gross realized gains and losses on our available-for-sale debt securities for the three and six months ended January 31, 2012 and January 31, 2011 were not significant. We accumulate unrealized gains and losses on our available-for-sale debt securities, net of tax, in accumulated other comprehensive income in the stockholders’ equity section of our balance sheets. Gross unrealized gains and losses on our available-for-sale debt securities at January 31, 2012 and July 31, 2011 were not significant.
We periodically review our investment portfolios to determine if any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. We believe that the investments we held at January 31, 2012 were not other-than-temporarily impaired. Unrealized losses at January 31, 2012 were not significant and were due to changes in interest rates, including market credit spreads, and not due to increased credit risks associated with specific securities. We do not intend to sell these investments and it is not more likely than not that we will be required to sell them before recovery at par, which may be at maturity.
The following table summarizes our available-for-sale debt securities classified by the stated maturity date of the security at the dates indicated.

 
January 31, 2012
 
July 31, 2011
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Due within one year
$
299

 
$
299

 
$
267

 
$
267

Due within two years
313

 
314

 
323

 
324

Due within three years
171

 
171

 
190

 
191

Due after three years
127

 
127

 
151

 
151

Total available-for-sale debt securities
$
910

 
$
911

 
$
931

 
$
933


Available-for-sale debt securities due after three years in the table above include our municipal auction rate securities. See Note 2 for more information. All of the remaining securities in that category had effective maturities of three years or less due to interest reset dates or mandatory call dates.

12



4.
Current Liabilities
Current Portion of Long-Term Debt
The current portion of long-term debt consists of $500 million of 5.40% senior unsecured notes due on March 15, 2012, less the unamortized discount. See Note 5, "Long-Term Obligations - Long-Term Debt," for more information.
Unsecured Revolving Credit Facility
On March 22, 2007 we entered into an agreement with certain institutional lenders for a $500 million unsecured revolving credit facility that was due to expire on March 22, 2012. We terminated this agreement as of February 17, 2012. Advances under the credit facility would have accrued interest at rates that were equal to, at our election, either Citibank’s base rate or the London InterBank Offered Rate (LIBOR) plus a margin that ranged from 0.18% to 0.575% based on our senior debt credit ratings. The agreement included covenants that required us to maintain a ratio of total debt to annual earnings before interest, taxes, depreciation and amortization (EBITDA) of not greater than 3.25 to 1.00 and a ratio of annual EBITDA to interest payable of not less than 3.00 to 1.00. We were in compliance with these covenants at January 31, 2012. We did not borrow under this credit facility.
On February 17, 2012 we entered into a new agreement with certain institutional lenders for a $500 million unsecured revolving credit facility that will expire on February 17, 2017. Advances under the credit facility will accrue interest at rates that are equal to, at our election, either JP Morgan's alternate base rate plus a margin that ranges from 0% to 0.5% or LIBOR plus a margin that ranges from 0.9% to 1.5%. Actual margins under either election will be based on our senior debt credit ratings. The agreement includes covenants that require us to maintain a ratio of total debt to annual earnings before interest, taxes, depreciation and amortization (EBITDA) of not greater than 3.25 to 1.00 and a ratio of annual EBITDA to interest payable of not less than 3.00 to 1.00. We may use amounts borrowed under this credit facility for general corporate purposes, including future acquisitions.
Other Current Liabilities
Other current liabilities were as follows at the dates indicated:

(In millions)
January 31,
2012
 
July 31,
2011
Reserve for product returns
$
86

 
$
20

Reserve for rebates
50

 
11

Current portion of license fee payable
10

 
10

Current portion of deferred rent
7

 
7

Interest payable
21

 
21

Executive deferred compensation plan liabilities
52

 
50

Other
32

 
22

Total other current liabilities
$
258

 
$
141


The balances of several of our other current liabilities, particularly our reserves for product returns and rebates, are affected by the seasonality of our business. See Note 1, “Seasonality.”


5.
Long-Term Obligations
Long-Term Debt
On March 12, 2007 we issued $500 million of 5.40% senior unsecured notes due on March 15, 2012 and $500 million of 5.75% senior unsecured notes due on March 15, 2017 (together, the Notes), for a total principal amount of $1 billion. We carried the Notes at face value less the unamortized discount in current portion of long-term debt and long-term debt on our balance sheets at January 31, 2012 and July 31, 2011. The Notes are redeemable by Intuit at any time, subject to a make-whole premium. The Notes include covenants that limit our ability to grant liens on our facilities and to enter into sale and leaseback transactions, subject to significant allowances. We paid $28 million in cash for interest on the Notes during the six months ended January 31, 2012 and January 31, 2011.

13


Other Long-Term Obligations
Other long-term obligations were as follows at the dates indicated:

(In millions)
January 31,
2012
 
July 31,
2011
Total license fee payable
$
62

 
$
60

Total deferred rent
53

 
52

Long-term deferred revenue
40

 
40

Long-term income tax liabilities
39

 
42

Long-term payables
10

 
12

Other

 
1

Total long-term obligations
204

 
207

Less current portion (included in other current liabilities)
(17
)
 
(17
)
Long-term obligations due after one year
$
187

 
$
190



6.
Income Taxes
Effective Tax Rate
We compute our provision for or benefit from income taxes by applying the estimated annual effective tax rate to income or loss from recurring operations and adding the effects of any discrete income tax items specific to the period. Our effective tax rate for the three months ended January 31, 2012 was approximately 34% and did not differ significantly from the federal statutory rate of 35%. The benefit we received from the domestic production activities deduction and the federal research and experimentation credit was substantially offset by state income taxes. Our effective tax rate for the three months ended January 31, 2011 was approximately 28%. Excluding discrete tax benefits primarily related to the retroactive reinstatement of the federal research and experimentation credit as described below, our effective tax rate for that quarter was approximately 36% and did not differ significantly from the federal statutory rate of 35%. State income taxes were substantially offset by the benefit we received from the domestic production activities deduction and the federal research and experimentation credit.
Our effective tax rate for the six months ended January 31, 2012 was approximately 33% and did not differ significantly from the federal statutory rate of 35%. The benefit we received from the domestic production activities deduction and the federal research and experimentation credit were substantially offset by state income taxes. We recorded a $12 million tax benefit on a pre-tax loss of $9 million for the six months ended January 31, 2011. Excluding discrete tax benefits primarily related to the retroactive reinstatement of the federal research and experimentation credit as described below, our effective tax rate for that period was approximately 36% and did not differ significantly from the statutory rate of 35%. State income taxes were substantially offset by the benefit we received from the domestic production activities deduction and the federal research and experimentation credit.
The decreases in the effective tax rates for the three and six months ended January 31, 2012 compared with the effective tax rates excluding discrete tax benefits for the three and six months ended January 31, 2011 were primarily related to the decrease in the California tax rate after the adoption of single sales factor apportionment effective August 1, 2011.
In December 2010 the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010 was signed into law. The Act included a reinstatement of the federal research and experimentation credit through December 31, 2011 that was retroactive to January 1, 2010. We recorded a discrete tax benefit of approximately $9 million for the retroactive amount related to fiscal 2010 and the first quarter of fiscal 2011 during the three months ended January 31, 2011.
Unrecognized Tax Benefits and Other Considerations
The total amount of our unrecognized tax benefits at July 31, 2011 was $41 million. Net of related deferred tax assets, unrecognized tax benefits were $35 million at that date. If we were to recognize these net benefits, our income tax expense would reflect a favorable net impact of $35 million. There were no material changes to these amounts during the six months ended January 31, 2012. We do not believe that it is reasonably possible that there will be a significant increase or decrease in our unrecognized tax benefits over the next 12 months.

14



7.
Stockholders’ Equity
Stock Repurchase Programs
Intuit’s Board of Directors has authorized a series of common stock repurchase programs. Shares of common stock repurchased under these programs become treasury shares. We repurchased 11.4 million shares for $586 million under these programs during the six months ended January 31, 2012 and 18.5 million shares for $860 million under these programs during the six months ended January 31, 2011. At January 31, 2012, we had authorization from our Board of Directors to expend up to an additional $53 million for stock repurchases through August 16, 2013 and $2 billion for stock repurchases through August 15, 2014.
Repurchased shares of our common stock are held as treasury shares until they are reissued or retired. When we reissue treasury stock, if the proceeds from the sale are more than the average price we paid to acquire the shares we record an increase in additional paid-in capital. Conversely, if the proceeds from the sale are less than the average price we paid to acquire the shares, we record a decrease in additional paid-in capital to the extent of increases previously recorded for similar transactions and a decrease in retained earnings for any remaining amount.
Dividends on Common Stock
During the three months ended October 31, 2011 and January 31, 2012 we declared and paid quarterly cash dividends of $0.15 per share that totaled approximately $45 million and $44 million. In February 2012 our Board of Directors declared a quarterly cash dividend of $0.15 per share of outstanding common stock payable on April 18, 2012 to stockholders of record at the close of business on April 10, 2012. Future declarations of dividends and the establishment of future record dates and payment dates are subject to the final determination of our Board of Directors.
Share-Based Compensation Expense
The following table summarizes the total share-based compensation expense that we recorded for the periods shown.

 
Three Months Ended
 
Six Months Ended
(In millions, except per share amounts)
January 31,
2012
 
January 31,
2011
 
January 31,
2012
 
January 31,
2011
Cost of revenue
$
2

 
$
2

 
$
3

 
$
3

Selling and marketing
15

 
12

 
29

 
21

Research and development
14

 
12

 
26

 
25

General and administrative
12

 
12

 
25

 
24

Total share-based compensation expense
43

 
38

 
83

 
73

Income tax benefit
(14
)
 
(13
)
 
(27
)
 
(25
)
Decrease in net income
$
29

 
$
25

 
$
56

 
$
48

Decrease in net income per share:
 
 
 
 

 

Basic
$
0.10

 
$
0.08

 
$
0.19

 
$
0.15

Diluted
$
0.09

 
$
0.08

 
$
0.18

 
$
0.15



15



Stock Option Activity and Related Share-Based Compensation Expense
A summary of activity under all share-based compensation plans for the six months ended January 31, 2012 was as follows:

 
 
 
Options Outstanding
(Shares in thousands)
Shares
Available
for Grant
 
Number
of Shares
 
Weighted
Average
Exercise
Price
Per Share
Balance at July 31, 2011
30,716

 
22,679

 
$
32.38

Options granted
(238
)
 
238

 
48.09

Restricted stock units granted (2)
(965
)
 

 

Options exercised

 
(4,051
)
 
28.19

Options canceled or expired (1)
264

 
(267
)
 
36.45

Restricted stock units forfeited (1)(2)
868

 

 

Balance at January 31, 2012
30,645

 
18,599

 
$
33.44

 
 
 
 
 
 
Exercisable at January 31, 2012
 
 
11,956

 
$
29.64

________________________________
(1)
Stock options and restricted stock units canceled, expired or forfeited under our 2005 Equity Incentive Plan are returned to the pool of shares available for grant. Stock options and restricted stock units canceled, expired or forfeited under older expired plans are not returned to the pool of shares available for grant.
(2)
Under the terms of our 2005 Equity Incentive Plan as amended on January 19, 2011, RSUs granted from the pool of shares available for grant on or after November 1, 2010 reduce the pool by 2.3 shares for each share granted. RSUs forfeited and returned to the pool of shares available for grant increase the pool by 2.3 shares for each share forfeited.

At January 31, 2012, there was approximately $51 million of unrecognized compensation cost related to non-vested stock options that we expect to recognize as expense in the future. We will adjust unrecognized compensation cost for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average vesting period of 1.8 years.
Restricted Stock Unit Activity and Related Share-Based Compensation Expense
A summary of restricted stock unit activity for the six months ended January 31, 2012 was as follows:

 
Restricted Stock Units
(Shares in thousands)
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Nonvested at July 31, 2011
11,055

 
$
37.92

Granted
419

 
46.57

Vested
(1,678
)
 
32.79

Forfeited
(377
)
 
37.42

Nonvested at January 31, 2012
9,419

 
$
39.24



At January 31, 2012, there was approximately $188 million of unrecognized compensation cost related to non-vested RSUs and restricted stock that we expect to recognize as expense in the future. We will adjust unrecognized compensation cost for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average vesting period of 2.1 years.

16




8.
Litigation
On January 13, 2012, two putative class actions were filed against Intuit Inc. in connection with our TurboTax income tax preparation software: Smith v. Intuit Inc. (U.S. District Court, Northern District of California) and Quildon v. Intuit Inc. (California Superior Court, Santa Clara County). The plaintiffs in both cases assert that our refund processing service fees are “refund anticipation loans” and our disclosures about those fees do not comply with California and federal laws. The Smith case was brought in federal court on behalf of a proposed nationwide class and subclasses; the Quildon case was brought in state court on behalf of a proposed California class and subclasses. Otherwise the two complaints are substantively identical. In each case the plaintiffs seek monetary relief (including restitution, statutory damages, treble damages, and interest) in an unspecified amount, as well as attorneys' fees and costs. On February 22, 2012, Intuit removed the Quildon case to federal court. Intuit has not yet responded substantively to either complaint. We believe we have meritorious defenses to the claims asserted in these actions and intend to defend vigorously against them. We believe that liabilities associated with these cases, while possible, are not probable, and therefore we have not recorded any accrual for them as of January 31, 2012. Further, any possible range of loss cannot be reasonably estimated at this time.
Intuit is subject to certain routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of our business, including assertions that we may be infringing patents or other intellectual property rights of others. We currently believe that, in addition to any amounts accrued, the amount of potential losses, if any, for any pending claims of any type (either alone or combined) will not have a material impact on our consolidated financial statements. The ultimate outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on Intuit because of defense costs, negative publicity, diversion of management resources and other factors. Our failure to obtain necessary license or other rights, or litigation arising out of intellectual property claims, could adversely affect our business.


9.
Segment Information
We have defined seven reportable segments based on factors such as how we manage our operations and how our chief operating decision maker views results. We define the chief operating decision maker as our Chief Executive Officer and our Chief Financial Officer. Our chief operating decision maker organizes and manages our business primarily on the basis of product and service offerings.
All of our business segments except Other Businesses operate primarily in the United States and sell primarily to customers in the United States. International total net revenue was less than 5% of consolidated total net revenue for all periods presented.
We include expenses such as corporate selling and marketing, product development, and general and administrative expenses and share-based compensation expenses that are not allocated to specific segments in unallocated corporate items. Unallocated corporate items also include amortization of acquired technology, amortization of other acquired intangible assets, and goodwill and intangible asset impairment charges.
The accounting policies of our reportable segments are the same as those described in the summary of significant accounting policies in Note 1 to the financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2011. Except for goodwill and purchased intangible assets, we do not generally track assets by reportable segment and, consequently, we do not disclose total assets by reportable segment.

17



The following table shows our financial results by reportable segment for the periods indicated.

 
Three Months Ended
 
Six Months Ended
(In millions)
January 31,
2012
 
January 31,
2011
 
January 31,
2012
 
January 31,
2011
Net revenue:
 
 
 
 
 
 
 
Financial Management Solutions
$
199

 
$
187

 
$
367

 
$
341

Employee Management Solutions
128

 
116

 
249

 
223

Payment Solutions
99

 
85

 
193

 
165

Consumer Tax
295

 
205

 
336

 
234

Accounting Professionals
131

 
122

 
158

 
147

Financial Services
92

 
84

 
181

 
165

Other Businesses
75

 
79

 
129

 
135

Total net revenue
$
1,019

 
$
878

 
$
1,613

 
$
1,410

 
 
 
 
 

 

Operating income:
 
 
 
 

 

Financial Management Solutions
$
67

 
$
60

 
$
109

 
$
93

Employee Management Solutions
72

 
63

 
147

 
127

Payment Solutions
23

 
12

 
47

 
24

Consumer Tax
114

 
53

 
86

 
24

Accounting Professionals
81

 
70

 
67

 
54

Financial Services
25

 
22

 
43

 
37

Other Businesses
12

 
16

 
9

 
17

Total segment operating income
394

 
296

 
508

 
376

Unallocated corporate items:
 
 
 
 

 

Share-based compensation expense
(43
)
 
(38
)
 
(83
)
 
(73
)
Other common expenses
(145
)
 
(131
)
 
(288
)
 
(265
)
Amortization of acquired technology
(4
)
 
(5
)
 
(8
)
 
(9
)
Amortization of other acquired intangible assets
(10
)
 
(11
)
 
(31
)
 
(22
)
Total unallocated corporate items
(202
)
 
(185
)
 
(410
)
 
(369
)
Total operating income
$
192

 
$
111

 
$
98

 
$
7



18


ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) includes the following sections:
Executive Overview that discusses at a high level our operating results and some of the trends that affect our business.
Significant changes since our most recent Annual Report on Form 10-K in the Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments underlying our financial statements.
Results of Operations that includes a more detailed discussion of our revenue and expenses.
Liquidity and Capital Resources which discusses key aspects of our statements of cash flows, changes in our balance sheets, and our financial commitments.
You should note that this MD&A discussion contains forward-looking statements that involve risks and uncertainties. Please see Item 1A in Part II of this Quarterly Report on Form 10-Q for important information to consider when evaluating such statements.
You should read this MD&A in conjunction with the financial statements and related notes in Part I, Item 1 of this report and our Annual Report on Form 10-K for the fiscal year ended July 31, 2011.

Executive Overview
This overview provides a high level discussion of our operating results and some of the trends that affect our business. We believe that an understanding of these trends is important in order to understand our financial results for the first six months of fiscal 2012 as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Quarterly Report on Form 10-Q.
About Intuit
Intuit is a leading provider of business and financial management solutions for small and medium-sized businesses, consumers, accounting professionals and financial institutions. We organize our portfolio of businesses into four principal categories — Small Business Group, Tax, Financial Services and Other Businesses. These categories include seven financial reporting segments.
Small Business Group: This category includes three segments — Financial Management Solutions, Employee Management Solutions, and Payment Solutions.
Our Financial Management Solutions segment includes QuickBooks financial and business management software and services; technical support; financial supplies; and Intuit Websites, which provides website design and hosting services for small and medium-sized businesses.
Our Employee Management Solutions segment provides payroll products and services for small businesses.
Our Payment Solutions segment provides merchant services for small businesses, including credit and debit card processing, electronic check conversion and automated clearing house services.
     Tax: This category includes two segments — Consumer Tax and Accounting Professionals.
Our Consumer Tax segment includes TurboTax income tax preparation products and services for consumers and small businesses.
Our Accounting Professionals segment includes Lacerte, ProSeries and Intuit Tax Online (formerly ProLine Tax Online) professional tax products and services. This segment also includes QuickBooks Premier Accountant Edition and the QuickBooks ProAdvisor Program for accounting professionals.

Financial Services: This segment consists primarily of outsourced online financial management solutions for banks and credit unions provided by our Intuit Financial Services business.
Other Businesses: This segment includes Quicken personal finance products and services; Mint.com online personal finance services; Intuit Health online patient-to-provider communication solutions; and our businesses in Canada, the United Kingdom, India and Singapore.

19



Seasonality and Trends
Our QuickBooks, Consumer Tax and Accounting Professionals businesses are highly seasonal. Revenue from our QuickBooks software products tends to be highest during our second and third fiscal quarters. Sales of income tax preparation products and services are heavily concentrated in the period from November through April. In our Consumer Tax business, a greater proportion of our revenue has been occurring later in this seasonal period due in part to the growth in sales of TurboTax Online, for which revenue is recognized upon printing or electronic filing of a tax return. The seasonality of our Consumer Tax and Accounting Professionals revenue is also affected by the timing of the availability of tax forms from taxing agencies and the ability of those agencies to receive electronic tax return submissions. The availability of tax forms or the ability of taxing agencies to receive submissions can cause revenue to shift between our second fiscal quarter and subsequent fiscal quarters. These seasonal patterns mean that our total net revenue is usually highest during our second quarter ending January 31 and third quarter ending April 30. We typically report losses in our first quarter ending October 31 and fourth quarter ending July 31, when revenue from our tax businesses is minimal while operating expenses continue at relatively consistent levels. We believe the seasonality of our revenue is likely to continue in the future. In our MD&A we often focus on year-to-date results for our seasonal businesses as they are generally more meaningful than quarterly results.
Overview of Financial Results
Total net revenue for the first six months of fiscal 2012 was $1.6 billion, an increase of 14% compared with the same period of fiscal 2011. Our Consumer Tax segment and our Our Small Business Group were the key drivers of revenue growth in the first half of fiscal 2012. Revenue in our Consumer Tax segment increased 43% compared with the same period a year ago due to 39% growth in TurboTax Online federal units. These results include the impact of last year's delay in the Internal Revenue Service's acceptance of certain electronically filed tax returns, which contributed to a shift in Consumer Tax revenue from the second quarter of fiscal 2011 to the third quarter of fiscal 2011. Revenue in our Small Business Group grew 11% compared with the same period a year ago due to growth in connected services offerings and improved offering mix. Operating income increased to $98 million in the first six months of fiscal 2012 from $7 million in the same period of fiscal 2011 due to higher revenue partially offset by higher costs and expenses, including higher spending for staffing expenses and share-based compensation expenses. Net income increased to $54 million in the first six months of fiscal 2012 from $3 million in the same period of fiscal 2011. Our effective tax rate for the first half of fiscal 2012 was approximately 33%. Including certain discrete tax benefits, we recorded a tax benefit of $12 million on a pre-tax loss of $9 million in the first half of fiscal 2011. Diluted net income per share for the first six months of fiscal 2012 increased to $0.18 from $0.01 in the same period of fiscal 2011 as a result of the higher net income and the decline in weighted average diluted common shares compared with the same period of fiscal 2011.
We ended the first six months of fiscal 2012 with cash, cash equivalents and investments totaling $1.0 billion. In the first six months of fiscal 2012 we generated cash from operations and from the issuance of common stock under employee stock plans. During the same period we used cash for the repurchase of shares of our common stock under our stock repurchase programs, for the payment of cash dividends, and for capital expenditures. At January 31, 2012, we had authorization from our Board of Directors to expend up to an additional $53 million for stock repurchases through August 16, 2013 and $2 billion for stock repurchases through August 15, 2014.


Critical Accounting Policies and Estimates
In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2011 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. We believe that there were no significant changes in those critical accounting policies and estimates during the first six months of fiscal 2012. Senior management has reviewed the development and selection of our critical accounting policies and estimates and their disclosure in this Quarterly Report on Form 10-Q with the Audit and Risk Committee of our Board of Directors.



20


Results of Operations
Financial Overview
(Dollars in millions, except per share amounts)
Q2
FY12
 
Q2
FY11
 
$
Change
 
%
Change
 
YTD
Q2
FY12
 
YTD
Q2
FY11
 
$
Change
 
%
Change
Total net revenue
$
1,019

 
$
878

 
$
141

 
16
%
 
$
1,613

 
$
1,410

 
$
203

 
14
%
Operating income
192

 
111

 
81

 
73
%
 
98

 
7

 
91

 
1,300
%
Net income
118

 
73

 
45

 
62
%
 
54

 
3

 
51

 
1,700
%
Diluted net income
per share
$
0.39

 
$
0.23

 
$
0.16

 
70
%
 
$
0.18

 
$
0.01

 
$
0.17

 
1,700
%

Current Fiscal Quarter
Total net revenue increased $141 million or 16% in the second quarter of fiscal 2012 compared with the same quarter of fiscal 2011. In our Small Business Group, revenue was up 9%. Financial Management Solutions segment revenue increased 6% due to growth in QuickBooks Online and QuickBooks Enterprise revenue. Employee Management Solutions segment revenue increased 9% due to favorable offering mix, improved customer adoption of payroll direct deposit services, and price increases for desktop payroll customers. Payment Solutions segment revenue increased 17% due to fee structure changes and growth in the merchant customer base. In our Consumer Tax segment, revenue increased 44% due to growth in TurboTax Online federal units. These results include the impact of last year's delay in the Internal Revenue Service's acceptance of certain electronically filed tax returns, which contributed to a shift in Consumer Tax revenue from the second quarter of fiscal 2011 to the third quarter of fiscal 2011. Accounting Professionals segment revenue increased 8% due to price increases in our professional tax business and higher QuickBooks Premier Accountant Edition and ProAdvisor Program revenue. Financial Services segment revenue increased 9% due to growth in mobile banking revenue and, to a lesser extent, to higher bill-pay revenue. Other Businesses segment revenue decreased 5% due to lower Quicken revenue partially offset by growth in global revenue.
Operating income increased 73% in the second quarter of fiscal 2012 compared with the same quarter of fiscal 2011 due to the increase in revenue described above partially offset by higher operating expenses. Total operating expenses were $30 million higher in the fiscal 2012 quarter due to higher staffing expenses. See "Operating Expenses” later in this Item 2 for more information.
Net income increased 62% in the second quarter of fiscal 2012 compared with the same quarter of fiscal 2011. Our effective tax rate for the second quarter of fiscal 2012 was approximately 34%. Including certain discrete tax benefits, our effective tax rate for the second quarter of fiscal 2011 was approximately 28%. See "Income Taxes" later in this Item 2 for more information about our effective tax rates for these periods. Diluted net income per share for the second quarter of fiscal 2012 increased 70% to $0.39 as a result of the higher net income and the decline in weighted average diluted common shares compared with the same quarter of fiscal 2011.
Fiscal Year to Date
Total net revenue increased $203 million or 14% in the first six months of fiscal 2012 compared with the same period of fiscal 2011. In our Small Business Group, revenue was up 11%. Financial Management Solutions segment revenue increased 7% due to growth in QuickBooks Online and QuickBooks Enterprise revenue. Employee Management Solutions segment revenue increased 11% due to favorable offering mix, improved customer adoption of payroll direct deposit services, and price increases for desktop payroll customers. Payment Solutions segment revenue increased 18% due to fee structure changes and growth in the merchant customer base. In our Consumer Tax segment, revenue increased 43% due to 39% growth in TurboTax Online federal units. These results include the impact of last year's delay in the Internal Revenue Service's acceptance of certain electronically filed tax returns, which contributed to a shift in Consumer Tax revenue from the second quarter of fiscal 2011 to the third quarter of fiscal 2011. Accounting Professionals segment revenue grew 8% due to price increases in our professional tax business and higher QuickBooks Premier Accountant Edition and ProAdvisor Program revenue. Financial Services segment revenue increased 9% due to growth in mobile banking revenue and, to a lesser extent, to higher bill-pay revenue. Other Businesses segment revenue decreased 4% due to lower Quicken revenue partially offset by growth in global revenue.
Operating income increased to $98 million in the first six months of fiscal 2012 from $7 million in the same period of fiscal 2011 due to the increase in revenue described above partially offset by higher operating expenses. Total operating expenses were $69 million higher in the fiscal 2012 period, including about $51 million for higher staffing expense and about $10 million for higher share-based compensation expenses. See "Operating Expenses” later in this Item 2 for more information.


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Net income increased to $54 million in the first six months of fiscal 2012 from $3 million in the same period of fiscal 2011. Our effective tax rate for the first half of fiscal 2012 was approximately 33%. Including certain discrete tax benefits, we recorded a tax benefit of $12 million on a pre-tax loss of $9 million in the first half of fiscal 2011. See "Income Taxes" later in this Item 2 for more information about our effective tax rates for these periods. Diluted net income per share for the first six months of fiscal 2012 increased to $0.18 from $0.01 in the same period of fiscal 2011 as a result of the higher net income and the decline in weighted average diluted common shares compared with the same period of fiscal 2011.
Business Segment Results
The information below is organized in accordance with our seven reportable business segments. All of our business segments except Other Businesses operate primarily in the United States and sell primarily to customers in the United States. International total net revenue was less than 5% of consolidated total net revenue for all periods presented.
Segment operating income or loss is segment net revenue less segment cost of revenue and operating expenses. See “Executive Overview — Seasonality and Trends” earlier in this Item 2 for a description of the seasonality of our business. Segment expenses do not include certain costs, such as corporate selling and marketing, product development, and general and administrative expenses and share-based compensation expenses, which are not allocated to specific segments. These unallocated costs totaled $371 million in the first six months of fiscal 2012 and $338 million in the first six months of fiscal 2011. Unallocated costs increased in the fiscal 2012 period due to increases in corporate product development and selling and marketing expenses in support of the growth of our businesses, and to a lesser extent to increases in share-based compensation expense.
Segment expenses also do not include amortization of acquired technology, amortization of other acquired intangible assets, and goodwill and intangible asset impairment charges. See Note 9 to the financial statements in Part I, Item 1 of this report for reconciliations of total segment operating income or loss to consolidated operating income or loss for each fiscal period presented.
We calculate revenue growth rates and segment operating margin figures using dollars in thousands. Those results may vary from figures calculated using the dollars in millions presented below.
Financial Management Solutions
(Dollars in millions)
Q2
FY12
 
Q2
FY11
 
%
Change
 
YTD
Q2
FY12
 
YTD
Q2
FY11
 
%
Change
Product revenue
$
116

 
$
115

 
 
 
$
205

 
$
199

 
 
Service and other revenue
83

 
72

 
 
 
162

 
142

 
 
Total segment revenue
$
199

 
$
187

 
6
%
 
$
367

 
$
341

 
7
%
% of total revenue
19
%
 
21
%
 
 
 
23
%
 
24
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment operating income
$
67

 
$
60

 
12
%
 
$
109

 
$
93

 
18
%
% of related revenue
34
%
 
32
%
 
 
 
30
%
 
27
%
 
 

Financial Management Solutions (FMS) product revenue is derived primarily from QuickBooks desktop software products and financial supplies such as paper checks, envelopes, invoices, business cards and business stationery. FMS service and other revenue is derived primarily from QuickBooks Online; QuickBooks technical support plans; Intuit Websites, which provides website design and hosting services for small and medium-sized businesses; QuickBase; and royalties from small business online services.
FMS total net revenue increased $12 million or 6% in the second quarter of fiscal 2012 compared with the same quarter of fiscal 2011 and increased $26 million or 7% in the first six months of fiscal 2012 compared with the same period of fiscal 2011. Strong growth in QuickBooks Online and QuickBooks Enterprise revenue drove higher average selling prices for QuickBooks offerings overall. Total QuickBooks software units increased 2% in the first half of fiscal 2012.
FMS segment operating income as a percentage of related revenue increased to 34% in the second quarter of fiscal 2012 from 32% in the same quarter of fiscal 2011 and increased to 30% in the first six months of fiscal 2012 from 27% in the same period of fiscal 2011. Operating income increased in the first six months of fiscal 2012 due to the increase in revenue described above and about $14 million in lower expenses for advertising and other marketing programs, partially offset by about $10 million for higher staffing expenses.

22


Employee Management Solutions

(Dollars in millions)
Q2
FY12