10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on March 13, 1998
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended JANUARY 31, 1998
or
[ ] 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 77-0034661
(State of incorporation) (IRS employer identification no.)
2535 GARCIA AVENUE, MOUNTAIN VIEW, CA 94043
(Address of principal executive offices)
(650) 944-6000
(Registrant's telephone number, including area code)
Indicate by a 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 X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
48,043,158 shares of Common Stock, $0.01 par value, as of February 28, 1998
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FORM 10-Q
INTUIT INC.
INDEX
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INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
See accompanying notes to condensed consolidated financial statements.
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INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Intuit Inc. ("Intuit" or the "Company") is a leading developer of small business
accounting, tax preparation and consumer finance software. Intuit develops,
markets and supports software products and services that enable individuals,
professionals and small businesses to automate commonly performed financial
tasks and better organize, understand, manage and plan their financial lives.
Principal products include small business accounting software, personal and
professional tax preparation software, consumer finance and Internet-based
products and services. In addition, the Company provides services and financial
supplies, such as invoice forms and checks. Intuit markets its products through
distributors and retailers, by direct sales to OEMs and individual users and
through the Internet. Intuit's customers are located primarily in North America,
Europe and Asia.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and include all adjustments (consisting of normal recurring
adjustments) that the Company considers necessary for a fair presentation of the
operating results for the periods shown. Results of operations for the three and
six months ended January 31, 1998 are not necessarily indicative of the results
to be expected for the fiscal year ending July 31, 1998 or any other future
period. These condensed consolidated financial statements and notes thereto
should be read in conjunction with the audited consolidated financial statements
for the fiscal year ended July 31, 1997 included in the Company's Annual Report
on Form 10-K filed with the Securities and Exchange Commission.
Principles of Consolidation
The consolidated financial statements include the accounts of Intuit and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Significant estimates are used in determining both the collectibility of
accounts receivable and reserves for returns and exchanges, and in assessing the
carrying value of goodwill and purchased intangibles. Actual results could
differ from those estimates.
Net Revenue
Desktop software product revenue is generally recognized at the time products
are shipped, net of allowances for estimated future returns and for excess
quantities in distribution channels, provided that no significant vendor
obligations exist and collections of accounts receivable are probable. Reserves
are provided for quantities of current product versions that are considered
excess and for inventories of all previous versions of products at the time new
product versions are introduced. Advance payments are recorded as deferred
revenue until the products are shipped or services are provided. Rebate costs
are provided at the time revenue is recognized. Intuit provides warranty
reserves for the estimated cost of replacing defective products at the time
revenue is recognized.
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For other types of revenue (such as subscription revenues, Internet-based
advertising and transaction revenue and fees for services such as electronic
filing), Intuit recognizes revenue as fees are earned or services are provided.
Customer Service and Technical Support
Customer service and technical support costs include order-processing, customer
inquiries and telephone assistance. The costs of post-contract customer support
are included in customer service and technical support expenses and are not
included in cost of goods sold.
Cash, Cash Equivalents and Short-Term Investments
Intuit considers all highly liquid investments purchased with a maturity of
three months or less at the date of acquisition to be cash equivalents. Both
cash equivalents and short-term investments are considered available-for-sale
securities and are carried at amortized cost, which approximates fair value. The
following is a summary of the estimated fair value of cash, cash equivalents and
short-term investments:
The estimated fair value of cash equivalents and short-term investments by
contractual maturity is as follows:
For information about restricted investments, see Note 5 of Notes to Condensed
Consolidated Financial Statements. Realized gains and losses from sales of each
type of security for the three and six months ended January 31, 1998 were
immaterial.
Marketable Securities
Marketable securities are carried at fair value and unrealized gains and losses,
net of tax, are included in stockholders' equity. Following is a summary of
marketable securities held at January 31, 1998:
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Marketable securities in Checkfree Corporation ("Checkfree") were obtained as
a result of Intuit's sale of its on-line banking and bill payment transaction
processing business to Checkfree in January 1997. For more information on
this sale, see Note 3 of Notes to Condensed Consolidated Financial
Statements.
The Company accounts for its investment in Checkfree as an available-for-sale
equity security, which accordingly is carried at market value. Checkfree
common stock is quoted on the Nasdaq Stock Market under the symbol CKFR. The
closing price of Checkfree common stock at January 31, 1998 was $24.75 per
share. At January 31, 1998, the Company held 10.6 million shares, or
approximately 19%, of Checkfree's outstanding common stock. The $106.0
million unrealized gain at January 31, 1998 and the $34.4 million unrealized
gain at July 31, 1997, on these available-for-sale securities has been
reported as a separate component of stockholders' equity (net of tax).
The Company acquired 2.9 million shares of common stock of Excite, Inc.
("Excite") in June 1997 in connection with entering into an agreement with
Excite to jointly develop, promote and distribute a new on-line financial
channel. Prior to January 1998, these shares were valued at cost, or $39.2
million, due to restrictions that prevented the sale of any of the shares. At
January 31, 1998, remaining restrictions on these shares will now expire
within 12 months. As a result, the Company now carries its investment in
Excite as an available-for-sale equity security at market value, or $124.0
million, reflecting an unrealized gain of $84.8 million, which has been
included as a separate component of stockholders' equity (net of tax).
Excite's common stock is quoted on the Nasdaq Stock Market under the symbol
XCIT. The closing price of Excite common stock at January 31, 1998, was
$42.75 per share. At January 31, 1998, the Company held approximately 15% of
the outstanding common stock of Excite.
Goodwill and Intangible Assets
Components of intangible assets are as follows:
Other intangibles include items such as trade names, logos and other
identified intangible assets. The balances presented above are net of total
accumulated amortization of $147.1 million and $88.7 million at July 31, 1997
and January 31, 1998, respectively. The accumulated amortization balance at
July 31, 1997 included $67.8 million relating to the acquisition of Parsons
Technology, Inc. ("Parsons") in September 1994.
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Concentration of Credit and Valuation Risk
Intuit's revenues are concentrated in the personal computer software industry,
which is highly competitive and rapidly changing. Significant technological
changes in the industry or in customer requirements, or the emergence of
competitive products or services with new capabilities or technologies, could
adversely affect Intuit's operating results.
Intuit is subject to concentration of credit and/or valuation risk because it
holds short-term investments, marketable securities and trade accounts
receivable. Intuit holds shares of Checkfree common stock as marketable
securities, representing approximately 19% of Checkfree's outstanding common
stock at January 31, 1998. Intuit also holds approximately 15% of Excite's
outstanding common stock as of January 31, 1998. The Company's ability to
dispose of both the Checkfree and Excite stock is restricted by volume trading
limitations and other contractual arrangements. No Excite shares may be sold
prior to December 1998. If marketable securities experience a permanent decline
in value below cost, the Company will report the decline in earnings. Intuit's
remaining investment portfolio is diversified and generally consists of
short-term investment-grade securities. The Company performs ongoing customer
credit evaluations to decrease the credit risk associated with accounts
receivable. Generally, no collateral is required. Intuit maintains reserves for
estimated credit losses and such losses have historically been within
management's expectations.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 establishes standards for reporting comprehensive income in a
financial statement. Comprehensive income items include changes in equity
(net assets) not included in net income. Examples are foreign currency
translation adjustments and unrealized gains/losses on available for sale
securities. The disclosure prescribed by SFAS 130 is required beginning with the
quarter ending October 31, 1998.
In June 1997, FASB issued SFAS 131, "Disclosures About Segments of an Enterprise
and Related Information." This statement establishes standards for the way
companies report information about operating segments in financial statements.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company has not yet
determined the impact, if any, of adopting this standard. The disclosures
prescribed by SFAS 131 are required in fiscal year 1999.
In October 1997, FASB approved the new American Institute of Certified Public
Accountants Statement of Position, "Software Revenue Recognition" ("SOP 97-2").
SOP 97-2 will be effective for the Company beginning in the first quarter of
fiscal 1999. The Company does not believe the adoption of SOP 97-2 will have a
significant impact on its revenue recognition policy.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the
current presentation format.
2. ACQUISITIONS
In September 1996, Intuit completed its acquisition of GALT Technologies, Inc.,
a provider of mutual fund information on the World Wide Web. The acquisition was
treated as a purchase for accounting purposes. Under the terms of the
acquisition agreement, Intuit issued 212,053 shares of Intuit common stock and
options to purchase approximately 33,686 shares of Intuit common stock to GALT
stockholders and option holders, respectively, at the date of acquisition. Of
the purchase price of $14.6 million, approximately $8.5 million was allocated to
identified intangible assets and goodwill, which is being amortized over a
period not to exceed three years. Approximately $4.9 million of in-process
research and development was expensed in the quarter ended January 31, 1997. Pro
forma information for GALT has not been presented because it is not material.
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In March 1997, Intuit KK, a wholly owned subsidiary of Intuit, completed its
acquisition of Nihon Micom Co. Ltd. ("Nihon Micom"), a Japanese small business
accounting software company, for cash. The acquisition was treated as a purchase
for accounting purposes. The purchase price of the acquisition was approximately
$39.9 million. In addition, liabilities of approximately $9.6 million were
assumed. Approximately $32.8 million was allocated to identified intangible
assets and goodwill, which is being amortized over a period not to exceed three
years. An in-process research and development charge of $6.1 million was
expensed in the quarter ended April 30, 1997. Under the terms of the agreement,
Intuit issued options to purchase 89,170 shares of Intuit common stock to
employees of Nihon Micom on the date of acquisition. Pro forma information for
Nihon Micom has not been presented because it is not material.
3. DISCONTINUED OPERATIONS AND DIVESTITURES
On January 27, 1997, Intuit completed the sale of its on-line banking and bill
payment transaction-processing subsidiary, Intuit Services Corporation ("ISC"),
to Checkfree in exchange for 12.6 million shares of Checkfree common stock. The
closing price of Checkfree common stock was $14.75 per share on January 24,
1997, the last business day prior to closing. As a result of the divestiture,
Intuit recorded a gain on sale of discontinued operations of $71.2 million, net
of tax, in the quarter ended January 31, 1997. This gain was recorded net of
certain contingent items relating to the divested business. In February 1997,
Intuit sold two million shares of the acquired Checkfree common stock.
On August 7, 1997, the Company completed the sale of Parsons, its consumer
software and direct marketing subsidiary, to Broderbund Software, Inc. for
approximately $31 million. Net assets acquired by Broderbund as a result of the
sale were approximately $17 million and direct costs incurred by Intuit relating
to the sale were approximately $9.5 million. As a result of the divestiture, the
Company recorded a pre-tax gain of $4.3 million and a related tax provision of
$2.7 million in the quarter ended October 31, 1997.
The following information shows pro forma net revenue, net income from
continuing operations and diluted net income per share from continuing
operations of Intuit as if the disposition of Parsons had taken place as of the
beginning of fiscal 1997:
4. OTHER ACCRUED LIABILITIES
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5. NOTES PAYABLE AND COMMITMENTS
In March 1997, Intuit's Japanese subsidiary, Intuit KK, entered into a
three-year loan agreement with Japanese banks for approximately $30.3 million
used to fund its acquisition of Nihon Micom. The interest rate is variable based
on the Tokyo interbank offered rate or the short-term prime rate offered in
Japan. At January 31, 1998, the interest rate was approximately 1.4%. The fair
value of the loan approximates cost as the interest rate on the borrowings is
adjusted periodically to reflect market rates (which are currently significantly
lower in Japan than in the United States). Intuit has guaranteed the loan and
has pledged approximately $32.5 million, or 110% of the loan balance, of
short-term investments to be restricted as security for the borrowings at
January 31, 1998.
6. INCOME TAXES
The Company computes the provision for income taxes by applying the estimated
annual effective tax rate to recurring operations and amortization of intangible
assets, excluding the write-off of in-process research and development and the
amortization of goodwill.
7. LITIGATION
Intuit is subject to legal proceedings and claims that arise in the course of
its business. Intuit believes that the ultimate amount of liability, if any, for
any pending actions (either alone or combined) will not materially affect its
financial position, results of operations or liquidity. However, the ultimate
outcome of any litigation is uncertain. An unfavorable outcome could have a
material negative impact. In addition, any litigation, regardless of outcome,
can have an adverse impact on Intuit because of defense costs, diversion of
management resources and other factors.
8. SUBSEQUENT EVENTS
On February 17, 1998, the Company announced a three-year agreement with America
Online, Inc. ("AOL"). Under the terms of the agreement, Intuit will be the
exclusive provider of tax preparation and filing, multi-carrier life and auto
insurance, and multi-lender mortgage services on both the AOL service and
AOL.com, which is AOL's default site for Internet access by AOL members. In
addition, on AOL.com, Intuit will be the primary source of financial content for
the Personal Finance Web Channel. Under terms of the agreement, Intuit
guarantees payments to AOL totaling $30 million over three years, of which
approximately $16 million was paid upon signing. This initial payment will be
expensed in the third quarter of fiscal 1998. The remainder of the guaranteed
payments will be expensed over the expected term of the agreement. AOL will also
be eligible for revenue sharing once certain revenue thresholds in the agreement
have been met.
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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CAUTIONS ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements about future financial
results and other events that have not yet occurred. Forward-looking statements
include, but are not limited to, statements regarding prospects for our
QuickBooks, TurboTax and Quicken '98 products (including the expected launch of
a new QuickBooks product) and our Internet-based businesses, and expected trends
in certain expenses. Actual results may differ significantly from our current
expectations because of risks and uncertainties about the future. Such risks
include, but are not limited to, intense competition and pricing pressures;
uncertain growth of the markets for the Company's offerings; possible delays in
product launch dates; possible product errors or other events that lead to
greater demand for customer service and technical support (and therefore greater
cost to the Company); the adequacy of our product return reserves; risks
associated with regulated businesses such as insurance and mortgage lending; the
Company's ability to adapt and expand its product, service and content offerings
for the Internet environment; rapidly changing technology and customer demands;
the timing and consumer acceptance of new products and services; the cost of
implementing the Company's Internet strategy; the success of relationships
between the Company and third parties that are significant to the Company's
Internet strategy; and uncertainty as to the timing and amount of potential
Internet-related revenue and profit. In addition, the Company will not
necessarily update the information in this Form 10-Q if any forward-looking
statements later turn out to be inaccurate. Additional information on factors
that could affect future results and events is included in our report on Form
10-K for the fiscal year ended July 31, 1997 and our Form 10-Q for the quarter
ended October 31, 1997, filed with the Securities and Exchange Commission.
OVERVIEW
Intuit's mission is to revolutionize the way individuals and small businesses
manage their finances. To achieve this goal, we create, sell and support small
business accounting, tax preparation and consumer finance software products,
financial supplies (such as computer checks, invoices and envelopes), and
Internet-based products and services. Our revenues come primarily from the
United States, Japan, Germany, Canada and the United Kingdom through both retail
distribution channels and direct customer sales. While software and related
products and services now provide most of our revenue, Internet-based revenue is
growing and has become an important part of our business strategy. We continue
to devote significant financial resources to developing Internet-related
products and services.
Our business is very seasonal. Our tax products sell from December through April
due to the tax return filing season. Consumer finance software products
(primarily Quicken) sell best in our second and third fiscal quarters.
Consequently, our financial results are usually strongest during the quarters
ending January 31 and April 30 and we have historically experienced operating
losses for the quarters ending July 31 and October 31. Operating results can
also fluctuate for other reasons such as changes in product release dates,
non-recurring events such as acquisitions and product price cuts in quarters
with relatively high fixed expenses. Because of these factors, we believe that
quarter to quarter comparisons can be less reliable and that annual comparisons
are generally more meaningful when measuring how we've performed.
We recognize revenue for our desktop software products when products are
shipped, less reserves for expected returns from both the retail and direct
distribution channels. These reserves are difficult to estimate, especially for
seasonal products. If actual returns are significantly higher than our estimated
reserves, this could have a material negative impact on our revenue and
operating results. See Note 1 of the Notes to Condensed Consolidated Financial
Statements regarding net revenue.
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RESULTS OF OPERATIONS
The following is selected consolidated statement of operations information for
the three and six-month periods ended January 31, 1997 and 1998. Investors
should be aware that the following pro forma operating results for the three and
six-month periods ended January 31, 1997 exclude results for our Parsons
subsidiary (except for results of the tax business, which we retained after the
sale) that was sold on August 7, 1997. These pro forma tables are being
presented for comparative purposes to allow investors to analyze results on a
more consistent basis and are not prepared in accordance with generally accepted
accounting principles (GAAP). For results that include Parsons activity for
fiscal 1997, investors should refer to our Condensed Consolidated Statements of
Operations on page four. For additional pro forma information about 1997 results
without Parsons, see Note 3 of the Notes to Condensed Consolidated Financial
Statements.
NET REVENUE
Small Business Division. Small business division revenues come primarily from
the following sources:
o QuickBooks product line
o Supplies products (including checks, invoices and envelopes)
o Tax table services
o Support fees charged to customers for telephone assistance
Overall, revenue for the division was down 8% and up 5% for the three and
six-month periods ended January 31, 1998, respectively, compared to the same
periods a year ago. These results were driven by QuickBooks product sales, which
were down 25% and 7% for the same periods. This decline in QuickBooks revenue
from last year was expected because we had a QuickBooks product release in the
second quarter of fiscal 1997 but no release so far in fiscal 1998. We expect
that our QuickBooks multiple-user product will be released in the fourth quarter
of fiscal 1998.
With the QuickBooks multi-user product, we will be targeting the multi-user
market for the first time. While this is an opportunity for future sales growth,
there are also risks. For example, the multi-user version of QuickBooks is
currently expected to have a higher sale price than single-user versions. This
may impact the distribution channels we use for the product. There is also a
risk that the multi-user release date could be delayed. In addition, customer
service and technical support costs may be higher due to the complexity of the
product. If these or other risks occur, our operating results could suffer.
Domestic supplies revenues, which are part of the small business division, grew
by 14% and 13% for the three and six-month periods ended January 31, 1998,
respectively, due primarily to our increasing base of small business owners. The
supplies business is unlike our software business. It is a more consistent
source of revenue that comes from our existing base of customers who use
QuickBooks and Quicken to run their small businesses. While customers may go
long periods of time without buying a new version of software, they will often
buy supplies in-between software purchases. This relatively steady revenue
stream has grown as our customer base of small business owners has increased.
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Tax table service revenue and fees charged for providing telephone support to
QuickBooks customers also increased for the three and six-month periods ended
January 31, 1998. Together with supplies growth, this helped to offset the
decrease in QuickBooks sales.
Tax Division. Tax division revenues come primarily from the following sources:
o TurboTax and MacInTax personal tax preparation product line
o Professional tax preparation products
o Electronic tax return filing fees
Overall, tax division revenues for the three and six months ended January 31,
1998 were down 6% and 8% respectively, compared to last year. This was driven in
part by a delay in recognizing a portion of revenue associated with a free
electronic filing service we offered to customers who bought our deluxe Federal
TurboTax products. Most customers will receive this free service from us in our
third fiscal quarter and we have to wait until then to recognize the portion of
tax product revenue that we've allocated to electronic filing. Last year we
didn't have this free offer so there was no deferral of revenue. The
year-over-year revenue decrease was also due to the fact that most of our
TurboTax state tax products were released in January (second quarter) in fiscal
1997, but in February (third quarter) this year. In addition, despite one-time
discount offers, not all of the tax customers from our divested Parsons
subsidiary have been converted to our TurboTax products.
To date, our new TurboTax product line is selling well through retail channels.
However, it's too early to predict results for the entire tax season. We expect
to face intense competition during the remainder of the tax season (particularly
from H&R Block's TaxCut product, which has been aggressively priced in the
past), and this could impact sales. In addition, though we believe our reserves
for returned products will be adequate to cover retailers' returns of unsold
products during the next two quarters, higher than expected returns could have a
negative impact on sales for the season.
Our professional tax product sales increased by 8% for the three and six months
ended January 31, 1998 compared to the same periods last year. We experienced
this growth primarily because we have been successful in retaining our customers
from last year and in many cases upgrading them to higher priced products. We
have also been successful in converting many professional tax customers who
formerly purchased products from our divested Parsons subsidiary.
Consumer Finance Division. Consumer finance division revenues come primarily
from the following sources:
o Quicken product line
o Advertising and sponsorship fees from our Quicken.com website
o Fees earned for connecting insurance brokers with insurance
customers through our Quicken InsureMarket service offered through
Quicken.com
o Fees earned for connecting mortgage lenders with mortgage customers
through our QuickenMortgage service offered through Quicken.com
o Fees earned for connecting Quicken customers with Checkfree's bill
payment services
Total revenue for the consumer finance division was up 11% for the three and
six-month periods ended January 31, 1998 compared to the same periods a year
ago. Results include $10 million in royalty revenue from Checkfree in the
second quarter of fiscal 1997 and in the first quarter of fiscal 1998.
Our Quicken product line sales were up 51% and down 1% for the three and
six-month periods ended January 31, 1998 respectively, compared to the same
periods last year. In the first quarter of this year, the quantity of Quicken we
shipped to retailers was lower compared to last year because we thought the
20% revenue decline we experienced in the prior year might continue. In the
second quarter, we responded to stronger than expected demand by increasing our
shipments to retailers. This resulted in the high growth rate we experienced
this quarter. For the six-month period, sales are roughly flat reflecting lower
overall unit sales offset by a more favorable sales mix toward our higher-priced
deluxe
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products. However, it is too early to predict results for the rest of the
fiscal year.
Internet-based revenues are up over 200% for the three and six-month periods
ended January 31, 1998 compared to the same periods a year ago. While Internet
revenues are growing rapidly, they represent less than 5% of our total
year-to-date revenue. The Internet is a relatively new source of revenue for us.
We earn fees from companies who advertise on Quicken.com and from certain
financial service providers, such as mortgage lenders and insurance brokers, who
obtain customers through Quicken.com. Our goal is to generate increasing traffic
to Quicken.com so that our advertising rates and other fees will increase. One
way we attract more customers is to expand and improve the content on
Quicken.com. For example, during fiscal 1998, we launched our QuickenMortgage
on-line mortgage service and our TurboTax on-line product. Another way we
generate traffic is by collaborating with third party on-line service and
content providers to deliver financial content to their customers through
co-branded content or links to the Quicken.com site. For example, we have an
agreement with Excite under which all Internet users who enter the Excite
Business and Investing channel are sent to a Quicken.com website that is
co-branded (with Excite). This has significantly increased traffic to
Quicken.com. In exchange, we share profits generated from Quicken.com with
Excite.
In October 1997, we entered into an exclusive relationship with CNN to provide
Quicken.com on FN, a co-branded personal finance area on CNNfn.com. In February
1998, we entered into an agreement with AOL under which Intuit will be the
exclusive U.S. provider of tax preparation and filing, and multi-carrier life
and auto insurance, and multi-lender mortgage services on both the AOL service
and AOL.com, which is AOL's default site for Internet access by AOL members. In
addition, on AOL.com, we will be the primary source of financial content for the
Personal Finance Web Channel.
We expect Internet revenues to remain insignificant at least through the
remainder of the fiscal year. Like other companies establishing Internet-based
businesses, we face several significant risks. We are operating in an
environment where the technology, customer demands and other factors are rapidly
changing. We face intense competition from a wide range of companies. The
barriers to entry are low. Consumers may be slow to accept the Internet as a way
to buy goods and services. While we believe that Internet revenues will continue
to grow, the rate of growth cannot be reasonably estimated and there can be no
assurance that growth will occur.
International Division. International division revenues come primarily from the
following sources:
o Japanese small business products (Obanto, Kobanto)
o German Quicken, QuickBooks and Tax products
o Canadian Quicken, QuickBooks and Tax products
o United Kingdom Quicken, QuickBooks, and Tax products
We also operate in smaller European, Asian and Latin American markets. For our
international division, revenues were up by 12% and 9% for the three and
six-month periods ended January 31, 1998, respectively, compared to the same
periods last year. Excluding the impact of our Nihon Micom acquisition, revenues
would have been roughly flat for the three and six-month periods ended January
31, 1998. Despite a recent economic slowdown in Japan, unit sales of our small
business products have increased this year. This growth was partially offset by
the negative impact of a weak Japanese currency. In Europe, we experienced a
delay in releasing our German Quicken product, which contributed to lower sales
compared to last year. In Canada, sales have been roughly flat year-over-year.
In Europe, we are in the process of focusing our product development efforts
toward small business products in selected larger markets. As a result, we will
be devoting fewer resources to consumer finance and tax products, and to
smaller geographic markets. This shift in strategy may negatively impact our
international revenue for the remainder of the fiscal year.
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COST OF GOODS SOLD
There are two components of cost of goods sold. The largest is the direct cost
of manufacturing and shipping products. The second component is the amortization
of purchased software, which is the cost of products obtained through business
acquisitions. Excluding the operating results of our divested Parsons subsidiary
for fiscal 1997, total cost of goods sold decreased to 19% and 21% of revenue
for the three and six months ended January 31, 1998 respectively. This compares
to 22% and 23% for the same periods of the prior year. The improvement in cost
of goods sold resulted from customers buying more of our CD ROM products, which
cost less to manufacture and ship than disk-based products. We have also
improved the efficiency of our order-taking process in the financial supplies
business, which has reduced costly re-orders. While we will continue our efforts
to decrease cost of goods sold as a percentage of net revenue, we believe it is
unlikely that these costs will continue to decrease at current rates. There can
also be no assurance that margins will continue at their current rates. If there
are errors in current or future products, we could experience increases in cost
of goods sold and an adverse effect on operating results. Specifically, the
impact of the August 1997 tax law changes on our tax preparation products and
the release of our multi-user version of QuickBooks may increase the risk of
product errors for the remainder of fiscal 1998.
OPERATING EXPENSES
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Customer Service and Technical Support. Excluding the operating results of our
divested Parsons subsidiary for fiscal 1997, customer service and technical
support stayed flat at 16% and 20% of revenue for the three and six months ended
January 31, 1998 and 1997 respectively, compared to the same periods of the
prior year. In the current year, we have benefited from cost reductions due to
the restructuring and consolidation of our technical support facilities in the
United States and Europe in the fourth quarter of fiscal 1997. These savings
have been offset by an increase in expenses for supporting international product
launches in the current fiscal year. While we anticipate that service and
support expenses will stay relatively flat or decrease as a percentage of sales
because of the 1997 restructuring and other cost-saving initiatives, there is a
risk that these expenses could increase. For example, our new multi-user
QuickBooks product may result in higher customer service and technical support
expenses since customers are likely to need considerably more assistance with
this more complex product.
Selling and Marketing. Excluding the operating results of our divested Parsons
subsidiary for fiscal 1997, selling and marketing expenses increased to 20% and
24% of revenue for the three and six months ended January 31, 1998,
respectively. This compares to 18% and 22% for the same periods of the prior
year. In the current fiscal year, we incurred additional expenses for
international product launches compared to last year. We also experienced
increased spending in support of our TurboTax product launch.
Research and Development. Excluding the operating results of our divested
Parsons subsidiary for fiscal 1997, research and development expenses increased
to 11% and 16% of revenue for the three and six months ended January 31, 1998
respectively. This compares to 8% and 13% for the same periods of the prior
year. These increases reflect our continuing investment in Internet-related
initiatives, significant expenses related to the development of our QuickBooks
multi-user product and higher development costs for our Japanese small business
products. We are spending more to improve and expand our Internet-based products
and services to attract more customer traffic to Quicken.com. The development of
QuickBooks multi-user also contributed to increasing costs since it has been
more expensive to develop than our less complex single-user products. We believe
that research and development expenses related to Internet-based products and
services will continue to increase as a percentage of net revenue for the
remainder of the fiscal year. This could have an adverse effect on our operating
results, particularly if revenue from these products and services does not meet
expectations.
General and Administrative. Excluding the operating results of our divested
Parsons subsidiary for fiscal 1997, general and administrative expenses were 4%
and 5% of revenue for the three and six months ended January 31, 1998
respectively. This compares to 4% and 6% for the same periods of the prior year.
Charge for Purchased Research and Development. When acquiring a company, we
often have to record a one-time charge for purchased research and development.
This charge represents the value of products we acquire that aren't yet complete
enough to be considered technologically feasible. We recorded such a charge of
$4.9 million in the first quarter of fiscal 1997 when we acquired GALT
Technologies Inc. There were no such charges for the three and six months ended
January 31, 1998.
Other Acquisition Costs. Other acquisition costs include the amortization of
goodwill and purchased intangibles that are recorded as part of an acquisition.
Excluding the operating results of our Parsons subsidiary for fiscal 1997, these
costs decreased to $4.9 million in the second quarter of fiscal 1998 compared to
$5.0 million in the second quarter of fiscal 1997. For the six months ended
January 31, 1998, these costs were $8.9 million compared to $13.9 million for
the same period of the prior year. This decrease was due to the fact that a
majority of the intangibles related to the December 1993 Chipsoft acquisition
became fully amortized during fiscal 1997. For future periods, acquisition costs
will continue to have an impact on our results. If there are no additional
acquisitions, future amortization will reduce net income by approximately $13.0
million, $11.0 million, $5.3 million and $0.5 million for the years ending July
31, 1998 through 2001, respectively. If we complete additional acquisitions in
the future, additional amortization could result.
OTHER INCOME
For the three and six months ended January 31, 1998, interest and other income
and expense, net, remained essentially flat as a percentage of revenue compared
to the same periods of the prior year. The $4.3 million gain on
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disposal of business in the six months ended January 31, 1998 resulted from the
sale of Parsons, our direct marketing subsidiary, in August 1997.
INCOME TAXES
For the three and six months ended January 31, 1998, we recorded tax expense of
$26.0 and $19.5 million respectively, on pretax income of $67.9 and $48.6
million, respectively. As of January 31, 1998, we have reserved $4.2 million for
certain tax assets of our international subsidiaries. This was based on our
belief that we may not receive the tax benefit of certain loss carryforwards in
these foreign countries.
DISCONTINUED OPERATIONS
We sold our ISC subsidiary to Checkfree Corporation in the second quarter of
fiscal 1997. This resulted in a $71.2 million gain, net of tax.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1998, our cash, cash equivalents and short-term investments were
$248.7 million, a $43.6 million increase from July 31, 1997. Because of the
seasonality of our business, liquidity generally improves in our second and
third fiscal quarters. This is because cash receipts are generated from the sale
of our tax products and other product releases that typically occur during the
first two quarters of our fiscal year.
During the six months ended January 31, 1998, our operations provided $19.6
million in cash compared to $94.3 million for the six months ended January 31,
1997. This year was lower than last year because of substantial cash payments we
made for expenses related to the ISC and Parsons sales, as well as restructuring
charges. We also experienced a significant increase in accounts receivable
balances due to the seasonal nature of our business and the concentration of
product releases in our fiscal second quarter.
Investing activities provided $29.7 million in cash for the six months ended
January 31, 1998, compared to cash used of $37.9 million for the same period a
year ago. During the current year, we received $26.4 million in cash proceeds
from the sale of our Parsons subsidiary and $9.0 million from the sale of our
technical support site in New Mexico. In addition, we liquidated $17.4 million
net short-term investments. This was offset by purchases of property and
equipment of $23.5 million. Last year's use of cash was driven by $21.4 million
in net purchases of short-term investments.
The $9.5 million in cash provided from financing activities is primarily due to
proceeds from the exercise of employee stock options. This was offset in part by
repayment of the loan for our technical support site in New Mexico, which we
sold in November 1997.
In the normal course of business, we enter into leases for new or expanded
facilities in both domestic and international locations. During 1996, we began
the move of our headquarters from Menlo Park, California to larger facilities in
Mountain View, California. We expect the move to be complete by the end of
calendar year 2000. We borrowed $30.3 million from Japanese banks in March 1997
in connection with our acquisition of Nihon Micom. We have guaranteed the loan
and pledged approximately $32.5 million, or 110% of the loan balance, of
short-term investments to be restricted as security for the borrowings at
January 31, 1998. In February 1998, we entered into an agreement with America
Online (AOL) that obligates us to pay AOL a minimum of $30 million over the
three-year term of the agreement. Of this amount, $16 million was paid to AOL in
February 1998. We currently do not have any other significant capital
expenditure commitments, though we may require additional cash for strategic
projects in the future.
We believe that our cash, cash equivalents and short-term investments will be
sufficient to meet anticipated seasonal working capital and capital expenditure
requirements for at least the next twelve months.
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YEAR 2000
Intuit is in the process of evaluating its internal computer systems, as well as
the software products it sells, to determine whether modifications will be
required to prevent problems related to the Year 2000. Based on preliminary
assessments, we believe that costs required to achieve Year 2000 compliance
(including costs incurred to date) will not be material. However, actual costs
may increase depending on the outcome of our continuing evaluations.
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PART II: OTHER INFORMATION
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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At the Company's Annual Meeting of Stockholders on January 16, 1998, Intuit's
stockholders approved the following proposals:
1. Proposal to re-elect the Company's six incumbent directors:
2. Proposal to amend the Company's 1993 Equity Incentive Plan to increase
the number of shares of common stock available for issuance thereunder
by 2,105,000 shares:
3. Proposal to amend the Company's 1996 Employee Stock Purchase Plan to
increase the number of shares of common stock available for issuance
thereunder by 200,000 shares:
4. Proposal to amend the Company's 1996 Directors Stock Option Plan to
increase the number of shares of common stock available for issuance
thereunder by 45,000 shares:
5. Proposal to ratify the selection of Ernst & Young LLP as the Company's
independent auditors for fiscal 1998.
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ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
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(A) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
10.01 Intuit Inc. 1993 Equity Incentive Plan, as amended through
January 16, 1998
10.02 Intuit Inc. 1996 Employee Stock Purchase Plan, as amended
through January 16, 1998
10.03 Intuit Inc. 1996 Directors Stock Option Plan, as amended through
January 16, 1998
11.01 Computation of Net Income Per Share
27.01 Financial Data Schedule (filed in electronic version only)
(B) REPORTS ON FORM 8-K:
The Company has not filed any reports on Form 8-K since the beginning
of the fiscal quarter ended January 31, 1998.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTUIT INC.
(REGISTRANT)
Date: March 13, 1998 By:______________________________________
Greg J. Santora
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
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Exhibit Index