Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

November 20, 2018

Documents

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Table of Contents

 
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, 2018
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
intuit2016rgb080317a06.jpg
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
Emerging growth
company
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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. 259,508,568 shares of Common Stock, $0.01 par value, were outstanding at November 14, 2018.
 


INTUIT INC.
FORM 10-Q
INDEX
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-10.01
 
 EX-10.02
 
 EX-10.03
 
 EX-10.04
 
 EX-31.01
 EX-31.02
 EX-32.01
 EX-32.02
 EX-101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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, Mint, Lacerte, ProSeries, and Intuit ProConnect, 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.


 
 
 
 
 
 Intuit Q1 Fiscal 2019 Form 10-Q
2         
 

Forward-Looking Statements
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 business;
•
our expectation that we will continue to invest significant resources in our product development, marketing and sales capabilities;
•
our expectation regarding the impact of recent U.S. tax legislation on Intuit's business and its corporate tax rate;
•
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 work with the broader industry and government to protect our customers from fraud;
•
our expectation that we will generate significant cash from operations;
•
our expectation that total service and other revenue as a percentage of our total revenue will continue to grow;
•
our expectations regarding the development of future products, services, business models and technology platforms and our research and development efforts;
•
our assumptions underlying our critical accounting policies and estimates, including our judgments and estimates regarding revenue recognition; 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 intention not to sell our investments and our belief that it is more likely than not that we will not be required to sell them before recovery at par;
•
our belief that the investments we hold are not other-than-temporarily impaired;
•
our belief that we take prudent measures to mitigate investment related risks;
•
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 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, 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 the payment of cash dividends, after taking into account our operating and strategic cash needs;
•
our judgments and assumptions relating to our loan portfolio;
•
our belief that the credit facility will be available to us should we choose to borrow under it; and
•
our assessments and beliefs regarding the future outcome of pending legal proceedings and inquiries by regulatory authorities, the liability, if any, that Intuit may incur as a result of those proceedings and inquiries, and the impact of any potential losses associated with such proceedings or inquiries on our financial statements.
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 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 revise or update any forward-looking statement for any reason.


 
 
 
 
 
 Intuit Q1 Fiscal 2019 Form 10-Q
3         
 
Table of Contents

PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 
 
 
Three Months Ended
(In millions, except per share amounts)
October 31,
2018
 
October 31,
2017
Net revenue:
 
 
 
Product
$
347

 
$
370

Service and other
669

 
540

Total net revenue
1,016

 
910

Costs and expenses:
 
 
 
Cost of revenue:
 
 
 
Cost of product revenue
15

 
18

Cost of service and other revenue
227

 
178

Amortization of acquired technology
5

 
2

Selling and marketing
346

 
308

Research and development
294

 
293

General and administrative
137

 
145

Amortization of other acquired intangible assets
2

 
1

Total costs and expenses
1,026

 
945

Operating loss
(10
)
 
(35
)
Interest expense
(4
)
 
(5
)
Interest and other income, net
—

 
3

Loss before income taxes
(14
)
 
(37
)
Income tax provision (benefit)
(48
)
 
(35
)
Net income (loss)
$
34

 
$
(2
)
 
 
 
 
Basic net income (loss) per share
$
0.13

 
$
(0.01
)
Shares used in basic per share calculations
260

 
256

 
 
 
 
Diluted net income (loss) per share
$
0.13

 
$
(0.01
)
Shares used in diluted per share calculations
264

 
256

 
 
 
 
Cash dividends declared per common share
$
0.47

 
$
0.39

See accompanying notes.


 
 
 
 
 
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Table of Contents

INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
 
 
 
Three Months Ended
(In millions)
October 31,
2018
 
October 31,
2017
 
 
 
 
Net income (loss)
$
34

 
$
(2
)
Other comprehensive loss, net of income taxes:
 
 
 
Foreign currency translation loss
(4
)
 
(7
)
Total other comprehensive loss, net
(4
)
 
(7
)
Comprehensive income (loss)
$
30

 
$
(9
)


See accompanying notes.



 
 
 
 
 
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INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
 
 
 
 
(In millions)
October 31,
2018
 
July 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,084

 
$
1,464

Investments
248

 
252

Accounts receivable, net
77

 
98

Income taxes receivable
116

 
39

Prepaid expenses and other current assets
269

 
202

Current assets before funds held for customers
1,794

 
2,055

Funds held for customers
438

 
367

Total current assets
2,232

 
2,422

Long-term investments
13

 
13

Property and equipment, net
805

 
812

Goodwill
1,610

 
1,611

Acquired intangible assets, net
55

 
61

Other assets
213

 
215

Total assets
$
4,928

 
$
5,134

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
50

 
$
50

Accounts payable
209

 
178

Accrued compensation and related liabilities
174

 
369

Deferred revenue
513

 
581

Other current liabilities
202

 
198

Current liabilities before customer fund deposits
1,148

 
1,376

Customer fund deposits
438

 
367

Total current liabilities
1,586

 
1,743

Long-term debt
375

 
388

Long-term deferred income tax liabilities
65

 
68

Other long-term obligations
120

 
119

Total liabilities
2,146

 
2,318

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock
—

 
—

Common stock and additional paid-in capital
5,501

 
5,338

Treasury stock, at cost
(11,151
)
 
(11,050
)
Accumulated other comprehensive loss
(40
)
 
(36
)
Retained earnings
8,472

 
8,564

Total stockholders’ equity
2,782

 
2,816

Total liabilities and stockholders’ equity
$
4,928

 
$
5,134

See accompanying notes.


 
 
 
 
 
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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, 2018
258,616

 
$
5,338

 
$
(11,050
)
 
$
(36
)
 
$
8,564

 
$
2,816

Comprehensive income
—

 
—

 
—

 
(4
)
 
34

 
30

Issuance of stock under employee stock plans, net of shares withheld for employee taxes
1,422

 
57

 


 
—

 
—

 
57

Stock repurchases under stock repurchase programs
(467
)
 
—

 
(101
)
 
—

 
—

 
(101
)
Dividends and dividend rights declared ($0.47 per share)
—

 
—

 
—

 
—

 
(126
)
 
(126
)
Share-based compensation expense
—

 
106

 
—

 
—

 
—

 
106

Balance at October 31, 2018
259,571

 
$
5,501

 
$
(11,151
)
 
$
(40
)
 
$
8,472

 
$
2,782


(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, 2017
255,668

 
$
4,857

 
$
(10,778
)
 
$
(22
)
 
$
7,642

 
$
1,699

Comprehensive loss
—

 
—

 
—

 
(7
)
 
(2
)
 
(9
)
Issuance of stock under employee stock plans, net of shares withheld for employee taxes
1,224

 
44

 
—

 
—

 
—

 
44

Stock repurchases under stock repurchase programs
(1,225
)
 
—

 
(170
)
 
—

 
—

 
(170
)
Dividends and dividend rights declared ($0.39 per share)
—

 
—

 
—

 
—

 
(100
)
 
(100
)
Share-based compensation expense
—

 
98

 
—

 
—

 
—

 
98

Balance at October 31, 2017
255,667

 
$
4,999

 
$
(10,948
)
 
$
(29
)
 
$
7,540

 
$
1,562



See accompanying notes.


 
 
 
 
 
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Table of Contents

INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
 
 
 
 
Three Months Ended
(In millions)
October 31,
2018
 
October 31,
2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
34

 
$
(2
)
 Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Depreciation
51

 
60

Amortization of acquired intangible assets
6

 
5

Share-based compensation expense
105

 
97

Deferred income taxes
(9
)
 
(4
)
Other
2

 
2

Total adjustments
155

 
160

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
21

 
(14
)
Income taxes receivable
(47
)
 
2

Prepaid expenses and other assets
(72
)
 
(25
)
Accounts payable
24

 
61

Accrued compensation and related liabilities
(191
)
 
(147
)
Deferred revenue
(69
)
 
(120
)
Other liabilities
2

 
7

Total changes in operating assets and liabilities
(332
)
 
(236
)
Net cash used in operating activities
(143
)
 
(78
)
Cash flows from investing activities:
 
 
 
Purchases of corporate and customer fund investments
(70
)
 
(86
)
Sales of corporate and customer fund investments
33

 
38

Maturities of corporate and customer fund investments
41

 
46

Net change in customer fund deposits
71

 
(53
)
Purchases of property and equipment
(35
)
 
(50
)
Originations of term loans to small businesses
(76
)
 
(12
)
Principal repayments of term loans from small businesses
52

 
4

Other
4

 
(15
)
Net cash provided by (used in) investing activities
20

 
(128
)
Cash flows from financing activities:
 
 
 
Proceeds from borrowings under revolving credit facility
—

 
400

Repayment of debt
(13
)
 
(13
)
Proceeds from issuance of stock under employee stock plans
120

 
83

Payments for employee taxes withheld upon vesting of restricted stock units
(63
)
 
(39
)
Cash paid for purchases of treasury stock
(95
)
 
(168
)
Dividends and dividend rights paid
(129
)
 
(105
)
Other
(2
)
 
—

Net cash provided by (used in) financing activities
(182
)
 
158

Effect of exchange rates on cash, cash equivalents, restricted cash, and restricted cash equivalents
(4
)
 
(5
)
Net decrease in cash, cash equivalents, restricted cash, and restricted cash equivalents
(309
)
 
(53
)
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period
1,631

 
701

Cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period
$
1,322

 
$
648

 
 
 
 
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents reported within the consolidated balance sheets to the total amounts reported on the consolidated statements of cash flows
 
 
 
Cash and cash equivalents
$
1,084

 
$
529

Restricted cash and restricted cash equivalents included in funds held for customers
238

 
119

Total cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period
$
1,322

 
$
648


See accompanying notes.


 
 
 
 
 
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Table of Contents

INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Intuit helps consumers, small businesses, and the self-employed prosper by delivering financial management and compliance products and services. We also provide specialized tax products to accounting professionals, who are key partners that help us reach small business customers.
Our flagship brands, QuickBooks and TurboTax, help customers run their small businesses, pay employees and send invoices, separate business and personal expenses, track their money, and file income taxes. ProSeries and Lacerte are our leading 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.
We acquired TSheets.com LLC, Exactor, Inc., and Applatix, Inc. in the second quarter of fiscal 2018. We have included the results of operations for these companies in our consolidated statements of operations from the dates of acquisition.
Effective August 1, 2018, we adopted the requirements of Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606)” and ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” All prior period amounts and disclosures set forth in this Quarterly Report on Form 10-Q have been restated to comply with these standards.
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, 2018. Results for the three months ended October 31, 2018 do not necessarily indicate the results we expect for the fiscal year ending July 31, 2019 or any other future period.
Seasonality
Our Consumer and Strategic Partner offerings have a significant and distinct seasonal pattern as sales and revenue from our income tax preparation products and services are heavily concentrated in the period from November through April. This seasonal pattern results in higher net revenues during our second and third quarters ending January 31 and April 30, respectively.
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, 2018. See the discussion of changes to our revenue recognition policy for the adoption of Topic 606, the new revenue recognition standard, below. There have been no other changes to our significant accounting policies during the first three months of fiscal 2019.
Revenue Recognition
We derive revenue from the sale of packaged software products, software subscriptions, hosted services, payroll services, merchant payment processing services, financial supplies and hardware. We enter into contracts with customers that include promises to transfer various products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized when the promised goods or services are transferred to customers, in an amount that reflects the consideration allocated to the respective performance obligation.


 
 
 
 
 
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Nature of Products and Services
Desktop Offerings
Our desktop offerings consist of our QuickBooks Desktop products, which include both packaged software products and software subscriptions, our consumer and professional tax desktop products, which include TurboTax, Lacerte and ProSeries, our desktop payroll products, and merchant payment processing services for small businesses who use our desktop offerings.
Our QuickBooks Desktop packaged software products include a perpetual software license as well as enhancements and connected services. We recognize revenue for our QuickBooks Desktop packaged software products at the time the software license is delivered. We have determined that the enhancements and connected services included in our QuickBooks Desktop packaged software products are immaterial within the context of the contract.
Our QuickBooks Desktop software subscriptions include a term software license, version protection, enhancements, support and various connected services. We recognize revenue for the software license and version protection at the time they are delivered and recognize revenue for support and connected services over the subscription term as the services are provided. We have determined that the enhancements included in our QuickBooks Desktop software subscriptions are immaterial within the context of the contract.
Our consumer and professional tax desktop products include an on-premise tax software license, related tax form updates, electronic filing service and connected services. We recognize revenue for the software license and related tax form updates, as one performance obligation, over the period the forms and updates are delivered. We recognize revenue for our electronic filings service and connected services as those services are provided.
We also sell some of our QuickBooks Desktop products and consumer tax desktop products in non-consignment and consignment arrangements to certain retailers. For non-consignment retailers, we begin recognizing revenue when control has transferred to the retailer. For consignment retailers, we begin recognizing revenue when control has transferred to the customer, at the time the end-user sale has occurred.
Our desktop payroll products are sold as software subscriptions and include a term software license with a stand-ready obligation to maintain compliance with current payroll tax laws, support and connected services. The term software license and stand-ready obligation to maintain compliance with current payroll tax laws is considered one performance obligation. Each of the performance obligations is considered distinct and control is transferred to the customer over the subscription term. As a result, revenue is recognized ratably over the subscription term as services are provided.
We offer merchant payment processing services as a separately paid connected service for our QuickBooks Desktop packaged software products and software subscriptions, and revenue is recognized as the services are provided to the customers.
Online Offerings
Our online offerings include our TurboTax Online products, ProConnect Tax Online products, QuickBooks Online products, online payroll products, and merchant payment processing services for small businesses who use our online offerings.
These online offerings provide customers with the right to use the hosted software over the contract period without taking possession of the software and are billed on either a subscription or consumption basis. Revenue related to our online offerings that are billed on a subscription basis is recognized ratably over the contract period. Revenue related to online offerings that are billed on a consumption basis, is recognized when the customer consumes the related service.
Other Solutions
Revenue from the sale of our financial supplies, such as printed check stock, and hardware, such as retail point-of-sale equipment and credit card readers for mobile phones, is recognized when control is transferred to the customer which is generally when the products are shipped.
We also have revenue-sharing and royalty arrangements with third-party partners and recognize this revenue as earned based upon reporting provided to us by our partners. In instances where we do not have reporting from our partners, we estimate revenue based on information available to us at the time.
Product Revenue and Service and Other Revenue
Product revenue includes revenue from: QuickBooks Desktop software licenses and version protection; consumer and professional tax desktop licenses and the related form updates; desktop payroll licenses and related updates; and financial supplies.
Service and other revenue includes revenue from: our online offerings discussed above; support, electronic filing services and connected services included with our desktop offerings; merchant payment processing services for our desktop offerings; and revenue-sharing and royalty arrangements.
We record revenue net of sales tax obligations. For payroll services, we generally require customers to remit payroll tax funds to us in advance of the payroll date via electronic funds transfer. We include in total net revenue the interest earned on these funds between the time that we collect them from customers and the time that we remit them to outside parties. Revenue for


 
 
 
 
 
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electronic payment processing services that we provide to merchants is recorded net of interchange fees charged by credit card associations.
Significant Judgments
Our contracts with customers often include promises to transfer multiple products and services to a customer. In determining how revenue should be recognized, a five-step process is used, which requires judgment and estimates. These judgments and estimates include identifying performance obligations in the contract, determining whether the performance obligations are distinct, determining the standalone sales price (SSP) for each distinct performance obligation, determining the timing of revenue recognition for distinct performance obligations and estimating the amount of variable consideration to include in the transaction price.
The functionality of the software licenses included in our consumer and professional tax and payroll desktop offerings is dependent on the related enhancements and updates included in these offerings. Judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the related updates and recognized over time.
Our contracts with customers include promises to transfer various products and services, which are generally capable of being distinct performance obligations. In many cases SSPs for distinct performance obligations are based on directly observable pricing. In instances where the SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs.
Our consumer and professional tax desktop products include an on-premise tax software license and related tax form updates that are recognized as the forms and updates are delivered. We measure progress towards complete satisfaction of the software license and related tax form updates using an output method based on the timing of when the tax forms are delivered.
We generally provide refunds to customers for product returns and subscription cancellations. We also provide promotional discounts and incentive rebates on retail and distribution sales. These refunds, discounts and incentive rebates are accounted for as variable consideration when estimating the amount of revenue to recognize. Refunds are estimated based on historical experience and current business and economic indicators and updated at the end of each reporting period as additional information becomes available to the extent that it is probable that a significant reversal of any incremental revenue will not occur. Discounts and incentive rebates are estimated based on distributors' and retailers' performance against the terms and conditions of the rebate programs.
Deferred Revenue
Generally, we receive payment at the time we enter into a contract with a customer. We record deferred revenue when we have entered into a contract with a customer and cash payments are received or due prior to transfer of control or satisfaction of the related performance obligation. During the three months ended October 31, 2018, we recognized revenue of $327 million that was included in deferred revenue at July 31, 2018. During the three months ended October 31, 2017, we recognized revenue of $339 million that was included in deferred revenue at July 31, 2017.
Our performance obligations are generally satisfied within 12 months of the initial contract date. As of October 31, 2018 and July 31, 2018, the deferred revenue balance related to performance obligations that will be satisfied after 12 months was $2 million and $3 million, respectively, and is included in other long-term obligations on our consolidated balance sheets.
Assets Recognized from the Costs to Obtain a Contract with a Customer
Our internal sales commissions are considered incremental costs of obtaining the contract with a customer. Internal sales commissions for subscription offerings where we expect the benefit of those costs to continue longer than one year are capitalized and amortized ratably over the period of benefit, which ranges from three to four years. Total capitalized costs to obtain a contract are included in prepaid expenses and other current assets and other assets on our consolidated balance sheets.
We apply a practical expedient to expense costs incurred to obtain a contract with a customer when the period of benefit is less than one year. These costs primarily include internal and external sales commissions for our consumer and professional tax offerings.


 
 
 
 
 
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Use of Estimates
In preparing our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP), we make certain judgments, estimates, and assumptions that affect the amounts reported in our financial statements and the disclosures made in the accompanying notes. For example, we use judgments and estimates in determining how revenue should be recognized. These judgments and estimates include identifying performance obligations, determining if the performance obligations are distinct, determining the SSP and timing of revenue recognition for each distinct performance obligation, and estimating variable consideration to be included in the transaction price. We use estimates in determining the collectibility of accounts receivable and notes 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 and unrecognized compensation expense that are less than the average market price for our common stock, and RSUs with unrecognized compensation expense that is 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 and unrecognized compensation expense that are greater than the average market price for our common stock, and RSUs with unrecognized compensation expense that is 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 and the amount of compensation expense for future service that we have not yet recognized for stock options and RSUs are assumed to be used to repurchase shares.
All of the RSUs we grant have dividend rights. Dividend rights are accumulated and paid when the underlying RSUs vest. 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.


 
 
 
 
 
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The following table presents the composition of shares used in the computation of basic and diluted net income per share for the periods indicated.
 
Three Months Ended
(In millions, except per share amounts)
October 31,
2018
 
October 31,
2017
Numerator:
 
 
 
Net income (loss)
$
34

 
$
(2
)
 
 
 
 
Denominator:
 
 
 
Shares used in basic per share amounts:
 
 
 
Weighted average common shares outstanding
260

 
256

 
 
 
 
Shares used in diluted per share amounts:
 
 
 
Weighted average common shares outstanding
260

 
256

Dilutive common equivalent shares from stock options
 
 
 
and restricted stock awards
4

 
—

Dilutive weighted average common shares outstanding
264

 
256

 
 
 
 
Basic and diluted net income (loss) per share:
 
 
 
Basic net income (loss) per share
$
0.13

 
$
(0.01
)
 
 
 
 
Diluted net income (loss) per share
$
0.13

 
$
(0.01
)
 
 
 
 
Shares excluded from diluted net income (loss) per share:
 
 
 
Weighted average stock options and restricted stock units that have been excluded from dilutive common equivalent shares outstanding due to their anti-dilutive effect
—

 
14


Notes Receivable and Allowances for Loan Losses
Notes receivable consist of term loans to small businesses and are included in prepaid expenses and other current assets on our consolidated balance sheets. As of October 31, 2018 and July 31, 2018, the notes receivable balance was $79 million and $55 million, respectively, and the allowance for loan losses were not significant. The term loans are not secured and are recorded at amortized cost, net of allowances for loan losses. We maintain an allowance for loan losses to reserve for potentially uncollectible notes receivable. We evaluate the creditworthiness of our loan portfolio on a pooled basis due to its composition of small, homogeneous loans with similar general credit risk and characteristics and apply a loss rate at the time of loan origination. The loss rate and underlying model are updated periodically to reflect actual loan performance and changes in assumptions. We make judgments about the known and inherent risks in the loan portfolio, adverse situations that may affect borrowers’ ability to repay and current economic conditions. When we determine that amounts are uncollectible, we write them off against the allowance.
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, 2018 or October 31, 2017. No customer accounted for 10% or more of gross accounts receivable at October 31, 2018 or July 31, 2018.
Accounting Standards Recently Adopted
Business Combinations - In January 2017 the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” This standard clarifies the definition of a business in order to allow for the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. We adopted this standard in the first quarter of our fiscal year beginning August 1, 2018. The impact of the adoption of ASU 2017-01 on our consolidated financial statements is not material.
Statement of Cash Flows - In August 2016 the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This standard makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. We adopted this standard in the first quarter of our fiscal year beginning August 1, 2018. The impact of the adoption of ASU 2016-15 on our consolidated financial statements is not material.
Income Taxes - In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” This standard requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs, as opposed to historical GAAP guidance which prohibited the


 
 
 
 
 
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recognition of current and deferred income taxes for an intra-entity asset transfer until the asset had been sold to an outside party. We adopted this standard in the first quarter of our fiscal year beginning August 1, 2018. The impact of the adoption of ASU 2016-16 on our consolidated financial statements is not material.
Statement of Cash Flows - In November 2016 the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” This standard provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. We adopted this standard in the first quarter of our fiscal year beginning August 1, 2018. We have modified our consolidated statements of cash flows to include restricted cash and restricted cash equivalents.
The adoption of ASU 2016-18 impacted our previously reported consolidated statement of cash flows as follows:
 
Three Months Ended October 31, 2017
(Dollars in millions)
As Reported
 
ASU 2016-18 Adjustment
 
As Adjusted
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
(78
)
 
$
—

 
$
(78
)
Investing activities
(75
)
 
(53
)
 
(128
)
Financing activities
158

 
—

 
158

Effect of exchange rates on cash, cash equivalents, restricted cash, and restricted cash equivalents
(5
)
 
—

 
(5
)
Net decrease in cash, cash equivalents, restricted cash, and restricted cash equivalents
$
—

 
$
(53
)
 
$
(53
)

Revenue from Contracts with Customers - In May 2014 the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” This standard superseded nearly all existing revenue recognition guidance under U.S. GAAP. Under this standard, revenue is recognized 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. This 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. We adopted this standard in the first quarter of our fiscal year beginning August 1, 2018 using the full retrospective method, which requires us to restate each prior reporting period presented. We have implemented internal controls and processes to enable the preparation of financial information on adoption.
The most significant impact of the standard relates to the timing and amount of revenue recognized for our QuickBooks Desktop solutions and our consumer and professional tax desktop solutions. Our QuickBooks Desktop solutions include both packaged software products and software subscriptions.
Our QuickBooks Desktop packaged software products include a software license as well as enhancements and connected services. Under the new standard, we recognize revenue for the QuickBooks Desktop packaged software products at the time the software license is delivered rather than ratably over the period that enhancements and connected services are provided, which was approximately three years. We have determined that the enhancements and connected services included in our QuickBooks Desktop packaged software products are immaterial within the context of the contract.
Our QuickBooks Desktop software subscriptions include a software license, version protection, enhancements, support and various connected services. We recognize revenue for the software license and version protection at the time they are delivered and recognize revenue for support and connected services over the subscription term as the services are provided. Previously, we recognized revenue for our QuickBooks Desktop software subscriptions ratably over the subscription term, which is generally one year. We have determined that the enhancements included in our QuickBooks Desktop software subscriptions are immaterial within the context of the contract.
Our consumer and professional tax desktop solutions include a desktop tax preparation software license, tax form updates, electronic filing and connected services. We recognize revenue for the desktop tax preparation software license and related tax form updates as the forms and updates are delivered and recognize revenue for our electronic filing and connected services as those services are provided. Previously, we recognized all revenue related to tax desktop solutions as services were provided.
We capitalize the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year, which include internal sales commissions related to our subscription offerings.
The adoption of this standard resulted in a decrease in deferred revenue and long-term deferred income taxes, primarily due to the change in revenue recognition for our QuickBooks Desktop and professional tax desktop solutions. Additionally, the adoption of the standard resulted in the recognition of additional revenue and a decrease in the income tax benefit, primarily due to the net change in revenue recognition for our QuickBooks Desktop and professional tax desktop solutions. Our prepaid expenses and other current assets and other assets balances increased due to the capitalized costs to obtain a contract.


 
 
 
 
 
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Adoption of ASU 2014-09 impacted our previously reported results as follows:
 
July 31, 2018
(In millions)
As Reported
 
Topic 606 Adjustment
 
As Adjusted
Prepaid expenses and other current assets
$
184

 
$
18

 
$
202

Long-term deferred income taxes (1)
87

 
(85
)
 
2

Other assets (1)
190

 
23

 
213

Deferred revenue
961

 
(380
)
 
581

Other current liabilities
191

 
7

 
198

Long-term deferred revenue (2)
197

 
(194
)
 
3

Other long-term obligations (2)
123

 
61

 
184

Stockholders’ equity
2,354

 
462

 
2,816

(1) Long-term deferred income taxes is included in other assets on our consolidated balance sheets.
(2) Long-term deferred revenue is included in other long-term obligations on our consolidated balance sheets.
 
Three Months Ended October 31, 2017
(In millions, except per share amounts)
As Reported
 
Topic 606 Adjustment
 
As Adjusted
Net revenue
$
886

 
$
24

 
$
910

Selling and marketing expense
308

 
—

 
308

Operating loss
(57
)
 
22

 
(35
)
Income tax benefit
(42
)
 
7

 
(35
)
Net loss
(17
)
 
15

 
(2
)
Diluted net loss per share
(0.07
)
 
0.06

 
(0.01
)

Adoption of Topic 606 had no impact to cash from or used in operating, financing, or investing on our consolidated statements of cash flows.
Accounting Standards Not Yet Adopted
Internal-Use Software - In August 2018 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15, “Intangibles—Goodwill and Other (Topic 350): Internal-Use Software.” This standard aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2019. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2018-15 on our consolidated financial statements.
Goodwill Impairment - In January 2017 the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This standard eliminates Step 2 from the goodwill impairment test. Instead, an entity should compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2020. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2017-04 on our consolidated financial statements.
Financial Instruments - In June 2016 the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326).” This standard requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2020. Earlier adoption is permitted in the first quarter of our fiscal year beginning August 1, 2019. We are currently evaluating the impact of our pending adoption of ASU 2016-13 on our consolidated financial statements.
Leases - In February 2016 the FASB issued ASU 2016-02, “Leases (Topic 842).” This standard amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years,


 
 
 
 
 
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which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2019. Early adoption is permitted. This standard is required to be adopted using a modified retrospective approach. We expect to elect certain available transitional practical expedients. In July 2018 the FASB issued ASU 2018-11, “Leases (Topic 842) Targeted Improvements," which allows for the adoption of this standard to be applied at the beginning of the most recent fiscal year as opposed to at the beginning of the earliest year presented. We plan to adopt under the provisions allowed under ASU 2018-11. While we continue to evaluate the impact of our pending adoption of ASU 2016-02 on our consolidated financial statements, we expect that the real estate and equipment leases designated as operating leases as discussed 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, 2018 will be recognized as right-of-use assets and corresponding lease liabilities on our consolidated balance sheets upon adoption. We do not expect the adoption of ASU 2016-02 to have a material impact on our consolidated statements of operations.
We do not expect that any other recently issued accounting pronouncements will have a significant effect on our financial statements.
2. Fair Value Measurements
Fair Value Hierarchy
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 unobservable 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 values are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.


 
 
 
 
 
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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, 2018
 
July 31, 2018
(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 and savings deposit accounts
$
512

 
$
—

 
$
—

 
$
512

 
$
1,143

 
$
—

 
$
—

 
$
1,143

Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
—

 
13

 
—

 
13

 
—

 
31

 
—

 
31

Corporate notes
—

 
420

 
—

 
420

 
—

 
412

 
—

 
412

U.S. agency securities
—

 
15

 
—

 
15

 
—

 
9

 
—

 
9

Total available-for-sale securities
—

 
448

 
—

 
448

 
—

 
452

 
—

 
452

Total assets measured at fair value on a recurring basis
$
512

 
$
448

 
$
—

 
$
960

 
$
1,143

 
$
452

 
$
—

 
$
1,595


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, 2018
 
July 31, 2018
(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
$
512

 
$
—

 
$
—

 
$
512

 
$
1,143

 
$
—

 
$
—

 
$
1,143

Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In investments
$
—

 
$
248

 
$
—

 
$
248

 
$
—

 
$
252

 
$
—

 
$
252

In funds held for customers
—

 
200

 
—

 
200

 
—

 
200

 
—

 
200

Total available-for-sale debt securities
$
—

 
$
448

 
$
—

 
$
448

 
$
—

 
$
452

 
$
—

 
$
452


We value our Level 1 assets, consisting primarily of money market funds and savings deposit accounts, 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.
There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended October 31, 2018.
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. In all periods presented, cash equivalents consist primarily of money market funds and savings deposit accounts, investments consist primarily of investment-grade available-for-sale debt securities, and funds held for customers consist of cash and cash equivalents and investment-grade available-for-sale debt securities. 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.


 
 
 
 
 
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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, 2018
 
July 31, 2018
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Classification on consolidated balance sheets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,084

 
$
1,084

 
$
1,464

 
$
1,464

Investments
250

 
248

 
253

 
252

Funds held for customers
438

 
438

 
368

 
367

Long-term investments
13

 
13

 
13

 
13

Total cash and cash equivalents, investments, and funds
held for customers
$
1,785

 
$
1,783

 
$
2,098

 
$
2,096


The following table summarizes our cash and cash equivalents, investments, and funds held for customers by investment category at the dates indicated.
 
October 31, 2018
 
July 31, 2018
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Type of issue:
 
 
 
 
 
 
 
Total cash, cash equivalents, restricted cash,
and restricted cash equivalents
$
1,322

 
$
1,322

 
$
1,631

 
$
1,631

Available-for-sale debt securities:
 
 
 
 
 
 
 
Municipal bonds
13

 
13

 
31

 
31

Corporate notes
422

 
420

 
414

 
412

U.S. agency securities
15

 
15

 
9

 
9

Total available-for-sale debt securities
450

 
448

 
454

 
452

Other long-term investments
13

 
13

 
13

 
13

Total cash and cash equivalents, investments, and funds
held for customers
$
1,785

 
$
1,783

 
$
2,098

 
$
2,096


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 on our consolidated statements of operations. Gross realized gains and losses on our available-for-sale debt securities for the three months ended October 31, 2018 and October 31, 2017 were not significant.
We accumulate unrealized gains and losses on our available-for-sale debt securities, net of tax, in accumulated other comprehensive loss in the stockholders’ equity section of our consolidated balance sheets. Gross unrealized gains and losses on our available-for-sale debt securities at October 31, 2018 and July 31, 2018 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, 2018 were not other-than-temporarily impaired. Unrealized losses on available-for-sale debt securities at October 31, 2018 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. In addition, it is more likely than not that we will not be required to sell them before recovery at par, which may be at maturity.
The following table summarizes our available-for-sale debt securities, included in investments and funds held for customers, classified by the stated maturity date of the security at the dates indicated.
 
October 31, 2018
 
July 31, 2018
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Due within one year
$
262

 
$
261

 
$
250

 
$
250

Due within two years
119

 
118

 
117

 
116

Due within three years
47

 
47

 
66

 
65

Due after three years
22

 
22

 
21

 
21

Total available-for-sale debt securities
$
450

 
$
448

 
$
454

 
$
452




 
 
 
 
 
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Funds held for customers represent cash held on behalf of our customers that is invested in cash and cash equivalents and investment grade available-for-sale securities, restricted for use solely for the purpose of satisfying amounts we owe on behalf of our customers, such as direct deposit payroll funds and payroll taxes.
The following table summarizes our funds held for customers by investment category at the dates indicated.
 
October 31, 2018
 
July 31, 2018
(In millions)
 
 
 
Restricted cash and restricted cash equivalents
$
238

 
$
167

Available-for-sale debt securities
200

 
200

Total funds held for customers