Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - INTUIT INCFinancial_Report.xls
EX-32.02 - EXHIBIT - INTUIT INCexhibit3202-fy15q1.htm
EX-31.01 - EXHIBIT - INTUIT INCexhibit3101-fy15q1.htm
EX-31.02 - EXHIBIT - INTUIT INCexhibit3102-fy15q1.htm
EX-32.01 - EXHIBIT - INTUIT INCexhibit3201-fy15q1.htm
EX-10.01 - EXHIBIT - INTUIT INCexhibit1001-fy15q1.htm



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________
FORM 10-Q
þ
 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the quarterly period ended October 31, 2014
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 þ 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 þ 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 þ
 
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 þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 285,496,420 shares of Common Stock, $0.01 par value, were outstanding at November 14, 2014.
 



INTUIT INC.
FORM 10-Q
INDEX

 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-10.01
 
 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
(In millions, except per share amounts)
October 31,
2014
 
October 31,
2013
Net revenue:
 
 
 
Product
$
233

 
$
229

Service and other
439

 
393

Total net revenue
672

 
622

Costs and expenses:
 
 
 
Cost of revenue:
 
 
 
Cost of product revenue
34

 
29

Cost of service and other revenue
131

 
108

Amortization of acquired technology
10

 
6

Selling and marketing
281

 
258

Research and development
200

 
176

General and administrative
124

 
118

Amortization of other acquired intangible assets
6

 
4

Total costs and expenses
786

 
699

Operating loss from continuing operations
(114
)
 
(77
)
Interest expense
(7
)
 
(8
)
Interest and other income, net

 
5

Loss before income taxes
(121
)
 
(80
)
Income tax benefit
(37
)
 
(23
)
Net loss from continuing operations
(84
)
 
(57
)
Net income from discontinued operations

 
46

Net loss
$
(84
)
 
$
(11
)
 
 
 
 
Basic net loss per share from continuing operations
$
(0.29
)
 
$
(0.20
)
Basic net income per share from discontinued operations

 
0.16

Basic net loss per share
$
(0.29
)
 
$
(0.04
)
Shares used in basic per share calculations
286

 
288

 
 
 
 
Diluted net loss per share from continuing operations
$
(0.29
)
 
$
(0.20
)
Diluted net income per share from discontinued operations

 
0.16

Diluted net loss per share
$
(0.29
)
 
$
(0.04
)
Shares used in diluted per share calculations
286

 
288

 
 
 
 
Dividends declared per common share
$
0.25

 
$
0.19

See accompanying notes.

3


INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)

 
Three Months Ended
(In millions)
October 31,
2014
 
October 31,
2013
 
 
 
 
Net loss
$
(84
)
 
$
(11
)
Other comprehensive income (loss), net of income taxes:
 
 
 
Unrealized gains on available-for-sale debt securities

 
2

Unrealized losses on available-for-sale equity securities

 
(1
)
Foreign currency translation losses
(5
)
 
(2
)
Total other comprehensive loss, net
(5
)
 
(1
)
Comprehensive loss
$
(89
)
 
$
(12
)


See accompanying notes.


4


INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
October 31,
2014
 
July 31,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
542

 
$
849

Investments
1,047

 
1,065

Accounts receivable, net
140

 
134

Income taxes receivable
91

 
35

Deferred income taxes
140

 
133

Prepaid expenses and other current assets
119

 
116

Current assets before funds held for customers
2,079

 
2,332

Funds held for customers
358

 
289

Total current assets
2,437

 
2,621

Long-term investments
31

 
31

Property and equipment, net
629

 
606

Goodwill
1,639

 
1,635

Acquired intangible assets, net
186

 
199

Other assets
116

 
109

Total assets
$
5,038

 
$
5,201

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
198

 
$
161

Accrued compensation and related liabilities
139

 
278

Deferred revenue
511

 
526

Other current liabilities
154

 
167

Current liabilities before customer fund deposits
1,002

 
1,132

Customer fund deposits
358

 
289

Total current liabilities
1,360

 
1,421

Long-term debt
499

 
499

Long-term deferred revenue
52

 
10

Other long-term obligations
200

 
193

Total liabilities
2,111

 
2,123

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock and additional paid-in capital
3,687

 
3,561

Treasury stock, at cost
(6,544
)
 
(6,430
)
Accumulated other comprehensive loss
(7
)
 
(2
)
Retained earnings
5,791

 
5,949

Total stockholders’ equity
2,927

 
3,078

Total liabilities and stockholders’ equity
$
5,038

 
$
5,201


See accompanying notes.

5


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
Loss
 
Retained
Earnings
 
Total
Stockholders'
Equity
Balance at July 31, 2014
284,950

 
$
3,561

 
$
(6,430
)
 
$
(2
)
 
$
5,949

 
$
3,078

Comprehensive loss

 

 

 
(5
)
 
(84
)
 
(89
)
Issuance of stock under employee stock plans
1,787

 
47

 

 

 

 
47

Stock repurchases under stock repurchase programs
(1,318
)
 

 
(114
)
 

 

 
(114
)
Cash dividends declared ($0.25 per share)

 

 

 

 
(74
)
 
(74
)
Tax benefit from share-based compensation plans

 
18

 

 

 

 
18

Share-based compensation expense

 
61

 

 

 

 
61

Balance at October 31, 2014
285,419

 
$
3,687

 
$
(6,544
)
 
$
(7
)
 
$
5,791

 
$
2,927


(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, 2013
299,503

 
$
3,201

 
$
(4,952
)
 
$
20

 
$
5,262

 
$
3,531

Comprehensive loss

 

 

 
(1
)
 
(11
)
 
(12
)
Issuance of treasury stock under employee stock plans
2,801

 
(6
)
 
86

 

 

 
80

Stock repurchases under stock repurchase programs
(17,607
)
 
(280
)
 
(1,120
)
 

 

 
(1,400
)
Cash dividends declared ($0.19 per share)

 

 

 

 
(55
)
 
(55
)
Tax benefit from share-based compensation plans

 
33

 

 

 

 
33

Share-based compensation expense

 
47

 

 

 

 
47

Balance at October 31, 2013
284,697

 
$
2,995

 
$
(5,986
)
 
$
19

 
$
5,196

 
$
2,224



See accompanying notes.

6


INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
(In millions)
October 31,
2014
 
October 31,
2013
Cash flows from operating activities:
 
 
 
Net loss
$
(84
)
 
$
(11
)
 Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation
36

 
39

Amortization of acquired intangible assets
18

 
11

Share-based compensation expense
61

 
47

Pre-tax gain on sale of discontinued operations

 
(40
)
Deferred income taxes
(6
)
 
77

Tax benefit from share-based compensation plans
18

 
33

Excess tax benefit from share-based compensation plans
(18
)
 
(33
)
Other
12

 
5

Total adjustments
121

 
139

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(4
)
 
(11
)
Income taxes receivable
(56
)
 
(143
)
Prepaid expenses and other assets
(3
)
 
(44
)
Accounts payable
32

 
32

Accrued compensation and related liabilities
(139
)
 
(103
)
Deferred revenue
28

 
(29
)
Other liabilities
(13
)
 
(20
)
Total changes in operating assets and liabilities
(155
)
 
(318
)
Net cash used in operating activities
(118
)
 
(190
)
Cash flows from investing activities:
 
 
 
Purchases of available-for-sale debt securities
(365
)
 
(163
)
Sales of available-for-sale debt securities
147

 
71

Maturities of available-for-sale debt securities
229

 
79

Net change in money market funds and other cash equivalents held
 to satisfy customer fund obligations
(69
)
 
7

Net change in customer fund deposits
69

 
(7
)
Purchases of property and equipment
(55
)
 
(47
)
Acquisitions of businesses, net of cash acquired
(9
)
 
(9
)
Proceeds from divestiture of businesses

 
1,025

Other
(8
)
 
(7
)
Net cash provided by (used in) investing activities
(61
)
 
949

Cash flows from financing activities:
 
 
 
Net proceeds from issuance of stock under employee stock plans
47

 
72

Purchases of treasury stock
(114
)
 
(1,400
)
Cash dividends paid to stockholders
(74
)
 
(55
)
Excess tax benefit from share-based compensation plans
18

 
33

Net cash used in financing activities
(123
)
 
(1,350
)
Effect of exchange rates on cash and cash equivalents
(5
)
 
(1
)
Net decrease in cash and cash equivalents
(307
)
 
(592
)
Cash and cash equivalents at beginning of period
849

 
1,009

Cash and cash equivalents at end of period
$
542

 
$
417


See accompanying notes.

7


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 businesses, consumers, and accounting professionals. With flagship products and services that include QuickBooks, TurboTax, Quicken and Mint, we help customers solve important business and financial management problems such as running a small business, paying bills, filing income tax returns, and managing personal finances. ProSeries and Lacerte are Intuit’s tax preparation offerings for professional accountants. 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.
On June 16, 2014 we acquired Check Inc. We have included the results of operations for this company in our consolidated results of operations from the date of acquisition.
As discussed in Note 4, we sold our Intuit Financial Services (IFS) and Intuit Health businesses in August 2013. We have reclassified our statements of operations for all periods presented to reflect these two businesses as discontinued operations. Because the cash flows of our IFS and Intuit Health discontinued operations were not material for any period presented, we have not segregated the cash flows of those businesses from continuing operations on our statements of cash flows. Unless noted otherwise, discussions in these notes pertain to our continuing operations.
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, 2014. Results for the three months ended October 31, 2014 do not necessarily indicate the results we expect for the fiscal year ending July 31, 2015 or any other future period.
Seasonality
Historically, our QuickBooks, Consumer Tax, and Professional Tax offerings have been highly seasonal. Revenue from our QuickBooks software products has tended 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. 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. During these quarters, revenue from our tax businesses is minimal while core operating expenses such as research and development 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, 2014. See the discussion of changes to our policy for recognizing product revenue below. There have been no other changes to our significant accounting policies during the first three months of fiscal 2015.
Revenue Recognition - Product Revenue
Prior to fiscal 2015, we recognized revenue from the sale of our packaged software products when legal title transferred. This was generally when our customers downloaded products from the Web, when we shipped the products or, in the case of certain agreements, when products were delivered to retailers. Beginning in fiscal 2015, we began delivering ongoing releases for our future QuickBooks and Quicken desktop products and for our future Professional Tax solutions. As a result, revenue for these QuickBooks and Quicken offerings will be recognized as services are provided over approximately three years and revenue for our Professional Tax solutions will be recognized as services are provided over the tax year.

8


Use of Estimates

In preparing our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP), we make certain estimates and assumptions that affect the amounts reported in our financial statements and the disclosures made in the accompanying notes. For example, we use estimates in determining the appropriate levels of reserves for product returns and rebates, the collectibility of accounts receivable, the appropriate levels of various accruals including accruals for litigation contingencies, the amount of our worldwide tax provision, and the realizability of deferred tax assets. We also use estimates in determining the remaining economic lives and fair values of acquired intangible assets, property and equipment, and other long-lived assets. In addition, we use assumptions to estimate the fair value of reporting units and share-based compensation. Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates.
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 consist of the 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 combined 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 combined 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.
All of the RSUs we grant have dividend rights. Since the dividend rights are subject to the same vesting requirements as the underlying equity awards they are considered a contingent transfer of value. Consequently, the RSUs are not considered participating securities and we do not present them separately in earnings per share.
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.

9


The following table presents the composition of shares used in the computation of basic and diluted net loss per share for the periods indicated.
 
Three Months Ended
(In millions, except per share amounts)
October 31,
2014
 
October 31,
2013
Numerator:
 
 
 
Net loss from continuing operations
$
(84
)
 
$
(57
)
Net income from discontinued operations

 
46

Net loss
$
(84
)
 
$
(11
)
 
 
 
 
Denominator:
 
 
 
Shares used in basic per share amounts:
 
 
 
Weighted average common shares outstanding
286

 
288

 
 
 
 
Shares used in diluted per share amounts:
 
 
 
Weighted average common shares outstanding
286

 
288

Dilutive common equivalent shares from stock options
 
 
 
and restricted stock awards

 

Dilutive weighted average common shares outstanding
286

 
288

 
 
 
 
Basic and diluted net loss per share:
 
 
 
Basic net loss per share from continuing operations
$
(0.29
)
 
$
(0.20
)
Basic net income per share from discontinued operations

 
0.16

Basic net loss per share
$
(0.29
)
 
$
(0.04
)
 
 
 
 
Diluted net loss per share from continuing operations
$
(0.29
)
 
$
(0.20
)
Diluted net income per share from discontinued operations

 
0.16

Diluted net loss per share
$
(0.29
)
 
$
(0.04
)
 
 
 
 
Shares excluded from computation of diluted net loss per share:
 
 
 
Weighted average stock options and restricted stock units that would have been included in the computation of dilutive common equivalent shares outstanding
if net income had been reported in the period
16

 
17

 
 
 
 
Weighted average stock options and restricted stock units excluded from
computation due to anti-dilutive effect
2

 
3

Concentration of Credit Risk and Significant Customers
No customer accounted for 10% or more of total net revenue in the three months ended October 31, 2014 or October 31, 2013. No customer accounted for 10% or more of gross accounts receivable at October 31, 2014 or July 31, 2014.
Recent Accounting Pronouncements
ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”
In April 2014 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This update raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures for discontinued operations and disposals that do not meet the definition of a discontinued operation. ASU 2014-08 is effective prospectively for fiscal years, and interim periods within those

10


years, beginning after December 15, 2014, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2015.
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”
In May 2014 the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This update supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible that more judgment and estimates may be required within the revenue recognition process than is required under present U.S. GAAP. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. The new standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2017. Early adoption is not permitted under U.S. GAAP. ASU 2014-09 allows adoption using either of two methods: (i) retrospective to each prior reporting period presented, with the option to elect certain practical expedients; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures. We are currently evaluating the impact of our pending adoption of ASU 2014-09 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.

11


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.
 
October 31, 2014
 
July 31, 2014
(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
$
431

 
$

 
$

 
$
431

 
$
652

 
$

 
$

 
$
652

Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds

 
647

 

 
647

 

 
701

 

 
701

Corporate notes

 
565

 

 
565

 

 
466

 

 
466

U.S. agency securities

 
10

 

 
10

 

 
42

 

 
42

Municipal auction rate securities

 

 
21

 
21

 

 

 
21

 
21

Total available-for-sale securities

 
1,222

 
21

 
1,243

 

 
1,209

 
21

 
1,230

Total assets measured at fair value on a recurring basis
$
431

 
$
1,222

 
$
21

 
$
1,674

 
$
652

 
$
1,209

 
$
21

 
$
1,882

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior notes (1)
$

 
$
550

 
$

 
$
550

 
$

 
$
556

 
$

 
$
556

______________________________
(1)
Carrying value on our balance sheet at October 31, 2014 was $499 million and at July 31, 2014 was $499 million. See Note 6.

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.
 
October 31, 2014
 
July 31, 2014
(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
$
248

 
$

 
$

 
$
248

 
$
507

 
$

 
$

 
$
507

In funds held for customers
183

 

 

 
183

 
145

 

 

 
145

Total cash equivalents
$
431

 
$

 
$

 
$
431

 
$
652

 
$

 
$

 
$
652

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In investments
$

 
$
1,047

 
$

 
$
1,047

 
$

 
$
1,065

 
$

 
$
1,065

In funds held for customers

 
175

 

 
175

 

 
144

 

 
144

In long-term investments

 

 
21

 
21

 

 

 
21

 
21

Total available-for-sale securities
$

 
$
1,222

 
$
21

 
$
1,243

 
$

 
$
1,209

 
$
21

 
$
1,230

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 with the help of a pricing service that either provides quoted market prices in active markets for identical or similar securities or uses observable inputs for their pricing without applying significant adjustments. Our fair value processes include controls that are designed to ensure that we record appropriate fair values for our Level 2 investments. These controls include comparison to pricing provided by a secondary pricing service or investment manager, validation of pricing sources and models, review of key model inputs, analysis of period-over-period price fluctuations, and independent recalculation of prices where appropriate.

12


Financial liabilities whose fair values we measure using Level 2 inputs consist of debt. See Note 6, “Long-Term Obligations,” for more information. 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) inputs consist of municipal auction rate securities that are no longer liquid. We estimate the fair values of these auction rate securities using a discounted cash flow model. We continue to classify them as long-term investments based on the maturities of the underlying securities at that date. 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.
There were no transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the three months ended October 31, 2014.


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 at October 31, 2014 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 investment grade available-for-sale debt securities in all periods presented. Long-term investments at October 31, 2014 consist primarily of municipal auction rate securities. See Note 2, “Fair Value Measurements,” for more information. 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 in debt securities 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.
 
October 31, 2014
 
July 31, 2014
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Classification on balance sheets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
542

 
$
542

 
$
849

 
$
849

Investments
1,046

 
1,047

 
1,064

 
1,065

Funds held for customers
358

 
358

 
289

 
289

Long-term investments
31

 
31

 
31

 
31

Total cash and cash equivalents, investments, and funds
held for customers
$
1,977

 
$
1,978

 
$
2,233

 
$
2,234


13


The following table summarizes our cash and cash equivalents, investments, and funds held for customers by investment category at the dates indicated. See Note 2, “Fair Value Measurements,” for more information on our municipal auction rate securities.
 
October 31, 2014
 
July 31, 2014
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Type of issue:
 
 
 
 
 
 
 
Total cash and cash equivalents
$
725

 
$
725

 
$
994

 
$
994

Available-for-sale debt securities:
 
 
 
 
 
 
 
Municipal bonds
647

 
647

 
700

 
701

Corporate notes
564

 
565

 
466

 
466

U.S. agency securities
10

 
10

 
42

 
42

Municipal auction rate securities
21

 
21

 
21

 
21

Total available-for-sale debt securities
1,242

 
1,243

 
1,229

 
1,230

Other long-term investments
10

 
10

 
10

 
10

Total cash and cash equivalents, investments, and funds
held for customers
$
1,977

 
$
1,978

 
$
2,233

 
$
2,234

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 months ended October 31, 2014 and October 31, 2013 were not significant.
We accumulate unrealized gains and losses on our available-for-sale debt securities, net of tax, in accumulated other comprehensive income or loss in the stockholders’ equity section of our balance sheets. Gross unrealized gains and losses on our available-for-sale debt securities at October 31, 2014 and July 31, 2014 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 October 31, 2014 were not other-than-temporarily impaired. Unrealized losses on available-for-sale debt securities at October 31, 2014 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.
 
October 31, 2014
 
July 31, 2014
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Due within one year
$
399

 
$
399

 
$
363

 
$
363

Due within two years
471

 
472

 
443

 
443

Due within three years
292

 
292

 
303

 
303

Due after three years
80

 
80

 
120

 
121

Total available-for-sale debt securities
$
1,242

 
$
1,243

 
$
1,229

 
$
1,230

Available-for-sale debt securities due after three years in the table above include our municipal auction rate securities. See Note 2, “Fair Value Measurements,” for more information. All of the remaining securities in that category had interest reset dates or mandatory call dates within three years of the dates indicated in the table.





14


4.
Discontinued Operations
Intuit Financial Services
On August 1, 2013 we completed the sale of our Intuit Financial Services (IFS) business for approximately $1.025 billion in cash. We recorded a gain on the disposal of IFS of approximately $36 million, net of income taxes, in the first quarter of fiscal 2014. The IFS business comprised substantially all of our former Financial Services reportable segment.
We classified our IFS business as discontinued operations and have therefore segregated its operating results from continuing operations in our statements of operations for all periods presented. Because operating cash flows from the IFS business were not material for any period presented, we have not segregated them from continuing operations on our statements of cash flows.
Intuit Health
On August 19, 2013 we completed the sale of our Intuit Health business for cash consideration that was not significant. We recorded a $4 million pre-tax loss on the disposal of Intuit Health that was more than offset by a related income tax benefit of approximately $14 million, resulting in a net gain on disposal of approximately $10 million in the first quarter of fiscal 2014. Intuit Health was part of our former Other Businesses reportable segment.
We classified our Intuit Health business as discontinued operations and have therefore segregated its operating results in our statements of operations for all periods presented. Because operating cash flows from the Intuit Health business were not material for any period presented, we have not segregated them from continuing operations on our statements of cash flows.

5.
Current Liabilities
Unsecured Revolving Credit Facility
On February 17, 2012 we entered into an 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 0.0% to 0.5% or London Interbank Offered Rate (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 customary affirmative and negative covenants, including financial 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 as of any date and a ratio of annual EBITDA to interest payable of not less than 3.00 to 1.00 as of the last day of each fiscal quarter. We remained in compliance with these covenants at all times during the quarter ended October 31, 2014. We may use amounts borrowed under this credit facility for general corporate purposes, including future acquisitions. To date we have not borrowed under this credit facility.
Other Current Liabilities
Other current liabilities were as follows at the dates indicated:
(In millions)
October 31,
2014
 
July 31,
2014
Reserve for product returns
$
19

 
$
24

Reserve for rebates
15

 
23

Current portion of license fee payable
10

 
10

Current portion of deferred rent
7

 
7

Interest payable
3

 
10

Executive deferred compensation plan liabilities
71

 
63

Other
29

 
30

Total other current liabilities
$
154

 
$
167

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, “Description of Business and Summary of Significant Accounting Policies – Seasonality,” for more information.




15


6.
Long-Term Obligations
Long-Term Debt
On March 12, 2007 we issued $500 million of 5.75% senior unsecured notes due on March 15, 2017 (the Notes). We carried the Notes at face value less the unamortized discount in long-term debt on our balance sheets at October 31, 2014 and July 31, 2014. The Notes are redeemable by Intuit at any time, subject to a make-whole premium, and include covenants that limit our ability to grant liens on our facilities and to enter into sale and leaseback transactions, subject to significant allowances. Interest on the Notes is payable semi-annually on March 15 and September 15. We paid $14 million in cash for interest on the Notes during the three months ended October 31, 2014 and $14 million in cash for interest on the Notes during the three months ended October 31, 2013.
Other Long-Term Obligations
Other long-term obligations were as follows at the dates indicated:
(In millions)
October 31,
2014
 
July 31,
2014
Total deferred rent
$
61

 
$
62

Total license fee payable
42

 
41

Long-term income tax liabilities
33

 
32

Long-term deferred income tax liabilities
62

 
61

Other
21

 
14

Total long-term obligations
219

 
210

Less current portion (included in other current liabilities)
(19
)
 
(17
)
Long-term obligations due after one year
$
200

 
$
193

Operating Lease Commitments
We describe our operating lease commitments in Note 9 to the financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2014. There were no significant changes in those commitments during the first three months of fiscal 2015.


7.
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 October 31, 2014 was approximately 31%. Excluding discrete tax items primarily related to share-based compensation and a state tax law change as well as including the effects of losses in certain jurisdictions where we do not recognize a tax benefit, our effective tax rate for the period was approximately 37% and did not differ significantly from the federal statutory rate of 35%. Tax expense related to share based compensation, state income taxes, and the effects of losses in certain jurisdictions where we do not recognize a tax benefit were partially offset by the benefit we received from the domestic production activities deduction.
Our effective tax rate for the three months ended October 31, 2013 was approximately 29%. Excluding the impact of discrete tax items primarily related to share-based compensation, our effective tax rate for that period 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 were substantially offset by tax expense related to state income taxes.
Unrecognized Tax Benefits and Other Considerations
The total amount of our unrecognized tax benefits at July 31, 2014 was $40 million. Net of related deferred tax assets, unrecognized tax benefits were $26 million at that date. If we were to recognize these net benefits, our income tax expense would reflect a favorable net impact of $26 million. There were no material changes to these amounts during the three months ended October 31, 2014. 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.


16




8.
Stockholders’ Equity
Stock Repurchase Programs and Treasury Shares
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 1.3 million shares for $114 million under these programs during the three months ended October 31, 2014 and 17.6 million shares for $1.4 billion under these programs during the three months ended October 31, 2013. At October 31, 2014, we had authorization from our Board of Directors to expend up to an additional $1.8 billion for stock repurchases through August 19, 2017. Future stock repurchases under the current program are at the discretion of management, and authorization of future stock repurchase programs is subject to the final determination of our Board of Directors.
Our treasury shares are repurchased at the market price on the trade date; accordingly, all amounts paid to reacquire these shares have been recorded as treasury stock on our balance sheets. 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.
In the past we have satisfied option exercises and restricted stock unit vesting under our employee equity incentive plans by reissuing treasury shares, and we may do so again in the future. During the second quarter of fiscal 2014 we began issuing new shares of common stock to satisfy option exercises and RSU vesting under our 2005 Equity Incentive Plan. We have not yet determined the ultimate disposition of the shares that we have repurchased in the past, and consequently we continue to hold them as treasury shares.
Dividends on Common Stock
During the three months ended October 31, 2014 we declared and paid a quarterly cash dividend of $0.25 per share of outstanding common stock or $74 million. In November 2014 our Board of Directors declared a quarterly cash dividend of $0.25 per share of outstanding common stock payable on January 20, 2015 to stockholders of record at the close of business on January 9, 2015. 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 in operating loss from continuing operations for the periods shown.
 
Three Months Ended
(In millions, except per share amounts)
October 31,
2014
 
October 31,
2013
Cost of revenue
$
2

 
$
2

Selling and marketing
18

 
15

Research and development
20

 
14

General and administrative
21

 
16

Total share-based compensation expense
61

 
47

Income tax benefit
(19
)
 
(15
)
Increase in net loss from continuing operations
$
42

 
$
32

Increase in net loss per share:
 
 
 
Basic
$
0.15

 
$
0.11

Diluted
$
0.15

 
$
0.11




17


Share-Based Awards Available for Grant
A summary of share-based awards available for grant under our 2005 Equity Incentive Plan for the three months ended October 31, 2014 was as follows:
(Shares in thousands)
Shares
Available
for Grant
Balance at July 31, 2014
24,203

Options granted

Restricted stock units granted (1)
(604
)
Share-based awards canceled/forfeited/expired (1)(2)
1,791

Balance at October 31, 2014
25,390

________________________________
(1)
RSUs granted from the pool of shares available for grant under our 2005 Equity Incentive Plan 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.
(2)
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.
Stock Option Activity and Related Share-Based Compensation Expense
A summary of stock option activity for the three months ended October 31, 2014 was as follows:
 
Options Outstanding
(Shares in thousands)
Number
of Shares
 
Weighted
Average
Exercise
Price
Per Share
Balance at July 31, 2014
10,938

 
$
52.67

Options granted

 

Options exercised
(1,085
)
 
47.78

Options canceled or expired
(291
)
 
63.73

Balance at October 31, 2014
9,562

 
$
52.89

 
 
 
 
Exercisable at October 31, 2014
5,252

 
$
40.48


At October 31, 2014, there was approximately $59 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 2.3 years.
Restricted Stock Unit Activity and Related Share-Based Compensation Expense
A summary of restricted stock unit activity for the three months ended October 31, 2014 was as follows:
 
Restricted Stock Units
(Shares in thousands)
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Nonvested at July 31, 2014
9,455

 
$
62.46

Granted
263

 
82.98

Vested
(709
)
 
53.93

Forfeited
(718
)
 
55.31

Nonvested at October 31, 2014
8,291

 
$
64.46



18


At October 31, 2014, there was approximately $349 million of unrecognized compensation cost related to non-vested RSUs 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 2.2 years.


9.
Litigation
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.


10.
Segment Information
We have defined three reportable segments, described below, 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.

Small Business. Our Small Business segment includes the following offerings, all targeting the small business market.
QuickBooks financial and business management online services and desktop software; QuickBooks technical support; and financial supplies.
QuickBooks Accountant, QuickBooks Accountant Plus, and QuickBooks Online Accountant as well as the QuickBooks ProAdvisor Program and Cloud ProAdvisor Program, all of which are intended for the accounting professionals who serve small businesses.

19


Small business payroll products and services, including online payroll offerings such as Quickbooks Online Payroll and Intuit Online Payroll; desktop payroll offerings such as QuickBooks Basic Payroll and QuickBooks Enhanced Payroll; and full service payroll offerings such as Intuit Full Service Payroll and QuickBooks Assisted Payroll.
Payment processing services for small businesses, including merchant services such as credit and debit card processing; Web-based transaction processing services for online merchants; secure online payments for small businesses and their customers through the Intuit Payment Network; GoPayment mobile payment processing services; and QuickBooks Point of Sale solutions.
Demandforce, which provides online marketing and customer communication solutions for small businesses, and QuickBase.
Consumer. Our Consumer segment includes two product lines – Consumer Tax and Consumer Ecosystem – both of which target consumers.
Consumer Tax includes TurboTax income tax preparation products and services and electronic tax filing services.
Consumer Ecosystem includes our personal finance offerings, Quicken, Mint and Check.
Professional Tax. Our Professional Tax segment targets professional accountants and includes Lacerte, ProSeries, and Intuit Tax Online professional tax preparation products and services, electronic tax filing services, bank product transmission services, and training services.
All of our segments operate primarily in the United States and sell primarily to customers in the United States. International total net revenue was approximately 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, 2014 and in Note 1, "Description of Business and Summary of Significant Accounting Policies - Significant Accounting Policies" in this Quarterly Report on Form 10-Q. 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.

20


The following table shows our financial results by reportable segment for the periods indicated. Results for all periods presented exclude results for our Intuit Financial Services and Intuit Health businesses. See Note 4, “Discontinued Operations,” for more information.
 
Three Months Ended
(In millions)
October 31,
2014
 
October 31,
2013
Net revenue:
 
 
 
Small Business segment
$
548

 
$
520

 
 
 
 
Consumer segment:
 
 
 
Consumer Tax
57

 
42

Consumer Ecosystem
31

 
35

  Total Consumer segment
88

 
77

 
 
 
 
Professional Tax segment
36

 
25

Total net revenue
$
672

 
$
622

 
 
 
 
Operating loss from continuing operations:
 
 
 
Small Business segment
$
192

 
$
190

Consumer segment
(34
)
 
(24
)
Professional Tax segment
(3
)
 
(9
)
Total segment operating income
155

 
157

Unallocated corporate items:
 
 
 
Share-based compensation expense
(61
)
 
(47
)
Other common expenses
(192
)
 
(177
)
Amortization of acquired technology
(10
)
 
(6
)
Amortization of other acquired intangible assets
(6
)
 
(4
)
Total unallocated corporate items
(269
)
 
(234
)
Total operating loss from continuing operations
$
(114
)
 
$
(77
)


21


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 Quarterly Report and our Annual Report on Form 10-K for the fiscal year ended July 31, 2014. In August 2013 we completed the sales of our Intuit Financial Services (IFS) business and our Intuit Health business. We have reclassified our statements of operations for all periods presented to reflect these two businesses as discontinued operations. Because the operating cash flows of our IFS and Intuit Health discontinued operations were not material for any period presented, we have not segregated them from continuing operations on our statements of cash flows. See “Results of Operations – Discontinued Operations” later in this Item 2 for more information. Unless otherwise noted, the following discussion pertains only to our continuing operations.

Executive Overview
This overview provides a high-level discussion of our business and growth strategy as well as the trends, opportunities, challenges, and risks that affect our performance and operating results. Understanding our growth strategy and the trends that affect our business provides context for the discussion of financial results and future opportunities which follows this overview. This summary is not intended to be exhaustive, nor is it a substitute for the detailed discussion and analysis provided elsewhere in this Quarterly Report on Form 10-Q.
About Intuit
Intuit creates business and financial management solutions that help simplify the business of life for small businesses, consumers, and accounting professionals. We organize our businesses into three reportable segments – Small Business, Consumer, and Professional Tax.

Small Business: This segment includes the following offerings, all targeting the small business market.
QuickBooks financial and business management online services and desktop software for small businesses and the accounting professionals who serve small businesses.
Small business payroll and employee management products and services.
Payment processing services for small businesses, including merchant services such as credit and debit card processing; Web-based transaction processing services for online merchants; secure online payments for small businesses and their customers through the Intuit Payment Network; and GoPayment mobile payment processing services.
Demandforce, which provides online marketing and customer communication solutions for small businesses.

Consumer: This segment includes two product lines – Consumer Tax and Consumer Ecosystem – both of which target consumers.
Consumer Tax includes TurboTax income tax preparation products and services.
Consumer Ecosystem includes our personal finance offerings, Quicken, Mint, and Check.


22


Professional Tax: This segment targets professional accountants and includes Lacerte, ProSeries, and Intuit Tax Online professional tax products and services.
Our Growth Strategy
Based on our assessment of key technology and demographic trends – an increasingly borderless world, the prevalence of mobile devices, and the scalability of the cloud – we see significant opportunities to drive future growth by continuing to solve the unmet needs of small businesses, consumers, and accounting professionals. Our evolving growth strategy includes three key elements:

Focus on the product – we call it “Delivering awesome product experiences.” Computing devices are moving to the palm of our hands in the form of tablets and smart phones. Therefore, we are increasingly focused on reimagining our products with a mobile-first, and in some cases mobile-only, design. Our TurboTax solutions, for example, let customers prepare and file their entire tax returns online, via tablet, mobile phone or desktop computer. We also believe that a key factor in growing our customer base is delivering an amazing first-use experience so our customers can get the value they expect from our offerings as quickly and easily as possible.

Creating network effect platforms – we call it “Enabling the contributions of others.” We expect to solve problems faster and more efficiently for our growing base of customers by moving to more open platforms with application programming interfaces that enable the contributions of end users and third-party developers. One example of this is QuickBooks Online, which allows small business customers all over the world to localize, configure, and add value to the offering.

Leveraging our data for our customers' benefit – we call it “Using data to create delight.” Our customers generate valuable data that we seek to appropriately use to deliver better products and breakthrough benefits by eliminating the need to enter data, helping them make better decisions and improving transactions and interactions.
Industry Trends and Seasonality
The industry in which we operate is dynamic and highly competitive, and we expect it to remain so in the future. The markets for software and related services, especially highly-available connected services, are characterized by rapid technological change, shifting customer needs, and frequent new product introductions and enhancements. Competitive interest and expertise in many of the markets we serve have grown markedly over the past few years and we expect this trend to continue. There are also large, cloud-based service companies who innovate quickly and serve small businesses and consumers. While today our competition with such companies may be limited, as we and those companies grow, our competition with them may increase. In recent years the widespread availability of the Internet, the emergence of mobile devices, and the explosion of social media have accelerated the pace of change and revolutionized the way that people throughout the world manage important financial tasks. The result is a global market that is shifting from traditional services that are paper-based, human-produced, and brick-and-mortar bound, to one where people understand, demand, and embrace the benefits of connected services. This trend toward connected services is the primary driver of the strategies in all of our businesses.
Historically, our QuickBooks, Consumer Tax, and Professional Tax offerings have been highly seasonal. Revenue from our QuickBooks software products have tended to be highest during our second and third fiscal quarters. Sales of income tax preparation products and services are heavily concentrated from November through April. In our Consumer Tax business, a greater proportion of our revenue has shifted to later in this seasonal period due in part to the growth in sales of TurboTax Online, for which we recognize revenue when tax returns are printed or electronically filed. The seasonality of our Consumer Tax and Professional Tax 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. Delays in the availability of tax forms or the ability of taxing agencies to receive submissions can cause revenue to shift between our 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. During these quarters, revenue from our tax businesses is minimal while core operating expenses such as research and development continue at relatively consistent levels. 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.
In August 2014 we announced that we would begin delivering ongoing releases for our future desktop software offerings in order to improve the product experience, accommodate operating system updates, and provide access to connected services. We believe that providing more frequent releases will create a better experience for customers who choose our desktop offerings, as well as a more seamless transition to our online offerings in the future. This decision affects the timing of revenue recognition for future sales of our QuickBooks and Quicken desktop products, where revenue will be recognized as services are provided over approximately three years, and our Professional Tax solutions, where revenue will be recognized as services are provided

23


over the tax year. We expect the seasonality of our Small Business and Professional Tax offerings to be partially mitigated by this change beginning in fiscal 2015.
Key Challenges and Risks
Our growth strategy depends upon our ability to initiate and embrace disruptive technology trends, to enter new markets, and to drive broad adoption of the products and services we develop and market. Our future growth also increasingly depends on the strength of our third-party business relationships and our ability to continue to develop, maintain and strengthen new and existing relationships. To remain competitive and continue to grow, we are investing significant resources in our product development, marketing, and sales capabilities, and we expect to continue to do so in the future.
As we continue transitioning to offer more connected services, the ongoing operation and availability of our information technology and communication systems and those of our external service providers is becoming increasingly important. Because we help customers manage their financial lives, we face risks associated with the hosting, collection, use and retention of personal customer information and data. We are investing significant management attention and resources in our information technology infrastructure and in our privacy and security capabilities, and we expect to continue to do so in the future.
For a complete discussion of the most significant risks and uncertainties affecting our business, please see “Forward-Looking Statements and Risk Factors” in Item 1A of this Quarterly Report.
Overview of Financial Results
The most important financial indicators that we use to assess our business are revenue growth for the company as a whole, for each reportable segment, and for product lines within each reportable segment; operating income growth and operating income margins for the company as a whole and for each reportable segment; earnings per share; and cash flow from operations. We also track certain non-financial drivers of revenue growth and, when material, identify them in the applicable discussions of segment results below. These non-financial drivers include, for example, customer growth and retention for all of our businesses and transaction volume for our payment processing business. Total credit and debit card transaction volume correlates strongly with the macroeconomic environment and is one of the key drivers of revenue growth in our payment processing business. Customers for our connected services offerings have generally grown faster than those for our traditional desktop software offerings, reflecting our strategic focus on connected services over the past few years. Connected services (total service and other revenue) generated $3.0 billion or 66% of our total revenue in fiscal 2014, compared with 50% of our total revenue six years ago. We expect connected services revenue as a percentage of our total revenue to continue to grow in the future.
Total net revenue for the first three months of fiscal 2015 was $672 million, an increase of 8% compared with the same period of fiscal 2014. Total net revenue growth was affected by the change to our desktop software offerings described in “Industry Trends and Seasonality” above. Our Small Business segment was the key driver of higher revenue in the first three months of fiscal 2015, growing 5% compared with the same period a year ago. Small Business segment revenue growth was driven by customer growth in our Small Business Online Ecosytem.
Operating loss from continuing operations for the first three months of fiscal 2015 was $114 million, an increase of 48% compared with the same period of fiscal 2014. Our operating loss was higher in fiscal 2015 due to the impact of the change to our desktop software offerings on fiscal 2015 revenue and due to higher expenses for staffing, outside services, and other operating expenses and due to higher share-based compensation expenses.
Net loss from continuing operations increased 47% in the first three months of fiscal 2015 compared with the same period of fiscal 2014 due to the higher operating loss. Basic and diluted net loss per share from continuing operations for the first three months of fiscal 2015 increased 45% to $0.29, in line with the increase in the net loss for that period.
We ended the first three months of fiscal 2015 with cash, cash equivalents and investments totaling $1.6 billion. During the first three months of fiscal 2015 we generated cash from the issuance of common stock under employee stock plans. During the same period we used cash for operations, the repurchase of shares of our common stock under our stock repurchase programs, the payment of cash dividends, and capital expenditures.
At October 31, 2014, we had authorization from our Board of Directors to expend up to an additional $1.8 billion for stock repurchases through August 19, 2017.


24


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, 2014 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. Except for the changes to our policy for recognizing product revenue described in “Executive Overview – Industry Trends and Seasonality” earlier in this Item 2, we believe that there were no significant changes in those critical accounting policies and estimates during the first three months of fiscal 2015. 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.


Results of Operations
Financial Overview
(Dollars in millions, except per share amounts)
Q1
FY15
 
Q1
FY14
 
$
Change
 
%
Change
Total net revenue
$
672

 
$
622

 
$
50

 
8
%
Operating loss from continuing operations
(114
)
 
(77
)
 
(37
)
 
48
%
Net loss from continuing operations
(84
)
 
(57
)
 
(27
)
 
47
%
Basic and diluted net loss per share from continuing operations
$
(0.29
)
 
$
(0.20
)
 
$
(0.09
)
 
45
%
Total net revenue increased $50 million or 8% in the first quarter of fiscal 2015 compared with the same quarter of fiscal 2014. Total net revenue growth was affected by the change to our desktop software offerings described in “Industry Trends and Seasonality” above. Our Small Business segment was the key driver of higher revenue in the first three months of fiscal 2015, growing 5% compared with the same period a year ago. Small Business segment revenue growth was driven by customer growth in our Small Business Online Ecosytem. See “Segment Results” later in this Item 2 for more information about the results for all of our reportable segments.
Operating loss from continuing operations increased 48% in the first quarter of fiscal 2015 compared with the same quarter of fiscal 2014. Our operating loss was higher in fiscal 2015 due to the impact of the change to our desktop software offerings on fiscal 2015 revenue and due to higher expenses for staffing, outside services, and other operating expenses and due to higher share-based compensation expenses. See “Operating Expenses” later in this Item 2 for more information.
Net loss from continuing operations increased 47% in the first quarter of fiscal 2015 compared with the same quarter of fiscal 2014 due to the higher operating loss, partially offset by the effect of a slightly higher effective tax rate in the fiscal 2015 period. See “Non-Operating Income and Expenses – Income Taxes” later in this Item 2 for more information. Basic and diluted net loss per share from continuing operations for the first quarter of fiscal 2015 increased 45% to $0.29, in line with the increase in the net loss for that period.
Segment Results
The information below is organized in accordance with our three reportable segments. See “Executive Overview – About Intuit” earlier in this Item 2 and Note 10 to the financial statements in Part I, Item 1 of this Quarterly Report for more information. All of our segments operate primarily in the United States and sell primarily to customers in the United States. International total net revenue was approximately 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 – Industry Trends and Seasonality” 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 $253 million in the first three months of fiscal 2015 and $224 million in the first three months of fiscal 2014. Unallocated costs increased in the fiscal 2015 period due to increases in corporate product development and selling and marketing expenses in support of the growth of our businesses and to higher share-based compensation expenses. 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 10 to the financial statements in Part I, Item 1 of this Quarterly

25


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.
Small Business
(Dollars in millions)
Q1
FY15
 
Q1
FY14
 
%
Change
Product revenue
$
187

 
$
192

 
(3
)%
Service and other revenue
361

 
328

 
10
 %
Total segment revenue
$
548

 
$
520

 
5
 %
% of total revenue
82
%
 
84
%
 
 
 
 
 
 
 
 
Segment operating income
$
192

 
$
190

 
1
 %
% of related revenue
35
%
 
37
%
 
 
Service and other revenue in our Small Business segment is derived primarily from QuickBooks Online and QuickBooks Online Accountant, our hosted financial and business management offerings; QuickBooks Pro Plus, QuickBooks Premier Plus, and QuickBooks Accountant Plus, our subscription offerings; QuickBooks technical support plans; small business payroll services, including Quickbooks Online Payroll, Intuit Online Payroll, Intuit Full Service Payroll, and QuickBooks Assisted Payroll; payment processing services for small businesses; Demandforce; and QuickBase. Product revenue in our Small Business segment is derived primarily from QuickBooks desktop software products, including QuickBooks Pro, QuickBooks Premier, QuickBooks Accountant, and QuickBooks Enterprise Solutions; QuickBooks Basic Payroll and QuickBooks Enhanced Payroll; QuickBooks Point of Sale solutions; ProAdvisor Program subscriptions for the accounting professionals who serve small businesses; and financial supplies.
As part of our connected services strategy, over the past several quarters we have been focusing Small Business segment resources on the enhancement and marketing of our QuickBooks Online and QuickBooks desktop subscription offerings. As a result, QuickBooks desktop license units and revenue have been declining as more customers choose our hosted and subscription offerings and we expect this trend to continue. In our payments business we are focusing resources on core offerings for QuickBooks merchants in support of our small business ecosystem approach. Over the next few quarters we anticipate declining revenue for certain non-QuickBooks payments offerings that may slow overall revenue growth in our payments business.
Small Business segment total net revenue increased $28 million or 5% in the first quarter of fiscal 2015 compared with the same quarter of fiscal 2014. Small Business segment revenue growth was affected by the change to our desktop software offerings described in “Industry Trends and Seasonality” above. Small Business Online Ecosystem revenue grew 30%, driven by customer acquisition. QuickBooks Online customers grew 43% and online payroll customers grew 24%. Active online payments customers grew 3% and online payments charge volume grew 22%. In our Small Business Desktop Ecosystem revenue declined 2%. QuickBooks desktop unit sales were 23% lower as we continued to emphasize QuickBooks Online while QuickBooks Enterprise Solutions revenue grew 29%.
Small Business segment operating income as a percentage of related revenue decreased in the first quarter of fiscal 2015 compared with the same period of fiscal 2014. The increase in segment revenue described above was nearly offset by higher segment operating expenses, including $20 million for outside services and marketing programs.

26


Consumer
(Dollars in millions)
Q1
FY15
 
Q1
FY14
 
%
Change
Product revenue
$
16

 
$
19

 
(15
)%
Service and other revenue
72

 
58

 
24
 %
Total segment revenue
$
88

 
$
77

 
15
 %
% of total revenue
13
 %
 
12
 %
 
 
 
 
 
 
 
 
Segment operating loss
$
(34
)
 
$
(24
)
 
40
 %
% of related revenue
(39
)%
 
(32
)%
 
 
Our Consumer segment includes our Consumer Tax and Consumer Ecosystem product lines. Consumer Tax service and other revenue is derived primarily from TurboTax Online tax return preparation services and electronic tax filing services.
Consumer Tax product revenue is derived primarily from TurboTax desktop tax return preparation software. Consumer Ecosystem product revenue is derived primarily from Quicken desktop personal finance software products. Consumer Ecosystem service and other revenue is derived primarily from mobile and online consumer finance offerings as well as from online lead generation fees from our Mint personal finance offerings.
Due to the seasonal nature of our Consumer Tax offerings, we typically generate nominal revenue from consumer tax products and services in our first fiscal quarter compared with our second and third fiscal quarters. The majority of Consumer Tax product line revenue for the first quarter of each fiscal year is for the filing of extended returns for the previous tax year. Consumer segment total net revenue increased $11 million or 15% in the first quarter of fiscal 2015 compared with the same quarter of fiscal 2014 primarily due to TurboTax Online offering mix. Because of the seasonality of our Consumer Tax revenue, we do not believe that first fiscal quarter revenue in our Consumer segment is indicative of revenue trends for the current fiscal year. We will not have substantially complete results for the 2014 tax season until the third quarter of fiscal 2015.
In our first fiscal quarter our Consumer segment typically generates operating losses because Consumer Tax revenue is nominal while segment operating expenses for functions such as research and development continue at relatively consistent levels. We do not believe that Consumer segment operating results for the first quarter of fiscal 2015 compared with the same quarter of fiscal 2014 are indicative of trends for the full fiscal year.
Professional Tax
(Dollars in millions)
Q1
FY15
 
Q1
FY14
 
%
Change
Product revenue
$
30

 
$
18

 
66
 %
Service and other revenue
6

 
7

 
(8
)%
Total segment revenue
$
36

 
$
25

 
46
 %
% of total revenue
5
 %
 
4
 %
 
 
 
 
 
 
 
 
Segment operating loss
$
(3
)
 
$
(9
)
 
(66
)%
% of related revenue
(8
)%
 
(35
)%
 
 
Professional Tax segment product revenue is derived primarily from ProSeries and Lacerte professional tax preparation software products. Professional Tax service and other revenue is derived primarily from Intuit Tax Online tax return preparation services, electronic tax filing services, bank product transmission services, and training services.
Due to the seasonal nature of our Professional Tax offerings, we typically generate nominal revenue from professional tax products and services in our first fiscal quarter compared with our second and third fiscal quarters. The majority of Professional Tax revenue for the first quarter of each fiscal year is for the filing of extended returns for the previous tax year. Professional Tax total net revenue increased $11 million or 46% in the first quarter of fiscal 2015 compared with the same quarter of fiscal 2014. Professional Tax revenue increased primarily because customers filed more extended tax returns in the fiscal 2015 quarter compared with the same quarter of fiscal 2014. We do not believe that first fiscal quarter revenue in this segment is indicative of revenue trends for the current fiscal year. We will not have substantially complete results for the 2014 tax season until the third quarter of fiscal 2015.

27


In our first fiscal quarter our Professional Tax segment typically generates operating losses because revenue is nominal while operating expenses for functions such as research and development continue at relatively consistent levels. We do not believe that Professional Tax operating results for the first quarter of fiscal 2015 compared with the same quarter of fiscal 2014 are indicative of trends for the full fiscal year.
Cost of Revenue
(Dollars in millions)
Q1
FY15
 
% of
Related
Revenue
 
Q1
FY14
 
% of
Related
Revenue
Cost of product revenue
$
34

 
15
%
 
$
29

 
13
%
Cost of service and other revenue
131

 
30
%
 
108

 
27
%
Amortization of acquired technology
10

 
n/a

 
6

 
n/a

Total cost of revenue
$
175

 
26
%
 
$
143

 
23
%
Cost of product revenue as a percentage of product revenue increased in the first three months of fiscal 2015 compared with the same period of fiscal 2014 due to the deferral of QuickBooks and Quicken revenue described in “Executive Overview – Industry Trends and Seasonality” earlier in this Item 2. We expense costs of product revenue as they are incurred for delivered software and we do not defer any of these costs when product revenue is deferred. Cost of service and other revenue as a percentage of service and other revenue increased in the first three months of fiscal 2015 compared with the same period of fiscal 2014 due to higher data center costs for our online offerings.
Operating Expenses
(Dollars in millions)
Q1
FY15
 
% of
Total
Net
Revenue
 
Q1
FY14
 
% of
Total
Net
Revenue
Selling and marketing
$
281

 
42
%
 
$
258

 
41
%
Research and development
200

 
30
%
 
176

 
28
%
General and administrative
124

 
18
%
 
118

 
19
%
Amortization of other acquired intangible assets
6

 
1
%
 
4

 
1
%
Total operating expenses
$
611

 
91
%
 
$
556

 
89
%
Total operating expenses as a percentage of total net revenue increased to 91% in the first quarter of fiscal 2015 compared with 89% in the same quarter of fiscal 2014. Total net revenue for the first quarter of fiscal 2015 increased $50 million or 8% and total operating expenses for that quarter increased $55 million. Total net revenue growth was affected by the change to our desktop software offerings described in “Executive Overview - Industry Trends and Seasonality” earlier in this Item 2. Staffing expenses increased about $20 million due to annual salary increases, sales commissions, and benefits. Operating expenses also increased about $29 million for outside services, equipment leases and facilities, and marketing programs, and about $14 million for share-based compensation expenses. Share-based compensation expenses increased due to our assumption of certain equity awards in connection with business combinations during fiscal 2014. Share-based compensation expenses have also been increasing over time because the market price of our common stock has generally been increasing.
Non-Operating Income and Expenses
Interest Expense
Interest expense of $7 million for the first three months of fiscal 2015 and $8 million for the first three months of fiscal 2014 consisted primarily of interest on senior notes that we issued in March 2007. See Note 6 to the financial statements in Part I, Item 1 of this Quarterly Report for more information.

28


Interest and Other Income, Net
 
Three Months Ended
(In millions)
October 31,
2014
 
October 31,
2013
Interest income
$
2

 
$
1

Net gain on executive deferred compensation plan assets
1

 
3

Other
(3
)
 
1

Total interest and other income, net
$

 
$
5

Interest and other income, net consists primarily of interest income and net gains on executive deferred compensation plan assets. Higher average invested balances and slightly higher average interest rates resulted in higher interest income in the first quarter of fiscal 2015 compared with the same quarter of fiscal 2014. In accordance with authoritative guidance, we record gains and losses associated with executive deferred compensation plan assets in interest and other income and gains and losses associated with the related liabilities in operating expenses. The total amounts recorded in operating expenses for each period are approximately equal to the total amounts recorded in interest and other income in those periods.
Income Taxes
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 first quarter of fiscal 2015 was approximately 31%. Excluding discrete tax items primarily related to share-based compensation and a state tax law change as well as including the effects of losses in certain jurisdictions where we do not recognize a tax benefit, our effective tax rate for the period was approximately 37% and did not differ significantly from the federal statutory rate of 35%.
Our effective tax rate for the first quarter of fiscal 2014 was approximately 29%. Excluding the impact of discrete tax items primarily related to share-based compensation, our effective tax rate was approximately 34% and did not differ significantly from the federal statutory rate of 35%. See Note 7 to the financial statements in Part I, Item 1 of this Quarterly Report for more information.
Discontinued Operations
We sold our Intuit Financial Services (IFS) business in August 2013 for approximately $1.025 billion in cash and recorded a gain on disposal of approximately $36 million, net of income taxes, in the first quarter of fiscal 2014. We also sold our Intuit Health business in August 2013 for cash consideration that was not significant and recorded a $4 million pre-tax loss on disposal that was more than offset by a related income tax benefit of approximately $14 million, resulting in a net gain on disposal of approximately $10 million in the first quarter of fiscal 2014. We have reclassified our statements of operations for all periods presented to reflect these two businesses as discontinued operations. See Note 4 to the financial statements in Part I, Item 1 of this Quarterly Report for more information.

Liquidity and Capital Resources
Overview
At October 31, 2014, our cash, cash equivalents and investments totaled $1.6 billion, a decrease of $325 million from July 31, 2014 due to the factors discussed under “Statements of Cash Flows” below. Our primary source of liquidity has been cash from operations, which entails the collection of accounts receivable for products and services. Our primary uses of cash have been for research and development programs, selling and marketing activities, capital projects, acquisitions of businesses, debt service costs, repurchases of our common stock under our stock repurchase programs, and the payment of cash dividends. As discussed in “Executive Overview – Industry Trends and Seasonality” earlier in this Item 2, our business is subject to significant seasonality. The balance of our cash, cash equivalents, and investments generally fluctuates with that seasonal pattern. We believe the seasonality of our business is likely to continue in the future.

29


The following table summarizes selected measures of our liquidity and capital resources at the dates indicated:
(Dollars in millions)
October 31,
2014
 
July 31,
2014
 
$
Change
 
%
Change
Cash, cash equivalents, and investments
$
1,589

 
$
1,914

 
$
(325
)
 
(17
)%
Long-term investments
31

 
31

 

 
 %
Long-term debt
499

 
499

 

 
 %
Working capital
1,077

 
1,200

 
(123
)
 
(10
)%
Ratio of current assets to current liabilities
1.8 : 1

 
1.8 : 1

 
 
 
 
We have historically generated significant cash from operations and we expect to continue to do so during fiscal 2015. Since our operations are primarily domestic, approximately 89% of our cash, cash equivalents and investments at October 31, 2014 were located in the U.S. and none of those funds were restricted. Our only significant debt consists of $500 million in senior unsecured notes due in March 2017. We also have an unused $500 million unsecured revolving line of credit facility available to us for general corporate purposes, including future acquisitions.
We evaluate, on an ongoing basis, the merits of acquiring technology or businesses, or establishing strategic relationships with and investing in other companies. Our strong liquidity profile enables us to respond nimbly to these kinds of opportunities.
Based on past performance and current expectations, we believe that our cash and cash equivalents, investments, and cash generated from operations will be sufficient to meet anticipated seasonal working capital needs, capital expenditure requirements, contractual obligations, commitments, debt service requirements, and other liquidity requirements associated with our operations for at least the next 12 months. We expect to return excess cash generated by operations to our stockholders through repurchases of our common stock and payment of cash dividends, after taking into account our operating and strategic cash needs.
Statements of Cash Flows
The following table summarizes selected items from our statements of cash flows for the first three months of fiscal 2015 and fiscal 2014. See the financial statements in Part I, Item 1 of this Quarterly Report for complete statements of cash flows for those periods.
 
Three Months Ended
(Dollars in millions)
October 31,
2014
 
October 31,
2013
 
$
Change
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
(118
)
 
$
(190
)
 
$
72

Investing activities
(61
)
 
949

 
(1,010
)
Financing activities
(123
)
 
(1,350
)
 
1,227

Effect of exchange rate changes on cash
(5
)
 
(1
)
 
(4
)
Total decrease in cash and cash equivalents
$
(307
)
 
$
(592
)
 
$
285

During the first three months of fiscal 2015 we generated cash from the issuance of common stock under employee stock plans. During the same period we used cash for operations, including the payment of accrued bonuses for fiscal 2014, for the repurchase of shares of our common stock under our stock repurchase programs, for the payment of cash dividends, and for capital expenditures.
During the first three months of fiscal 2014 we generated $1.0 billion in cash from the sale of our Intuit Financial Services business and used $1.4 billion in cash to repurchase shares of our common stock under our stock repurchase programs. During the same period we also generated cash from the issuance of common stock under employee stock plans and used cash for operations, including the payment of accrued bonuses for fiscal 2013, for the payment of cash dividends, and for capital expenditures.
Stock Repurchase Programs, Treasury Shares, and Dividends on Common Stock
As described in Note 8 to the financial statements in Part I, Item 1 of this Quarterly Report, during the first three months of fiscal 2015 we continued to repurchase shares of our common stock under repurchase programs that our Board of Directors has authorized. At October 31, 2014, we had authorization from our Board of Directors to expend up to an additional $1.8 billion

30


for stock repurchases through August 19, 2017. We currently expect to continue repurchasing our common stock on a quarterly basis; however, future stock repurchases under the current program are at the discretion of management, and authorization of future stock repurchase programs is subject to the final determination of our Board of Directors.
In the past we have satisfied option exercises and restricted stock unit vesting under our employee equity incentive plans by reissuing treasury shares, and we may do so again in the future. During the second quarter of fiscal 2014 we began issuing new shares of common stock to satisfy option exercises and RSU vesting under our 2005 Equity Incentive Plan. We have not yet determined the ultimate disposition of the shares that we have repurchased in the past, and consequently we continue to hold them as treasury shares.
During the first three months of fiscal 2015 we also continued to pay quarterly cash dividends on shares of our outstanding common stock. In November 2014 our Board of Directors declared a quarterly cash dividend of $0.25 per share of outstanding common stock payable on January 20, 2015 to stockholders of record at the close of business on January 9, 2015. We currently expect to continue paying comparable cash dividends on a quarterly basis; however, 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.
Unsecured Revolving Credit Facility
On February 17, 2012 we entered into an agreement with certain institutional lenders for a $500 million unsecured revolving credit facility that will expire on February 17, 2017. See Note 5 to the financial statements in Part I, Item 1 of this Quarterly Report for a description of the key terms of this agreement, including the covenants. We remained in compliance with those covenants at all times during the quarter ended October 31, 2014. We may use amounts borrowed under this credit facility for general corporate purposes, including future acquisitions. To date we have not borrowed under the credit facility. We monitor counterparty risk associated with the institutional lenders that are providing the credit facility. We currently believe that the credit facility will be available to us should we choose to borrow under it.
Cash Held by Foreign Subsidiaries
Our cash, cash equivalents, and investments totaled $1.6 billion at October 31, 2014. Of this amount, approximately 11% was held by our foreign subsidiaries and subject to repatriation tax considerations. These foreign funds were located primarily in Canada, India, and the United Kingdom. We intend to permanently reinvest a significant portion of our earnings from foreign operations, and we currently do not anticipate that we will need funds generated from foreign operations to fund our domestic operations. In the event that funds from foreign operations are needed to fund operations in the United States, if U.S. taxes have not been previously provided on the related earnings we would provide for and pay additional U.S. taxes at the time we change our intention with regard to the reinvestment of those earnings.


Off-Balance Sheet Arrangements
At October 31, 2014, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.


Contractual Obligations
We presented our contractual obligations at July 31, 2014 in our Annual Report on Form 10-K for the fiscal year then ended. There were no significant changes in those obligations during the first three months of fiscal 2015.
 

Recent Accounting Pronouncements
For a description of recent accounting pronouncements, if any, and the potential impact of these pronouncements on our consolidated financial statements, see Note 1 to the financial statements in Part I, Item 1 of this Quarterly Report.

31


ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment Risk
We actively monitor market conditions and developments specific to the securities in which we invest. We believe that we take a conservative approach to investing our funds in that we invest only in highly-rated securities and diversify our portfolio of investments. While we believe we take prudent measures to mitigate investment related risks, such risks cannot be fully eliminated because of market circumstances that are outside our control.
Our investments consist of instruments that meet quality standards that are consistent with our investment policy. This policy specifies that, 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. We do not hold derivative financial instruments or European sovereign debt in our portfolio of investments. See Note 3 to the financial statements in Part I, Item 1 of this Quarterly Report for a summary of the cost and fair value of our investments by type of issue.
Interest Rate Risk
Our cash equivalents and investments are subject to market risk due to changes in interest rates. Interest rate movements affect the interest income we earn on cash equivalents and investments and the fair value of those investments. If the Federal Reserve Target Rate had increased by 25 basis points from the level of October 31, 2014, the value of our investments at that date would have decreased by approximately $3 million. If the Federal Reserve Target Rate had increased by 100 basis points from the level of October 31, 2014, the value of our investments at that date would have decreased by approximately $13 million.
We are also exposed to the impact of changes in interest rates as they affect our $500 million revolving credit facility. Advances under the credit facility accrue interest at rates that are equal to JP Morgan's alternate base rate plus a margin that ranges from 0.0% to 0.5% or the London InterBank Offered Rate (LIBOR) plus a margin that ranges from 0.9% to 1.5%, in both cases based on our senior debt credit ratings. Consequently, our interest expense would fluctuate with changes in the general level of these interest rates if we were to borrow any amounts under the credit facility. At October 31, 2014, no amounts were outstanding under the credit facility.
On March 12, 2007 we issued $500 million of 5.75% senior unsecured notes due on March 15, 2017. We carry these senior notes at face value less unamortized discount on our balance sheets. Since these senior notes bear interest at fixed rates, we have no financial statement risk associated with changes in interest rates. However, the fair value of these notes fluctuates when interest rates change. See Note 2 and Note 6 to the financial statements in Part I, Item 1 of this Quarterly Report for more information.
Impact of Foreign Currency Rate Changes
The functional currencies of our international operating subsidiaries are the local currencies. We translate the assets and liabilities of our foreign subsidiaries at the exchange rates in effect on the balance sheet date. We translate their revenue, costs and expenses at the average rates of exchange in effect during the period. We include translation gains and losses in the stockholders’ equity section of our balance sheets. We include net gains and losses resulting from foreign exchange transactions in interest and other income in our statements of operations.
Since we translate foreign currencies (primarily Canadian dollars, Indian rupees, and British pounds) into U.S. dollars for financial reporting purposes, currency fluctuations can have an impact on our financial results. The historical impact of currency fluctuations on our financial results has generally been immaterial. We believe that our exposure to currency exchange fluctuation risk is not significant primarily because our global subsidiaries invoice customers and satisfy their financial obligations almost exclusively in their local currencies. Although the impact of currency fluctuations on our financial results has generally been immaterial in the past and we believe that for the reasons cited above currency fluctuations will not be significant in the future, there can be no guarantee that the impact of currency fluctuations will not be material in the future. As of October 31, 2014, we did not engage in foreign currency hedging activities.


32


ITEM 4
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based upon an evaluation of the effectiveness of disclosure controls and procedures, Intuit’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures as defined under Exchange Act Rule 13a-15(e) and 15d-15(e) were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During our most recent fiscal quarter, there has not occurred any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and that they are effective at the reasonable assurance level. However, no matter how well conceived and executed, a control system can provide only reasonable and not absolute assurance that the objectives of the control system are met. The design of any control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. There are also limitations that are inherent in any control system. These limitations include the realities that breakdowns can occur because of errors in judgment or mistakes, and that controls can be circumvented by individual persons, by collusion of two or more people, or by management override of the controls. Because of these inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.


33


PART II
ITEM 1
LEGAL PROCEEDINGS
See Note 9 to the financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of legal proceedings.


ITEM 1A
RISK FACTORS

Forward-Looking Statements and Risk Factors
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements in this report, other than statements that are purely historical, are forward-looking statements. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “forecast,” “estimate,” “seek,” and similar expressions also identify forward-looking statements. In this report, forward-looking statements include, without limitation, the following:
our expectations and beliefs regarding future conduct and growth of the business;
our beliefs and expectations regarding seasonality, competition and other trends that affect our businesses;
our expectation that we will solve problems faster and more efficiently for our growing base of customers by moving to more open platforms with application programming interfaces that enable the contributions of end users and third-party developers;
our expectation that we will continue to invest significant resources in our product development, marketing and sales capabilities in the future;
our expectation that we will continue to invest significant management attention and resources in our information technology infrastructure and in our privacy and security capabilities;
our expectation that we will continue to generate significant cash from operations in the future;
our expectation that connected services revenue as a percentage of our total revenue will continue to grow in the future;
the assumptions underlying our Critical Accounting Policies and Estimates, including our estimates regarding product rebate and return reserves; the collectability of accounts receivable; stock volatility and other assumptions used to estimate the fair value of share-based compensation; the fair value of goodwill; and expected future amortization of acquired intangible assets;
our belief that the investments we hold are not other-than-temporarily impaired;
our belief that our exposure to currency exchange fluctuation risk will not be significant in the future;
our assessments and estimates that determine our effective tax rate;
our belief that it is not reasonably possible that there will be a significant increase or decrease in our unrecognized tax benefits over the next 12 months;
our belief that we will not need funds generated from foreign operations to fund our domestic operations;
our belief that our cash and cash equivalents, investments and cash generated from operations will be sufficient to meet our seasonal working capital needs, capital expenditure requirements, contractual obligations, commitments, debt service requirements and other liquidity requirements associated with our operations for at least the next 12 months;
our expectation that we will return excess cash generated by operations to our stockholders through repurchases of our common stock and payment of cash dividends; and
our assessments and beliefs regarding the future outcome of pending legal proceedings and the liability, if any, that Intuit may incur as a result of those proceedings.

We caution investors that forward-looking statements are only predictions based on our current expectations about future events and are not guarantees of future performance. We encourage you to read carefully all information provided in this Quarterly Report and in our other filings with the Securities and Exchange Commission before deciding to invest in our stock or to

34


maintain or change your investment. These forward-looking statements are based on information as of the filing date of this Quarterly Report, and we undertake no obligation to publicly revise or update any forward-looking statement for any reason.
Because forward-looking statements involve risks and uncertainties, there are important factors that may cause actual results to differ materially from those contained in the forward-looking statements. These factors include the following:
We face intense competitive pressures that may harm our operating results.
We face intense competition in all of our businesses, and we expect competition to remain intense in the future. Our competitors and potential competitors range from large and established entities to emerging start-ups. Our competitors may introduce superior products and services, reduce prices, have greater technical, marketing and other resources, have greater name recognition, have larger installed bases of customers, have well-established relationships with our current and potential customers, advertise aggressively or beat us to market with new products and services. In addition, we may face competition from existing companies, with large established consumer user-bases and broad-based platforms, who may change or expand the focus of their business strategies and marketing to target our customers, including small businesses and tax customers. We also face intensified competition from providers of free accounting, tax, payments, and other financial services. In order to compete, we have also introduced free offerings in several categories, but we may not be able to attract customers or effectively monetize all of these offerings, and customers who have formerly paid for Intuit’s products and services may elect to use free offerings instead. These competitive factors may diminish our revenue and profitability and harm our ability to acquire and retain customers.
Our consumer tax business also faces significant competition from the public sector, where we face the risk of federal and state taxing authorities developing software or other systems to facilitate tax return preparation and electronic filing at no charge to taxpayers. These or similar programs may be introduced or expanded in the future, which may cause us to lose customers and revenue. Although the Free File Alliance has kept the federal government from being a direct competitor to Intuit’s tax offerings, it has fostered additional online competition and may cause us to lose significant revenue opportunities. The current agreement with the Free File Alliance is scheduled to expire in October 2015. We anticipate that governmental encroachment at both the federal and state levels may present a continued competitive threat to our business for the foreseeable future.
Future revenue growth depends upon our ability to adapt to technological change and successfully introduce new and enhanced products, services and business models.
The software as a service (SaaS), desktop software and mobile technology industries are characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. As we continue to grow our software as a service, mobile and other offerings, we must continue to innovate and develop new products and features to meet changing customer needs and attract and retain talented software developers. We need to continue to develop our skills, tools and capabilities to capitalize on existing and emerging technologies, which require us to devote significant resources.
A number of our businesses also derive a significant amount of their revenue from one-time upfront license fees and rely on customer upgrades and service offerings to generate a significant portion of their revenues. In addition, our consumer and professional tax businesses depend significantly on revenue from customers who return each year to use our updated tax preparation and filing software and services. As our existing products mature, encouraging customers to purchase product upgrades becomes more challenging unless new product releases provide features and functionality that have meaningful incremental value. If we are not able to develop and clearly demonstrate the value of new or upgraded products or services to our customers, our revenues may be harmed. In addition, as we continue to introduce and expand our new business models, including offerings that are subscription-based or that are free to end users, we may be unsuccessful in monetizing or increasing customer adoption of these offerings.
The number of people who access products and services through devices other than personal computers, including mobile phones, smartphones, and handheld computers such as tablets, continues to increase. We have devoted significant resources to develop products and services for users of these alternative devices, but the versions of our products and services developed for these devices may not be compelling to users. Even if we are able to attract new users through these mobile offerings, the amount of revenue that we derive per user from mobile offerings may be less than the revenue that we have historically derived from users of personal computers. As new devices and new platforms are continually being released, it is difficult to predict the problems we may encounter in developing versions of our products and services for use on these alternative devices and we may need to devote significant resources to the creation, support, and maintenance of such offerings. If we are slow to develop products and technologies that are compatible with these alternative devices, or if our competitors are able to achieve those results more quickly than us, we will fail to capture a significant share of an increasingly important portion of the market for online services, which could adversely affect our business.
In some cases, we may expend a significant amount of resources and management attention on offerings that do not ultimately succeed in their markets. We have encountered difficulty in launching new products and services in the past. If we misjudge

35


customer needs in the future, our new products and services may not succeed and our revenues and earnings may be harmed. We have also invested, and in the future expect to invest, in new business models, geographies, strategies and initiatives. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, expenses associated with the initiatives and inadequate return on investments. Because these new initiatives are inherently risky, they may not be successful and may harm our financial condition and operating results.
Business interruption or failure of our information technology and communication systems may impair the availability of our products and services, which may damage our reputation and harm our future financial results.
As we continue to transition our business to more connected services, we become more dependent on the continuing operation and availability of our information technology and communication systems and those of our external service providers, including, for example, third party Internet-based or “cloud” computing services. We do not have redundancy for all of our systems, many of our critical applications reside in only one of our data centers, and our disaster recovery planning may not account for all eventualities. We also do not maintain real-time back-up of all our data, and in the event of significant system disruption we may experience loss of data or processing capabilities, which may cause us to lose customers and may materially harm our reputation and our operating results. In addition, we are in the process of updating our customer facing applications and the supporting information technology infrastructure to meet our customers’ expectations for continuous service availability. Any difficulties in upgrading these applications or infrastructure or failure of our systems or those of our third-party service providers may result in interruptions in our service, which may reduce our revenues and profits, cause us to lose customers and damage our reputation. Any prolonged interruptions at any time may result in lost customers, additional refunds of customer charges, negative publicity and increased operating costs, any of which may significantly harm our business, financial condition and results of operations.
We are in the process of migrating our applications and infrastructure to new data centers and to third party hosted environments. If we do not execute the transition to these new environments in an effective manner, we may experience unplanned service disruptions or unforeseen increases in costs which may harm our operating results and our business.
Our business operations, data centers, information technology and communications systems are vulnerable to damage or interruption from natural disasters, human error, malicious attacks, fire, power loss, telecommunications failures, computer viruses, computer denial of service attacks, terrorist attacks and other events beyond our control. The majority of our activities, our corporate headquarters, our principal information technology systems, and other critical business operations are located near major seismic faults. We do not carry earthquake insurance for direct quake-related losses. Our future financial results may be materially harmed in the event of a major earthquake or other natural or man-made disaster.
We rely on internal systems and external systems maintained by manufacturers, distributors and other service providers to take and fulfill customer orders, handle customer service requests and host certain online activities. Any interruption or failure of our internal or external systems may prevent us or our service providers from accepting and fulfilling customer orders or cause company and customer data to be unintentionally disclosed. Our continuing efforts to upgrade and expand our network security and other information systems as well as our high-availability capabilities may be costly, and problems with the design or implementation of system enhancements may harm our business and our results of operations.
We host, collect, use and retain sensitive and personal customer information and data. A security breach resulting in third party access to this information and data could materially disrupt our businesses, result in the disclosure of confidential information, significantly damage our reputation and cause material losses.

We host, collect, use and retain large amounts of sensitive and personal customer information and data, including credit card numbers, tax return information, bank account numbers and passwords, personal and business financial data and transactions, social security numbers, healthcare information and payroll information. In addition, we collect and maintain sensitive and personal information of our employees in the ordinary course of our business. The volume of sensitive and personal information that we collect has been increasing and will continue to increase as we further transition our businesses to connected services. We and our vendors use commercially available security technologies to protect this information and data, and we also use security and business controls to limit access to and use of such sensitive and personal customer information and data. However, a major breach of our security measures or those of third parties that provide hosting services or have access to our sensitive and personal customer information may have serious negative consequences for our businesses, including possible fines, penalties and damages, reduced customer demand for our services, material harm to our reputation and brands, further regulation and oversight by federal or state agencies, and loss of our ability to provide financial transaction services or accept and process customer credit card orders or tax returns.

From time to time, we detect, or receive notices from customers or public or private agencies that they have detected, vulnerabilities in our servers, our software or third-party software components that are distributed with our products. The existence of vulnerabilities, even if they do not result in a security breach, may harm customer confidence and require

36


substantial resources to address, and we may not be able to discover or remediate such security vulnerabilities before they are exploited. In addition, our technologies, systems, and networks and our customers' devices have been subject to, and are likely to continue to be the target of, cyber attacks, computer viruses, worms, phishing attacks, malicious software programs and other information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our customers' sensitive and personal information and data, or otherwise disrupt our or our customers' or other third parties' business operations. Although this is an industry-wide problem that affects software across platforms, it is increasingly affecting our offerings because cybercriminals tend to focus their efforts on well-known offerings that are popular among customers, and we expect them to continue to do so. If these cybercriminals are able to circumvent our security measures, or if we are unable to detect an intrusion into our systems and contain such intrusion in a reasonable amount of time, our customers' sensitive and personal information and data may be compromised.

In addition, our employees, contractors, temporary and seasonal employees may have access to sensitive and personal information of our customers and employees. While we conduct background checks of our employees and these other individuals and limit access to systems and data, it is possible that one or more of these individuals may circumvent these controls, resulting in a security breach. In addition, we rely on third party vendors to host certain of our sensitive and personal information and data. While we conduct due diligence on these third party partners with respect to their security and business controls, we may not have the ability to effectively monitor or oversee the implementation of these controls measures, and, in any event, individuals or third parties may be able to circumvent and/or exploit vulnerabilities that may exist in these security and business controls, resulting in a loss of sensitive and personal customer or employee information and data.
If we are unable to develop, manage and maintain critical third party business relationships, our business may be adversely affected.
Our growth is dependent on the strength of our business relationships and our ability to continue to develop, maintain and leverage new and existing relationships. We rely on various third party partners, including software and service providers