10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on March 9, 2006
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 January 31, 2006
OR
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission File Number 0-21180
INTUIT INC.
(Exact name of registrant as specified in its charter)
Delaware | 77-0034661 | |
(State of incorporation) | (IRS employer identification no.) |
2700 Coast Avenue, Mountain View, CA 94043
(Address of principal executive offices)
(Address of principal executive offices)
(650) 944-6000
(Registrants telephone number, including area code)
(Registrants 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 þ No o
Yes þ No o
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
174,109,359 shares of Common Stock, $0.01 par value, as of February 28, 2006
INTUIT INC.
FORM 10-Q
INDEX
FORM 10-Q
INDEX
Intuit, the Intuit logo, QuickBooks, TurboTax, Lacerte, ProSeries, Quicken and QuickBase, 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. Simple Start, QuickTax, TaxWiz and ProFile,
among others, are trademarks and/or service marks of Intuit Inc., or one of its subsidiaries, in
the United States and other countries. Other parties marks are the property of their respective
owners.
2
Table of Contents
PART I
ITEM 1
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | January 31, | January 31, | |||||||||||||
(In thousands, except per share amounts; unaudited) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Net revenue: |
||||||||||||||||
Product |
$ | 557,079 | $ | 497,198 | $ | 739,533 | $ | 651,201 | ||||||||
Service |
166,917 | 135,410 | 271,537 | 219,567 | ||||||||||||
Other |
18,708 | 15,636 | 35,705 | 30,252 | ||||||||||||
Total net revenue |
742,704 | 648,244 | 1,046,775 | 901,020 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of revenue: |
||||||||||||||||
Cost of product revenue |
71,739 | 63,863 | 104,170 | 93,707 | ||||||||||||
Cost of service revenue |
57,271 | 47,458 | 110,667 | 87,210 | ||||||||||||
Cost of other revenue |
6,122 | 5,111 | 11,974 | 10,908 | ||||||||||||
Amortization of purchased intangible assets |
2,763 | 2,626 | 5,712 | 5,167 | ||||||||||||
Selling and marketing |
196,903 | 173,458 | 344,333 | 302,004 | ||||||||||||
Research and development |
100,084 | 76,946 | 197,364 | 151,311 | ||||||||||||
General and administrative |
65,297 | 56,425 | 128,892 | 106,066 | ||||||||||||
Acquisition-related charges |
3,553 | 4,169 | 7,312 | 8,610 | ||||||||||||
Total costs and expenses |
503,732 | 430,056 | 910,424 | 764,983 | ||||||||||||
Operating income from continuing operations |
238,972 | 218,188 | 136,351 | 136,037 | ||||||||||||
Interest and other income |
5,322 | 2,982 | 11,626 | 6,837 | ||||||||||||
Gains on marketable equity securities and other
investments, net |
3,027 | 60 | 7,294 | 218 | ||||||||||||
Income from continuing operations before
income taxes |
247,321 | 221,230 | 155,271 | 143,092 | ||||||||||||
Income tax provision |
92,074 | 76,256 | 57,635 | 43,615 | ||||||||||||
Net income from continuing operations |
155,247 | 144,974 | 97,636 | 99,477 | ||||||||||||
Net income from discontinued operations |
27,726 | 2,278 | 39,533 | 1,639 | ||||||||||||
Net income |
$ | 182,973 | $ | 147,252 | $ | 137,169 | $ | 101,116 | ||||||||
Basic net income per share from
continuing operations |
$ | 0.88 | $ | 0.78 | $ | 0.56 | $ | 0.53 | ||||||||
Basic net income per share
from discontinued operations |
0.16 | 0.01 | 0.22 | 0.01 | ||||||||||||
Basic net income per share |
$ | 1.04 | $ | 0.79 | $ | 0.78 | $ | 0.54 | ||||||||
Shares used in basic per share amounts |
175,146 | 186,331 | 176,276 | 187,339 | ||||||||||||
Diluted net income per share from
continuing operations |
$ | 0.86 | $ | 0.76 | $ | 0.54 | $ | 0.52 | ||||||||
Diluted net income per share from
discontinued operations |
0.15 | 0.01 | 0.21 | 0.01 | ||||||||||||
Diluted net income per share |
$ | 1.01 | $ | 0.77 | $ | 0.75 | $ | 0.53 | ||||||||
Shares used in diluted per share amounts |
181,791 | 190,100 | 182,600 | 191,229 | ||||||||||||
Net income for the three and six months ended January 31, 2006 included share-based
compensation expense for stock options and our Employee Stock Purchase Plan that we recorded as a
result of our adoption of SFAS 123(R) on August 1, 2005. For continuing operations, this expense
totaled $16.4 million and $35.5 million before income taxes and $10.3 million and $22.4 million net
of income taxes for those periods. We recorded no share-based compensation expense for stock
options or our Employee Stock Purchase Plan for the three and six months ended January 31, 2005
because we did not adopt the optional recognition provisions of SFAS 123. As previously disclosed
in the notes to our financial statements for the three and six months ended January 31, 2005, net
income including pro forma share-based compensation expense for those periods was $134.3 million
and $74.3 million. See Note 1 and Note 10 to the financial statements for additional information.
See accompanying notes.
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Table of Contents
INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, | July 31, | |||||||
(In thousands; unaudited) | 2006 | 2005 | ||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 122,706 | $ | 83,842 | ||||
Investments |
711,170 | 910,416 | ||||||
Accounts receivable, net |
319,493 | 86,125 | ||||||
Deferred income taxes |
50,940 | 54,854 | ||||||
Prepaid expenses, taxes and other current assets |
87,846 | 99,275 | ||||||
Current assets of discontinued operations |
| 21,989 | ||||||
Current assets before funds held for payroll customers |
1,292,155 | 1,256,501 | ||||||
Funds held for payroll customers |
424,008 | 357,838 | ||||||
Total current assets |
1,716,163 | 1,614,339 | ||||||
Property and equipment, net |
211,582 | 208,548 | ||||||
Goodwill, net |
529,770 | 509,499 | ||||||
Purchased intangible assets, net |
67,296 | 69,678 | ||||||
Long-term deferred income taxes |
124,948 | 118,475 | ||||||
Loans to executive officers and other employees |
8,865 | 9,245 | ||||||
Other assets |
35,651 | 30,078 | ||||||
Long-term assets of discontinued operations |
| 156,589 | ||||||
Total assets |
$ | 2,694,275 | $ | 2,716,451 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 126,042 | $ | 65,812 | ||||
Accrued compensation and related liabilities |
124,529 | 144,823 | ||||||
Deferred revenue |
256,698 | 279,382 | ||||||
Income taxes payable |
31,341 | 30,423 | ||||||
Other current liabilities |
161,240 | 103,131 | ||||||
Current liabilities of discontinued operations |
| 21,995 | ||||||
Current liabilities before payroll customer fund deposits |
699,850 | 645,566 | ||||||
Payroll customer fund deposits |
424,008 | 357,838 | ||||||
Total current liabilities |
1,123,858 | 1,003,404 | ||||||
Long-term obligations |
16,515 | 17,308 | ||||||
Long-term obligations of discontinued operations |
| 240 | ||||||
Total long-term obligations |
16,515 | 17,548 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock |
| | ||||||
Common stock and additional paid-in capital |
2,029,142 | 1,977,954 | ||||||
Treasury stock, at cost |
(1,848,936 | ) | (1,557,833 | ) | ||||
Deferred compensation |
| (16,283 | ) | |||||
Accumulated other comprehensive income |
1,312 | 174 | ||||||
Retained earnings |
1,372,384 | 1,291,487 | ||||||
Total stockholders equity |
1,553,902 | 1,695,499 | ||||||
Total liabilities and stockholders equity |
$ | 2,694,275 | $ | 2,716,451 | ||||
See accompanying notes.
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Table of Contents
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Six Months Ended January 31, 2006 and 2005
For the Six Months Ended January 31, 2006 and 2005
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common Stock | Paid In | Treasury | Deferred | Comprehensive | Retained | Stockholders | ||||||||||||||||||||||||||
(Dollars in thousands; unaudited) | Shares | Amount | Capital | Stock | Compensation | Income (Loss) | Earnings | Equity | ||||||||||||||||||||||||
Balance at July 31, 2005 |
179,270,062 | $ | 1,793 | $ | 1,976,161 | $ | (1,557,833 | ) | $ | (16,283 | ) | $ | 174 | $ | 1,291,487 | $ | 1,695,499 | |||||||||||||||
Reclassification of deferred compensation
balance upon adoption of SFAS 123(R) |
(16,283 | ) | 16,283 | | ||||||||||||||||||||||||||||
Components of comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
137,169 | 137,169 | ||||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
1,138 | 1,138 | ||||||||||||||||||||||||||||||
Comprehensive net income |
138,307 | |||||||||||||||||||||||||||||||
Issuance of common stock upon
exercise of options and other |
4,199,173 | 42 | 191,326 | (54,187 | ) | 137,181 | ||||||||||||||||||||||||||
Issuance of common stock pursuant to
Employee Stock Purchase Plan |
271,581 | 2 | 12,453 | (2,085 | ) | 10,370 | ||||||||||||||||||||||||||
Stock repurchases under stock
repurchase programs |
(9,913,913 | ) | (99 | ) | (494,882 | ) | (494,981 | ) | ||||||||||||||||||||||||
Tax benefit from employee stock
option transactions |
29,076 | 29,076 | ||||||||||||||||||||||||||||||
Share-based compensation restricted stock |
2,653 | 2,653 | ||||||||||||||||||||||||||||||
Share-based compensation all other (1) |
35,797 | 35,797 | ||||||||||||||||||||||||||||||
Balance at January 31, 2006 |
173,826,903 | $ | 1,738 | $ | 2,027,404 | $ | (1,848,936 | ) | $ | | $ | 1,312 | $ | 1,372,384 | $ | 1,553,902 | ||||||||||||||||
(1) | Includes $35,520 for continuing operations and $277 for Intuit Information Technology Solutions discontinued operations. |
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common Stock | Paid In | Treasury | Deferred | Comprehensive | Retained | Stockholders | ||||||||||||||||||||||||||
(Dollars in thousands; unaudited) | Shares | Amount | Capital | Stock | Compensation | Income (Loss) | Earnings | Equity | ||||||||||||||||||||||||
Balance at July 31, 2004 |
190,090,604 | $ | 1,901 | $ | 1,947,325 | $ | (1,088,389 | ) | $ | (19,434 | ) | $ | (3,375 | ) | $ | 984,391 | $ | 1,822,419 | ||||||||||||||
Components of comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
101,116 | 101,116 | ||||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
2,673 | 2,673 | ||||||||||||||||||||||||||||||
Comprehensive net income |
103,789 | |||||||||||||||||||||||||||||||
Issuance of common stock upon
exercise of options and other |
1,737,988 | 17 | 85,631 | (35,901 | ) | 49,747 | ||||||||||||||||||||||||||
Issuance of common stock pursuant to
Employee Stock Purchase Plan |
308,354 | 4 | 15,869 | (5,250 | ) | 10,623 | ||||||||||||||||||||||||||
Stock repurchases under stock
repurchase programs |
(6,547,000 | ) | (66 | ) | (284,144 | ) | (284,210 | ) | ||||||||||||||||||||||||
Repurchases of vested restricted stock |
(32 | ) | (1 | ) | (1 | ) | ||||||||||||||||||||||||||
Tax benefit from employee stock
option transactions |
9,049 | 9,049 | ||||||||||||||||||||||||||||||
Stock bonus awards and related
stock issuance |
87 | 38 | (38 | ) | | |||||||||||||||||||||||||||
Retirement of treasury stock and other |
74 | (1 | ) | 1 | | |||||||||||||||||||||||||||
Reduction of deferred stock compensation
due to stock option cancellations |
(18 | ) | 18 | | ||||||||||||||||||||||||||||
Share-based compensation restricted stock |
3,251 | 3,251 | ||||||||||||||||||||||||||||||
Share-based compensation acquisitions |
133 | 133 | ||||||||||||||||||||||||||||||
Balance at January 31, 2005 |
185,590,075 | $ | 1,856 | $ | 1,956,393 | $ | (1,271,033 | ) | $ | (16,070 | ) | $ | (702 | ) | $ | 1,044,356 | $ | 1,714,800 | ||||||||||||||
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Table of Contents
INTUIT
INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | January 31, | January 31, | |||||||||||||
(In thousands; unaudited) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Cash flows from operating activities: |
||||||||||||||||
Net income |
$ | 182,973 | $ | 147,252 | $ | 137,169 | $ | 101,116 | ||||||||
Net income from discontinued operations |
(27,726 | ) | (2,278 | ) | (39,533 | ) | (1,639 | ) | ||||||||
Net income from continuing operations |
155,247 | 144,974 | 97,636 | 99,477 | ||||||||||||
Adjustments to reconcile net income from continuing operations
to net cash provided by operating activities: |
||||||||||||||||
Depreciation |
22,616 | 23,320 | 45,761 | 44,730 | ||||||||||||
Acquisition-related charges |
3,553 | 4,169 | 7,312 | 8,610 | ||||||||||||
Amortization of purchased intangible assets |
2,763 | 2,626 | 5,712 | 5,167 | ||||||||||||
Amortization of other purchased intangible assets |
2,259 | 1,883 | 4,290 | 3,766 | ||||||||||||
Share-based compensation restricted stock |
1,328 | 1,626 | 2,653 | 3,251 | ||||||||||||
Share-based compensation all other |
16,421 | | 35,520 | | ||||||||||||
Gain on disposal of property and equipment |
(161 | ) | (8 | ) | (127 | ) | (134 | ) | ||||||||
Amortization of premiums and discounts on available-for-sale
debt securities |
972 | 2,280 | 2,066 | 5,746 | ||||||||||||
Net realized loss on sales of available-for-sale debt securities |
98 | 223 | 478 | 1,520 | ||||||||||||
Net gains on marketable equity securities and other investments |
(3,027 | ) | (60 | ) | (7,294 | ) | (218 | ) | ||||||||
Deferred income taxes |
(4,128 | ) | 11,190 | (1,608 | ) | 270 | ||||||||||
Tax benefit from employee stock options |
14,108 | 3,896 | 15,691 | 9,049 | ||||||||||||
Loss (gain) on foreign exchange transactions |
121 | (35 | ) | 106 | (362 | ) | ||||||||||
Subtotal |
212,170 | 196,084 | 208,196 | 180,872 | ||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Accounts receivable |
(245,772 | ) | (238,842 | ) | (232,851 | ) | (217,329 | ) | ||||||||
Prepaid expenses, taxes and other current assets |
70,864 | 87,110 | 32,370 | (9,279 | ) | |||||||||||
Accounts payable |
28,937 | 18,710 | 59,602 | 32,375 | ||||||||||||
Accrued compensation and related liabilities |
43,917 | 36,270 | (20,482 | ) | (23,984 | ) | ||||||||||
Deferred revenue |
(17,825 | ) | 34,847 | (23,062 | ) | 32,810 | ||||||||||
Income taxes payable |
8,343 | (31,546 | ) | (8,428 | ) | 17,154 | ||||||||||
Other current liabilities |
66,473 | 111,066 | 57,002 | 108,848 | ||||||||||||
Total changes in operating assets and liabilities |
(45,063 | ) | 17,615 | (135,849 | ) | (59,405 | ) | |||||||||
Net cash provided by operating activities of continuing
operations |
167,107 | 213,699 | 72,347 | 121,467 | ||||||||||||
Net cash provided by operating activities of discontinued operations |
3,109 | 6,537 | 14,090 | 11,383 | ||||||||||||
Net cash provided by operating activities |
170,216 | 220,236 | 86,437 | 132,850 | ||||||||||||
Cash flows from investing activities: |
||||||||||||||||
Purchases of available-for-sale debt securities |
(392,673 | ) | (675,876 | ) | (681,792 | ) | (1,343,060 | ) | ||||||||
Liquidation and maturity of available-for-sale debt securities |
302,878 | 532,529 | 878,722 | 1,480,532 | ||||||||||||
Proceeds from sale of marketable equity securities |
4,235 | | 4,235 | | ||||||||||||
Net change in funds held for payroll customers money
market funds and other cash equivalents |
(78,576 | ) | 2,212 | (66,170 | ) | (7,845 | ) | |||||||||
Purchases of property and equipment |
(22,855 | ) | (13,163 | ) | (47,912 | ) | (37,560 | ) | ||||||||
Proceeds from sale of property |
334 | | 334 | | ||||||||||||
Change in other assets |
(1,925 | ) | 276 | (6,379 | ) | (4,610 | ) | |||||||||
Net change in payroll customer funds deposits |
78,576 | (2,212 | ) | 66,170 | 7,845 | |||||||||||
Acquisitions of businesses and intangible assets, net of cash acquired |
(23,733 | ) | (4,156 | ) | (33,881 | ) | (4,156 | ) | ||||||||
Net cash provided by (used in) investing activities of
continuing operations |
(133,739 | ) | (160,390 | ) | 113,327 | 91,146 | ||||||||||
Net proceeds from sales of discontinued operations |
171,833 | 9,197 | 171,833 | 9,197 | ||||||||||||
Net cash provided by (used in) investing activities |
38,094 | (151,193 | ) | 285,160 | 100,343 | |||||||||||
Cash flows from financing activities: |
||||||||||||||||
Change in long-term obligations |
(16 | ) | (717 | ) | (650 | ) | (1,341 | ) | ||||||||
Net proceeds from issuance of common stock under stock plans |
126,083 | 29,412 | 147,551 | 60,370 | ||||||||||||
Purchase of treasury stock |
(300,181 | ) | (113,649 | ) | (494,981 | ) | (284,211 | ) | ||||||||
Excess tax benefit from employee stock options |
12,446 | | 13,385 | | ||||||||||||
Net cash used in financing activities |
(161,668 | ) | (84,954 | ) | (334,695 | ) | (225,182 | ) | ||||||||
Effect of exchange rates on cash and cash equivalents |
1,090 | (13 | ) | 1,962 | 864 | |||||||||||
Net increase (decrease) in cash and cash equivalents |
47,732 | (15,924 | ) | 38,864 | 8,875 | |||||||||||
Cash and cash equivalents at beginning of period |
74,974 | 50,791 | 83,842 | 25,992 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 122,706 | $ | 34,867 | $ | 122,706 | $ | 34,867 | ||||||||
See accompanying notes.
6
Table of Contents
INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(UNAUDITED)
1. Summary of Significant Accounting Policies
Basis of Presentation
The 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 reclassified certain amounts previously reported in our
financial statements to conform to the current presentation, including amounts related to
discontinued operations.
As discussed later in this Note 1, we adopted Statement of Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment, on August 1, 2005 using the modified prospective transition
method. Accordingly, our operating income from continuing operations for the three and six months
ended January 31, 2006 includes approximately $16.4 million and $35.5 million in share-based
employee compensation expense for stock options and our Employee Stock Purchase Plan. Because we
elected to use the modified prospective transition method, results for prior periods have not been
restated.
As discussed in Note 5, in December 2005 we sold our Intuit Information Technology Solutions (ITS)
business and in December 2004 we sold our Intuit Public Sector Solutions (IPSS) business.
Accordingly, we have reclassified our financial statements for all periods prior to the sales to
reflect ITS and IPSS as discontinued operations. Unless noted otherwise, discussions in these notes
pertain to our continuing operations.
We have included all normal recurring adjustments and the adjustments for discontinued operations
that we considered necessary to give a fair presentation of our operating results for the periods
presented. These condensed consolidated financial statements and accompanying notes should be read
together with the audited consolidated financial statements for the fiscal year ended July 31, 2005
included in Intuits Annual Report on Form 10-K, filed with the Securities and Exchange Commission
on September 26, 2005. Results for the three and six months ended January 31, 2006 do not
necessarily indicate the results we expect for the fiscal year ending July 31, 2006 or any other
future period.
Our QuickBooks, Consumer Tax and Professional Tax businesses are highly seasonal. Some of our other
offerings are also seasonal, but to a lesser extent. Revenue from upgrades for many of our small
business software products, including QuickBooks, tends to be concentrated around calendar year
end. Sales of income tax preparation products and services are heavily concentrated in the period
from November through April. These seasonal patterns mean that our total net revenue is usually
highest during our second quarter ending January 31 and third quarter ending April 30. We typically
report losses in our first quarter ending October 31 and fourth quarter ending July 31, when
revenue from our tax businesses is minimal while operating expenses continue at relatively
consistent levels.
Use of Estimates
We make estimates and assumptions that affect the amounts reported in the financial statements and
the disclosures made in the accompanying notes. For example, we use estimates in determining the
appropriate levels of reserves for product returns and rebates, the collectibility of accounts
receivable, the appropriate levels of various accruals, 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 carrying values of purchased intangible assets (including goodwill), property
and equipment and other long-lived assets. In addition, we use assumptions to estimate the fair
value of share-based compensation. See Note 10, Stockholders Equity Share-Based Compensation
Plans. Despite our intention to establish accurate estimates and use reasonable assumptions,
actual results may differ from our estimates.
Net Revenue
We derive revenue from the sale of packaged software products, license fees, software
subscriptions, product support, professional services, outsourced payroll services, merchant
services, transaction fees and multiple element arrangements that may include any combination of
these items. We recognize revenue for software products and related services in accordance with the
American Institute of Certified Public Accountants Statement of Position
7
Table of Contents
(SOP) 97-2, Software
Revenue Recognition, as modified by SOP 98-9. For other offerings, we follow Staff
Accounting Bulletin No. 104, Revenue Recognition. We recognize revenue when persuasive evidence
of an arrangement exists, we have delivered the product or performed the service, the fee is fixed
or determinable and collectibility is probable.
In some situations, we receive advance payments from our customers. We also offer multiple element
arrangements to our customers. We defer revenue associated with these advance payments and the
relative fair value of undelivered elements under multiple element arrangements until we ship the
products or perform the services. Deferred revenue consisted of the following at the dates
indicated:
January 31, | July 31, | |||||||
(In thousands) | 2006 | 2005 | ||||||
Product and product-related services |
$ | 229,701 | $ | 261,135 | ||||
Customer support |
26,997 | 18,247 | ||||||
Total deferred revenue |
$ | 256,698 | $ | 279,382 | ||||
In accordance with the Financial Accounting Standards Boards (FASBs) Emerging Issues Task
Force Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or a Reseller
of the Vendors Product, we account for cash consideration such as sales incentives that we give
to our customers or resellers as a reduction of revenue rather than as an operating expense unless
we receive a benefit that we can identify and for which we can reasonably estimate the fair value.
Product Revenue
We recognize revenue from the sale of our packaged software products and supplies when legal title transfers, which is generally when we ship the products or, in the case of certain agreements, when products are delivered to retailers. We sell some of our QuickBooks, Consumer Tax and Quicken products on consignment to a limited number of retailers. We recognize revenue for these consignment transactions only when the end-user sale has occurred. For products that are sold on a subscription basis and include periodic updates, we recognize revenue ratably over the contractual time period.
We recognize revenue from the sale of our packaged software products and supplies when legal title transfers, which is generally when we ship the products or, in the case of certain agreements, when products are delivered to retailers. We sell some of our QuickBooks, Consumer Tax and Quicken products on consignment to a limited number of retailers. We recognize revenue for these consignment transactions only when the end-user sale has occurred. For products that are sold on a subscription basis and include periodic updates, we recognize revenue ratably over the contractual time period.
We reduce product revenue from distributors and retailers for estimated returns that are based on
historical returns experience and other factors, such as the volume and price mix of products in
the retail channel, return rates for prior releases of the product, trends in retailer inventory
and economic trends that might impact customer demand for our products (including the competitive
environment and the timing of new releases of our product). We also reduce product revenue for the
estimated redemption of rebates on certain current product sales. Our estimated reserves for
distributor and retailer sales incentive rebates are based on distributors and retailers actual
performance against the terms and conditions of rebate programs, which we typically establish
annually. Our reserves for end user rebates are estimated based on the terms and conditions of the
specific promotional rebate program, actual sales during the promotion, the amount of redemptions
received and historical redemption trends by product and by type of promotional program.
Service Revenue
We recognize revenue from outsourced payroll processing and payroll tax filing services as the services are performed, provided we have no other remaining obligations to these customers. We generally require customers to remit payroll tax funds to us in advance of the applicable payroll due date via electronic funds transfer. We include in total net revenue the interest earned on invested balances resulting from timing differences between when we collect these funds from customers and when we remit the funds to outside parties.
We recognize revenue from outsourced payroll processing and payroll tax filing services as the services are performed, provided we have no other remaining obligations to these customers. We generally require customers to remit payroll tax funds to us in advance of the applicable payroll due date via electronic funds transfer. We include in total net revenue the interest earned on invested balances resulting from timing differences between when we collect these funds from customers and when we remit the funds to outside parties.
We offer several technical support plans and recognize support revenue over the life of the plans.
Service revenue also includes Web services such as TurboTax Online and electronic tax filing
services in both our Consumer Tax and Professional Tax segments. Service revenue for electronic
payment processing services that we provide to merchants is recorded net of interchange fees
charged by credit card associations because we do not control these fees. Finally, service revenue
includes revenue from consulting and training services, primarily in our Intuit-Branded Small
Business segment. We generally recognize revenue as these services are performed, provided that we
have no other remaining obligations to these customers and that the services performed are not
essential to the functionality of delivered products and services.
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Other Revenue
Other revenue consists primarily of revenue from revenue-sharing arrangements with third-party
service providers and from online advertising agreements. We recognize transaction fees from
revenue-sharing arrangements as end-user sales are reported to us by these partners. We typically
recognize revenue from online advertising agreements as the lesser of when the advertisements are
displayed or pro rata based on the contractual time period of the advertisements.
Multiple Element Arrangements
We enter into certain revenue arrangements for which we are obligated to deliver multiple products and/or services (multiple elements). For these arrangements, which generally include software products, we allocate and defer revenue for the undelivered elements based on their vendor-specific objective evidence of fair value (VSOE). VSOE is generally the price charged when that element is sold separately.
We enter into certain revenue arrangements for which we are obligated to deliver multiple products and/or services (multiple elements). For these arrangements, which generally include software products, we allocate and defer revenue for the undelivered elements based on their vendor-specific objective evidence of fair value (VSOE). VSOE is generally the price charged when that element is sold separately.
In situations where VSOE exists for all elements (delivered and undelivered), we allocate the total
revenue to be earned under the arrangement among the various elements, based on their relative fair
value. For transactions where VSOE exists only for the undelivered elements, we defer the full fair
value of the undelivered elements and recognize the difference between the total arrangement fee
and the amount deferred for the undelivered items as revenue. If VSOE does not exist for
undelivered items that are services, then we recognize the entire arrangement fee ratably over the
service period. If VSOE does not exist for undelivered elements that are specified products or
features, we defer revenue until the earlier of the delivery of all elements or the point at which
we determine VSOE for these undelivered elements.
We recognize revenue related to the delivered products or services only if: (1) the above revenue
recognition criteria are met; (2) any undelivered products or services are not essential to the
functionality of the delivered products and services; (3) payment for the delivered products or
services is not contingent upon delivery of the remaining products or services; and (4) we have an
enforceable claim to receive the amount due in the event that we do not deliver the undelivered
products or services.
For arrangements where undelivered services are essential to the functionality of delivered
software, we recognize both the product license revenue and service revenue under the percentage of
completion contract method in accordance with the provisions of SOP 81-1, Accounting for
Performance of Construction Type and Certain Production Type Contracts. To date, product license
and service revenues recognized pursuant to SOP 81-1 have not been significant.
Shipping and Handling
We record the amounts we charge our customers for the shipping and handling of our software
products as product revenue and we record the related costs as cost of product revenue on our
statement of operations. Product revenue from shipping and handling is not significant.
Customer Service and Technical Support
We include the costs of providing customer service under paid technical support contracts on the
cost of service revenue line on our statement of operations. We include customer service and free
technical support costs on the sales and marketing expense line on our statements of operations.
Customer service and technical support costs include costs associated with performing order
processing, answering customer inquiries by telephone and through Web sites, e-mail and other
electronic means, and providing free technical support assistance to customers. In connection with
the sale of certain products, we provide a limited amount of free technical support assistance to
customers. We do not defer the recognition of any revenue associated with sales of these products,
since the cost of providing this free technical support is insignificant. The technical support is
provided within one year after the associated revenue is recognized and free product enhancements
are minimal and infrequent. We accrue the estimated cost of providing this free support upon
product shipment.
Leases
We review all leases for capital or operating classification at their inception under the guidance
of SFAS 13, Accounting for Leases, as amended. We use our incremental borrowing rate in the
assessment of lease classification and define the initial lease term to include the construction
build-out period but to exclude lease extension periods. We conduct our operations primarily under
operating leases. For leases that contain rent escalations, we record the total rent payable during
the lease term, as defined above, on a straight-line basis over the
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initial term of the lease. We record the difference between the rents paid and the straight-line
rent in a deferred rent account in other current liabilities or long-term obligations, as
appropriate, on our balance sheets.
In accordance with FASB Technical Bulletin (FTB) No. 88-1, Issues Relating to Accounting for
Leases, we record landlord allowances as deferred rent liabilities in other current liabilities or
long-term obligations, as appropriate, on our balance sheets. We record landlord cash incentives as
operating activity on our statements of cash flows. We record other landlord allowances as non-cash
investing and financing activities on our statements of cash flows. Also in accordance with FTB
88-1, we classify the amortization of landlord allowances as a reduction of occupancy expense on
our statements of operations.
Income Taxes
When we prepare our financial statements, we estimate our income taxes based on the various
jurisdictions where we conduct business. Significant judgment is required in determining our
worldwide income tax provision. We recognize liabilities for anticipated tax audit issues in the
United States and other tax jurisdictions based on our estimate of whether, and the extent to
which, additional taxes will be due. We record an additional amount in our provision for income
taxes in the period in which we determine that our recorded tax liability is less than we expect
the ultimate tax assessment to be. If in a later period we determine that payment of this
additional amount is unnecessary, we reverse the liability and recognize a tax benefit in that
later period. As a result, our ongoing assessments of the probable outcomes of the audit issues and
related tax positions require judgment and can materially increase or decrease our effective tax
rate and materially affect our operating results. This also requires us to estimate our current tax
exposure and to assess temporary differences that result from differing treatments of certain items
for tax and accounting purposes. These differences result in deferred tax assets and liabilities,
which we show on our balance sheet. We must then assess the likelihood that our deferred tax assets
will be realized. To the extent we believe that realization is not likely, we establish a valuation
allowance. When we establish a valuation allowance or increase this allowance in an accounting
period, we record a corresponding tax expense on our statement of operations.
We record a valuation allowance to reflect uncertainties about whether we will be able to utilize
some of our deferred tax assets (consisting primarily of certain state capital loss and net
operating loss carryforwards) before they expire. The valuation allowance is based on our estimates
of taxable income for the jurisdictions in which we operate and the period over which our deferred
tax assets will be realizable. While we have considered future taxable income in assessing the need
for the valuation allowance, we could be required to increase the valuation allowance to take into
account additional deferred tax assets that we may be unable to realize. An increase in the
valuation allowance would have an adverse impact, which could be material, on our income tax
provision and net income in the period in which we make the increase.
Per Share Computations
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 or loss per share using the weighted
average number of common and dilutive common equivalent shares outstanding during the period.
Common equivalent shares consist of the shares issuable upon the exercise of stock options under
the treasury stock method and vested restricted stock awards. We exclude stock options with
combined exercise prices and unamortized fair values that are greater than the average market price
for our common stock from the calculation of diluted net income per share because their effect is
anti-dilutive. In loss periods, basic net loss per share and diluted net loss per share are
identical since the effect of common equivalent 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 loss per share for the periods indicated.
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | January 31, | January 31, | |||||||||||||
(In thousands, except per share amounts) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Numerator: |
||||||||||||||||
Net income from continuing operations |
$ | 155,247 | $ | 144,974 | $ | 97,636 | $ | 99,477 | ||||||||
Net income from discontinued operations |
27,726 | 2,278 | 39,533 | 1,639 | ||||||||||||
Net income |
$ | 182,973 | $ | 147,252 | $ | 137,169 | $ | 101,116 | ||||||||
Denominator: |
||||||||||||||||
Shares used in basic per share amounts: |
||||||||||||||||
Weighted average common shares outstanding |
175,146 | 186,331 | 176,276 | 187,339 | ||||||||||||
Shares used in diluted per share amounts: |
||||||||||||||||
Weighted average common shares outstanding |
175,146 | 186,331 | 176,276 | 187,339 | ||||||||||||
Dilutive common equivalent shares from
stock options and restricted stock awards |
6,645 | 3,769 | 6,324 | 3,890 | ||||||||||||
Dilutive weighted average common shares
outstanding |
181,791 | 190,100 | 182,600 | 191,229 | ||||||||||||
Basic and diluted net income per share: |
||||||||||||||||
Basic net income per share from
continuing operations |
$ | 0.88 | $ | 0.78 | $ | 0.56 | $ | 0.53 | ||||||||
Basic net income per share
from discontinued operations |
0.16 | 0.01 | 0.22 | 0.01 | ||||||||||||
Basic net income per share |
$ | 1.04 | $ | 0.79 | $ | 0.78 | $ | 0.54 | ||||||||
Diluted net income per share from
continuing operations |
$ | 0.86 | $ | 0.76 | $ | 0.54 | $ | 0.52 | ||||||||
Diluted net income per share
from discontinued operations |
0.15 | 0.01 | 0.21 | 0.01 | ||||||||||||
Diluted net income per share |
$ | 1.01 | $ | 0.77 | $ | 0.75 | $ | 0.53 | ||||||||
Weighted average stock options excluded
from calculation due to anti-dilutive effect: |
||||||||||||||||
Stock options with combined exercise prices
and unamortized fair values that were greater
than the average market price for the common
stock in the period |
7,587 | 10,098 | 9,205 | 9,976 | ||||||||||||
Cash Equivalents and Investments
We consider highly liquid investments with maturities of three months or less at the date of
purchase to be cash equivalents. Cash equivalents consist primarily of money market funds in all
periods presented. Investments consist of available-for-sale debt securities that we carry at fair
value. We use the specific identification method to compute gains and losses on investments. We
include unrealized gains and losses on investments, net of tax, in stockholders equity.
Available-for-sale debt securities are classified as current assets based upon our intent and
ability to use any and all of these securities as necessary to satisfy the significant short-term
liquidity requirements that may arise from the highly seasonal and cyclical nature of our
businesses. Because of our significant business seasonality, stock repurchase programs and
acquisition opportunities, cash flow requirements may fluctuate dramatically from quarter to
quarter and require us to use a significant amount of the investments held as available-for-sale
securities. See Note 2.
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Funds Held for Payroll Customers and Payroll Customer Fund Deposits
Funds held for payroll customers represent amounts held on behalf of our payroll customers that are
invested in cash, cash equivalents and investments. Payroll customer fund deposits consist
primarily of payroll taxes we owe on behalf of our payroll customers.
Goodwill, Purchased Intangible Assets and Other Long-Lived Assets
We record goodwill when the purchase price of net tangible and intangible assets we acquire exceeds
their fair value. We amortize the cost of identified intangible assets on a straight-line basis
over periods ranging from two to seven years.
We regularly perform reviews to determine if the carrying values of our long-lived assets are
impaired. In accordance with SFAS 142, Goodwill and Other Intangible Assets, we review goodwill
and other intangible assets that have indefinite useful lives for impairment at least annually in
our fourth fiscal quarter, or more frequently if an event occurs indicating the potential for
impairment. In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, we review intangible assets that have finite useful lives and other long-lived assets when
an event occurs indicating the potential for impairment. In our reviews, we look for facts or
circumstances, either internal or external, indicating that we may not recover the carrying value
of the asset. We measure impairment losses related to long-lived assets based on the amount by
which the carrying amounts of these assets exceed their fair values. Our measurement of fair value
under SFAS 142 is generally based on a blend of an analysis of the present value of estimated
future discounted cash flows and a comparison of revenue and operating income multiples for
companies of similar industry and/or size. Our measurement of fair value under SFAS 144 is
generally based on the present value of estimated future discounted cash flows. Our analysis is
based on available information and on assumptions and projections that we consider to be reasonable
and supportable. The discounted cash flow analysis considers the likelihood of possible outcomes
and is based on our best estimate of projected future cash flows. If necessary, we perform
subsequent calculations to measure the amount of the impairment loss based on the excess of the
carrying value over the fair value of the impaired assets.
Share-Based Compensation Plans
Our share-based employee compensation plans are described in Note 10. Prior to August 1, 2005, we
accounted for these share-based employee compensation plans under the measurement and recognition
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations, as permitted by SFAS 123, Accounting for Stock-Based
Compensation. Accordingly, we recorded no share-based employee compensation expense for options
granted under the 2005 Plan or its predecessor plans during the three and six months ended January
31, 2005 as all options granted under those plans had exercise prices equal to the fair market
value of our common stock on the date of grant. We also recorded no compensation expense in those
periods in connection with our Employee Stock Purchase Plan as the purchase price of the stock was
not less than 85% of the lower of the fair market value of our common stock at the beginning of
each offering period or at the end of each purchase period. In accordance with SFAS 123 and SFAS
148, Accounting for Stock-Based Compensation Transition and Disclosure, we provided pro forma
net income or loss and net income or loss per share disclosures for each period prior to the
adoption of SFAS 123(R) as if we had applied the fair value-based method in measuring compensation
expense for our share-based compensation plans.
Effective August 1, 2005, we adopted the fair value recognition provisions of SFAS 123(R),
Share-Based Payment, using the modified prospective transition method. Under that transition
method, compensation expense that we recognized for the three and six months ended January 31, 2006
included: (a) compensation expense for all share-based payments granted prior to, but not yet
vested as of, August 1, 2005, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123, and (b) compensation expense for all share-based payments granted
on or after August 1, 2005, based on the grant date fair value estimated in accordance with the
provisions of SFAS 123(R). Because we elected to use the modified prospective transition method,
results for prior periods have not been restated. In March 2005 the Securities and Exchange
Commission issued Staff Accounting Bulletin (SAB) No. 107, which provides supplemental
implementation guidance for SFAS 123(R). We have applied the provisions of SAB 107 in our adoption
of SFAS 123(R). See Note 10 for information on the impact of our adoption of SFAS 123(R) and the
assumptions we use to calculate the fair value of share-based employee compensation.
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Concentration of Credit Risk and Significant Customers and Suppliers
We operate in markets that are highly competitive and rapidly changing. Significant technological
changes, shifting customer requirements, the emergence of competitive products or services with new
capabilities and other factors could negatively impact our operating results.
We are also subject to risks related to changes in the values of our significant balance of
investments and funds held for payroll customers. Our portfolio of investments consists of
investment-grade securities and our funds held for payroll customers consist of cash, cash
equivalents and investment-grade securities. Except for direct obligations of the United States
government, securities issued by agencies of the United States government, and money market or cash
management funds, we diversify our investments by limiting our holdings with any individual issuer.
We sell a significant portion of our products through third-party retailers and distributors. As a
result, we face risks related to the collectibility of our accounts receivable. For example, at
January 31, 2006, in the midst of the 2005 consumer tax season, amounts due from our eight largest
retailers and distributors represented approximately 47% of total accounts receivable. To
appropriately manage this risk, we perform ongoing evaluations of customer credit and limit the
amount of credit extended as we deem appropriate but generally do not require collateral. We
maintain reserves for estimated credit losses and these losses have historically been within our
expectations. However, since we cannot necessarily predict future changes in the financial
stability of our customers, we cannot guarantee that our reserves will continue to be adequate. No
distributor or individual retailer accounted for 10% or more of total net revenue in the three or
six months ended January 31, 2006 or 2005. The accounts of two retailers each represented 12% of
total accounts receivable at January 31, 2006. No customer accounted for 10% or more of total
accounts receivable at July 31, 2005. Amounts due from Rock Acquisition Corporation, the purchaser
of our Quicken Loans mortgage business, under certain licensing and distribution agreements
comprised 11% of total accounts receivable at July 31, 2005.
We rely on three third-party vendors to perform the manufacturing and distribution functions for
our primary retail desktop software products. We also have a key single-source vendor that prints
and fulfills orders for all of our checks and most other products for our financial supplies
business. While we believe that relying heavily on key vendors improves the efficiency and
reliability of our business operations, relying on any one vendor for a significant aspect of our
business can have a significant negative impact on our revenue and profitability if that vendor
fails to perform at acceptable service levels for any reason, including financial difficulties of
the vendor.
Recent Accounting Pronouncements
SFAS 154, Accounting Changes and Error Corrections
On June 1, 2005 the FASB issued SFAS 154, Accounting Changes and Error Corrections, which
replaces APB 20, Accounting Changes, and SFAS 3, Reporting Accounting Changes in Interim
Financial Statements. SFAS 154 applies to all voluntary changes in accounting principle, and
changes the requirements for accounting for and reporting of a change in accounting principle. SFAS
154 requires retrospective application to prior periods financial statements of a voluntary change
in accounting principle unless it is impracticable. APB 20 previously required that most voluntary
changes in accounting principle be recognized by including in net income of the period of the
change the cumulative effect of changing to the new accounting principle. SFAS 154 is effective for
accounting changes made in fiscal years beginning after December 15, 2005. Earlier application is
permitted for accounting changes made in fiscal years beginning after June 1, 2005. We do not
expect our adoption of this new standard to have a material impact on our financial position,
results of operations or cash flows.
SFAS 155, Accounting for Certain Hybrid Instruments
On February 16, 2006 the FASB issued SFAS 155, Accounting for Certain Hybrid Instruments, which
amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole
(eliminating the need to bifurcate the derivative from its host) if the holder elects to account
for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other
provisions of SFAS 133 and SFAS 140. This statement is effective for all financial instruments
acquired or issued in fiscal years beginning after September 15, 2006. We do not expect our
adoption of this new standard to have a material impact on our financial position, results of
operations or cash flows.
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2. Investments and Funds Held for Payroll Customers
As discussed in Note 1, Concentration of Credit Risk and Significant Customers and Suppliers, our
portfolio of investments consists of investment-grade securities and our funds held for payroll
customers consist of cash, cash equivalents and investment-grade securities. Except for direct
obligations of the United States government, securities issued by agencies of the United States
government, and money market or cash management funds, we diversify our investments by limiting our
holdings with any individual issuer.
As also discussed in Note 1, Cash Equivalents and Investments, investments consist of
available-for-sale debt securities that we carry at fair value. The following table summarizes our
investments and funds held for payroll customers at the dates indicated.
January 31, 2006 | July 31, 2005 | |||||||||||||||
(In thousands) | Cost | Fair Value | Cost | Fair Value | ||||||||||||
Type of issue: |
||||||||||||||||
Cash and cash equivalents in funds held for
payroll customers |
$ | 330,245 | $ | 330,245 | $ | 263,860 | $ | 263,860 | ||||||||
Available-for-sale debt securities: |
||||||||||||||||
Corporate notes |
| | 7,000 | 7,000 | ||||||||||||
Municipal bonds |
795,644 | 795,030 | 981,341 | 980,500 | ||||||||||||
U.S. government securities |
10,000 | 9,903 | 16,991 | 16,894 | ||||||||||||
Total available-for-sale debt securities |
805,644 | 804,933 | 1,005,332 | 1,004,394 | ||||||||||||
Total investments and funds held for
payroll customers |
$ | 1,135,889 | $ | 1,135,178 | $ | 1,269,192 | $ | 1,268,254 | ||||||||
Classification of investments on balance sheets: |
||||||||||||||||
Investments |
$ | 711,881 | $ | 711,170 | $ | 911,354 | $ | 910,416 | ||||||||
Funds held for payroll customers |
424,008 | 424,008 | 357,838 | 357,838 | ||||||||||||
Total investments and funds held for
payroll customers |
$ | 1,135,889 | $ | 1,135,178 | $ | 1,269,192 | $ | 1,268,254 | ||||||||
We accumulate unrealized gains and losses on our available-for-sale debt securities, net of
tax, in accumulated other comprehensive income (loss) in the equity section of our balance sheet.
Gross unrealized gains and losses on our available-for-sale debt securities were as follows at the
dates indicated:
January 31, | July 31, | |||||||
(In thousands) | 2006 | 2005 | ||||||
Gross unrealized gains |
$ | 22 | $ | 31 | ||||
Gross unrealized losses |
(733 | ) | (969 | ) | ||||
Net unrealized losses |
$ | (711 | ) | $ | (938 | ) | ||
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The following table summarizes the fair value and gross unrealized losses related to 78
available-for-sale debt securities, aggregated by type of investment and length of time that
individual securities have been in a continuous unrealized loss position, at January 31, 2006:
In a Loss Position for | In a Loss Position for | |||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total in a Loss Position | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
(In thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
Corporate notes |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Municipal bonds |
158,765 | (525 | ) | 35,518 | (111 | ) | 194,283 | (636 | ) | |||||||||||||||
U.S. government securities |
9,903 | (97 | ) | | | 9,903 | (97 | ) | ||||||||||||||||
$ | 168,668 | $ | (622 | ) | $ | 35,518 | $ | (111 | ) | $ | 204,186 | $ | (733 | ) | ||||||||||
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 that we held at January 31, 2006 were not
other-than-temporarily impaired. While certain available-for-sale debt securities have fair values
that are below cost, we believe that it is probable that principal and interest will be collected
in accordance with contractual terms, and that the decline in market value is due to changes in
interest rates and not due to increased credit risk.
We include realized gains and losses on our available-for-sale debt securities in interest and
other income on our statement of operations. Gross realized gains and losses on our
available-for-sale debt securities were as follows for the periods indicated:
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | January 31, | January 31, | |||||||||||||
(In thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Gross realized gains |
$ | | $ | 5 | $ | 10 | $ | 165 | ||||||||
Gross realized losses |
(98 | ) | (228 | ) | (488 | ) | (1,685 | ) | ||||||||
Net realized losses |
$ | (98 | ) | $ | (223 | ) | $ | (478 | ) | $ | (1,520 | ) | ||||
The following table summarizes our available-for-sale debt securities held in investments and
funds held for payroll customers, classified by the stated maturity date of the security.
January 31, 2006 | ||||||||
(In thousands) | Cost | Fair Value | ||||||
Due within one year |
$ | 135,112 | $ | 134,888 | ||||
Due within two years |
56,751 | 56,416 | ||||||
Due within three years |
3,170 | 3,159 | ||||||
Due after three years |
610,611 | 610,470 | ||||||
Total available-for-sale debt securities |
$ | 805,644 | $ | 804,933 | ||||
Approximately 90% of our available-for-sale debt securities at January 31, 2006 had an
interest reset date, put date or mandatory call date within one year.
3. Goodwill and Purchased Intangible Assets
In November 2005 we acquired all of the outstanding shares of My Corporation Business Services,
Inc. for $20.9 million in cash. We deposited $3.0 million of the purchase price in a third-party
escrow account, to be held for up to
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eighteen months from the date of purchase to satisfy potential indemnification claims that may affect
the purchase price. Doing business as MyCorporation.com, the company offers online incorporation
and related corporate services to small and medium-sized businesses. We acquired MyCorporation.com
as part of our Right for Me initiative to offer a wider range of business solutions for small
businesses. MyCorporation.com became part of our Consumer Tax segment. Tangible net assets acquired
were nominal. We allocated $1.4 million of the purchase price to identified intangible assets and
recorded the excess purchase price of $19.5 million as goodwill. The identified intangible assets
are being amortized over terms ranging from two to four years. MyCorporation.coms results of
operations for periods prior to the date of acquisition were not material when compared with our
consolidated results.
4. Comprehensive Net Income (Loss)
SFAS 130, Reporting Comprehensive Income, establishes standards for reporting and displaying
comprehensive net income (loss) and its components in stockholders equity. SFAS 130 requires that
the components of other comprehensive income (loss), such as changes in the fair value of
available-for-sale securities and foreign currency translation adjustments, be added to our net
income (loss) to arrive at comprehensive net income (loss). Other comprehensive income (loss) items
have no impact on our net income (loss) as presented on our statement of operations.
The components of accumulated other comprehensive income (loss), net of income taxes, were as
follows for the periods indicated:
Unrealized Gain (Loss) on | Foreign | |||||||||||||||
Marketable | Currency | |||||||||||||||
(In thousands) | Investments | Securities | Translation | Total | ||||||||||||
Balance July 31, 2005 |
$ | (582 | ) | $ | 1,451 | $ | (695 | ) | $ | 174 | ||||||
Unrealized loss, net of income tax benefits
of $95 and $73 |
(155 | ) | (118 | ) | | (273 | ) | |||||||||
Reclassification adjustment for realized
loss (gain) included in net income, net of
income tax provision of $182 and benefit
of $965 |
296 | (1,575 | ) | | (1,279 | ) | ||||||||||
Translation adjustment |
2,690 | 2,690 | ||||||||||||||
Other comprehensive income (loss) |
141 | (1,693 | ) | 2,690 | 1,138 | |||||||||||
Balance January 31, 2006 |
$ | (441 | ) | $ | (242 | ) | $ | 1,995 | $ | 1,312 | ||||||
Balance July 31, 2004 |
$ | (1,502 | ) | $ | 375 | $ | (2,248 | ) | $ | (3,375 | ) | |||||
Unrealized (loss) gain, net of income tax
benefit of $212 and provision of $859 |
(478 | ) | 1,433 | | 955 | |||||||||||
Reclassification adjustment for realized
loss included in net income, net of income
tax provision of $578 |
942 | | | 942 | ||||||||||||
Translation adjustment |
| | 776 | 776 | ||||||||||||
Other comprehensive income |
464 | 1,433 | 776 | 2,673 | ||||||||||||
Balance January 31, 2005 |
$ | (1,038 | ) | $ | 1,808 | $ | (1,472 | ) | $ | (702 | ) | |||||
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Comprehensive net income was as follows for the periods indicated:
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | January 31, | January 31, | |||||||||||||
(In thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Net income |
$ | 182,973 | $ | 147,252 | $ | 137,169 | $ | 101,116 | ||||||||
Other comprehensive income |
21 | 581 | 1,138 | 2,673 | ||||||||||||
Comprehensive net income, net of income taxes |
$ | 182,994 | $ | 147,833 | $ | 138,307 | $ | 103,789 | ||||||||
Income tax provision (benefit) netted against
other comprehensive income |
$ | (953 | ) | $ | 608 | $ | (951 | ) | $ | 1,225 | ||||||
5. Discontinued Operations
Intuit Information Technology Solutions
In May 2005 our Board of Directors formally approved a plan to sell our Intuit Information
Technology Solutions (ITS) business, which was part of our Intuit-Branded Small Business segment.
In December 2005 we sold ITS for approximately $200 million in cash. The buyer deposited
approximately $20 million of the total purchase price in a third-party escrow account to be held
through December 2006 to cover breaches of representations and warranties set forth in the purchase
agreement, should they arise. The full escrow amount is in other current assets on our balance
sheet at January 31, 2006. The decision to sell ITS was a result of our desire to focus resources
on our core products and services. In accordance with the provisions of SFAS 144, Accounting for
the Impairment or Disposal of Long-lived Assets, we determined that ITS became a long-lived asset
held for sale in the fourth quarter of fiscal 2005. In accordance with SFAS 144, we discontinued
the amortization of ITS intangible assets and the depreciation of ITS property and equipment in the
fourth quarter of fiscal 2005.
Also in accordance with the provisions of SFAS 144, we determined that ITS became a discontinued
operation in the fourth quarter of fiscal 2005. Consequently, we have segregated the net assets,
operating results and cash flows of ITS from continuing operations on our balance sheet at July 31,
2005 and from our statements of operations and statements of cash flows for all periods prior to
the sale. We recorded a $34.3 million net gain on disposal of ITS for the six months ended January
31, 2006.
Intuit Public Sector Solutions
In December 2004 we sold our Intuit Public Sector Solutions (IPSS) business for approximately $11
million in cash. IPSS was part of our Intuit-Branded Small Business segment. The decision to sell
IPSS was a result of our desire to focus resources on our core products and services. In accordance
with SFAS 144, we accounted for the sale as discontinued operations. We have therefore segregated
the operating results and cash flows of IPSS from continuing operations on our statements of
operations and statements of cash flows for all periods prior to the sale. We recorded a $4.8
million net loss on disposal of IPSS for the six months ended January 31, 2005 that included a $4.3
million income tax provision for the estimated tax payable in connection with the expected tax gain
on the sale of IPSS.
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Components of Net Income (Loss) from Discontinued Operations
The components of net income (loss) from discontinued operations on our statements of operations as
well as net revenue from discontinued operations and income or loss from discontinued operations
before income taxes were as follows for the periods indicated:
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | January 31, | January 31, | |||||||||||||
(In thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Net income (loss) from discontinued operations |
||||||||||||||||
Net loss from Intuit Public Sector Solutions
operations |
$ | | $ | (188 | ) | $ | | $ | (486 | ) | ||||||
Net loss on disposal of Intuit Public Sector
Solutions discontinued operations |
| (1,403 | ) | | (4,771 | ) | ||||||||||
Net income from Intuit Information Technology
Solutions operations |
1,918 | 3,869 | 5,209 | 6,896 | ||||||||||||
Net gain on disposal of Intuit Information
Technology Solutions discontinued
operations |
25,808 | | 34,324 | | ||||||||||||
Total net income from discontinued
operations |
$ | 27,726 | $ | 2,278 | $ | 39,533 | $ | 1,639 | ||||||||
Net revenue from discontinued operations |
||||||||||||||||
Intuit Public Sector Solutions |
$ | | $ | 1,046 | $ | | $ | 3,827 | ||||||||
Intuit Information Technology Solutions |
5,807 | 14,395 | 20,167 | 27,609 | ||||||||||||
Total net revenue from discontinued operations |
$ | 5,807 | $ | 15,441 | $ | 20,167 | $ | 31,436 | ||||||||
Income (loss) from discontinued operations
before income taxes |
||||||||||||||||
Intuit Public Sector Solutions |
$ | | $ | (304 | ) | $ | | $ | (786 | ) | ||||||
Intuit Information Technology Solutions |
3,293 | 6,240 | 9,100 | 11,122 | ||||||||||||
Total income from discontinued operations
before income taxes |
$ | 3,293 | $ | 5,936 | $ | 9,100 | $ | 10,336 | ||||||||
6. Industry Segment and Geographic Information
SFAS 131, Disclosures about Segments of an Enterprise and Related Information, establishes
standards for the way in which public companies disclose certain information about operating
segments in their financial reports. Consistent with SFAS 131, we have defined five reportable
segments, described below, based on factors such as how we manage our operations and how our chief
operating decision maker views results. We define the chief operating decision maker as our chief
executive officer and our chief financial officer.
QuickBooks-Related product revenue is derived primarily from QuickBooks desktop software products;
QuickBooks Payroll, a family of products sold on a subscription basis offering payroll tax tables,
forms, electronic tax payment and filing, and in some cases QuickBooks software upgrades, to small
businesses that prepare their own payrolls; and financial supplies such as paper checks, envelopes
and invoices. QuickBooks-Related service revenue is derived primarily from QuickBooks Online
Edition, QuickBooks support plans and merchant services. Other revenue for this segment consists
primarily of royalties from small business online services.
Intuit-Branded Small Business product revenue is derived primarily from business management
software for three selected industries: residential, commercial and corporate property management;
wholesale durable goods distribution; and construction. Intuit-Branded Small Business service
revenue is derived from technical support, consulting and training services for those software
products and from outsourced payroll services. Service revenue for this segment also includes
interest earned on funds held for payroll customers.
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Consumer Tax product revenue is derived primarily from TurboTax federal and state consumer
desktop tax return preparation software. Consumer Tax service revenue is derived primarily from
TurboTax Online tax return preparation, consumer electronic filing and refund transfer services.
Professional Tax product revenue is derived primarily from Lacerte and ProSeries professional tax
preparation software products. Professional Tax service revenue is derived primarily from
electronic filing, bank product transmission and training services.
Other Businesses consist primarily of Quicken and Canada. Quicken product revenue is derived
primarily from Quicken desktop software products. Quicken other revenue consists primarily of fees
from consumer online transactions and from Quicken-branded credit card and bill payment offerings
that we provide through our partners. In Canada, product revenue is derived primarily from
localized versions of QuickBooks and Quicken as well as QuickTax and TaxWiz consumer desktop tax
return preparation software and ProFile professional tax preparation products. Service revenue in
Canada consists primarily of revenue from payroll services and software maintenance contracts sold
with QuickBooks.
Our QuickBooks-Related, Consumer Tax and Professional Tax segments operate primarily in the United
States. All of our segments sell primarily to customers located in the United States. International
total net revenue was 5% or less of consolidated total net revenue for all periods presented.
We include costs such as corporate general and administrative expenses and share-based compensation
expenses that are not allocated to specific segments in a category we call Corporate. The Corporate
category also includes amortization of purchased intangible assets, acquisition-related charges,
impairment of goodwill and purchased intangible assets, interest and other income, and realized net
gains or losses on marketable equity securities and other investments.
The accounting policies of the reportable segments are the same as those described in the summary
of significant accounting policies in Note 1. Except for goodwill and purchased intangible assets,
we do not generally track assets by reportable segment and, consequently, we do not disclose total
assets by reportable segment.
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The following tables show our financial results by reportable segment for the three and six
months ended January 31, 2006 and 2005.
Intuit- | ||||||||||||||||||||||||||||
Branded | ||||||||||||||||||||||||||||
QuickBooks | Small | Consumer | Professional | Other | ||||||||||||||||||||||||
(In thousands) | Related | Business | Tax | Tax | Businesses | Corporate | Consolidated | |||||||||||||||||||||
Three months ended January 31, 2006 | ||||||||||||||||||||||||||||
Product revenue |
$ | 209,677 | $ | 8,746 | $ | 139,023 | $ | 146,983 | $ | 52,650 | $ | | $ | 557,079 | ||||||||||||||
Service revenue |
45,785 | 60,765 | 51,155 | 3,540 | 5,672 | | 166,917 | |||||||||||||||||||||
Other revenue |
3,503 | 52 | 148 | | 15,005 | | 18,708 | |||||||||||||||||||||
Total net revenue |
258,965 | 69,563 | 190,326 | 150,523 | 73,327 | | 742,704 | |||||||||||||||||||||
Segment operating
income |
106,858 | 10,631 | 107,079 | 105,078 | 32,376 | | 362,022 | |||||||||||||||||||||
Common expenses |
| | | | | (116,734 | ) | (116,734 | ) | |||||||||||||||||||
Subtotal |
106,858 | 10,631 | 107,079 | 105,078 | 32,376 | (116,734 | ) | 245,288 | ||||||||||||||||||||
Amortization of purchased
intangible assets |
| | | | | (2,763 | ) | (2,763 | ) | |||||||||||||||||||
Acquisition-related charges |
| | | | | (3,553 | ) | (3,553 | ) | |||||||||||||||||||
Interest and other income |
| | | | | 5,322 | 5,322 | |||||||||||||||||||||
Realized net gain on
marketable equity
securities |
| | | | | 3,027 | 3,027 | |||||||||||||||||||||
Income (loss) from
continuing operations
before income taxes |
$ | 106,858 | $ | 10,631 | $ | 107,079 | $ | 105,078 | $ | 32,376 | $ | (114,701 | ) | $ | 247,321 | |||||||||||||
Intuit- | ||||||||||||||||||||||||||||
Branded | ||||||||||||||||||||||||||||
QuickBooks | Small | Consumer | Professional | Other | ||||||||||||||||||||||||
(In thousands) | Related | Business | Tax | Tax | Businesses | Corporate | Consolidated | |||||||||||||||||||||
Three months ended January 31, 2005 | ||||||||||||||||||||||||||||
Product revenue |
$ | 183,081 | $ | 9,578 | $ | 102,220 | $ | 146,361 | $ | 55,958 | $ | | $ | 497,198 | ||||||||||||||
Service revenue |
36,566 | 51,065 | 38,849 | 4,258 | 4,672 | | 135,410 | |||||||||||||||||||||
Other revenue |
2,663 | 25 | 41 | 6 | 12,901 | | 15,636 | |||||||||||||||||||||
Total net revenue |
222,310 | 60,668 | 141,110 | 150,625 | 73,531 | | 648,244 | |||||||||||||||||||||
Segment operating
income |
108,377 | 5,647 | 64,965 | 105,686 | 36,365 | | 321,040 | |||||||||||||||||||||
Common expenses |
| | | | | (96,057 | ) | (96,057 | ) | |||||||||||||||||||
Subtotal |
108,377 | 5,647 | 64,965 | 105,686 | 36,365 | (96,057 | ) | 224,983 | ||||||||||||||||||||
Amortization of purchased
intangible assets |
| | | | | (2,626 | ) | (2,626 | ) | |||||||||||||||||||
Acquisition-related charges |
| | | | | (4,169 | ) | (4,169 | ) | |||||||||||||||||||
Interest and other income |
| | | | | 2,982 | 2,982 | |||||||||||||||||||||
Realized net gain on
marketable equity
securities |
| | | | | 60 | 60 | |||||||||||||||||||||
Income (loss) from
continuing operations
before income taxes |
$ | 108,377 | $ | 5,647 | $ | 64,965 | $ | 105,686 | $ | 36,365 | $ | (99,810 | ) | $ | 221,230 | |||||||||||||
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Intuit- | ||||||||||||||||||||||||||||
Branded | ||||||||||||||||||||||||||||
QuickBooks | Small | Consumer | Professional | Other | ||||||||||||||||||||||||
(In thousands) | Related | Business | Tax | Tax | Businesses | Corporate | Consolidated | |||||||||||||||||||||
Six months ended January 31, 2006 | ||||||||||||||||||||||||||||
Product revenue |
$ | 343,222 | $ | 16,321 | $ | 141,813 | $ | 155,094 | $ | 83,083 | $ | | $ | 739,533 | ||||||||||||||
Service revenue |
87,645 | 111,397 | 56,230 | 4,325 | 11,940 | | 271,537 | |||||||||||||||||||||
Other revenue |
6,176 | 76 | 170 | 1 | 29,282 | | 35,705 | |||||||||||||||||||||
Total net revenue |
437,043 | 127,794 | 198,213 | 159,420 | 124,305 | | 1,046,775 | |||||||||||||||||||||
Segment operating
income |
157,405 | 10,077 | 82,809 | 83,118 | 51,054 | | 384,463 | |||||||||||||||||||||
Common expenses |
| | | | | (235,088 | ) | (235,088 | ) | |||||||||||||||||||
Subtotal |
157,405 | 10,077 | 82,809 | 83,118 | 51,054 | (235,088 | ) | 149,375 | ||||||||||||||||||||
Amortization of purchased
intangible assets |
| | | | | (5,712 | ) | (5,712 | ) | |||||||||||||||||||
Acquisition-related charges |
| | | | | (7,312 | ) | (7,312 | ) | |||||||||||||||||||
Interest and other income |
| | | | | 11,626 | 11,626 | |||||||||||||||||||||
Realized net gain on
marketable equity
securities |
| | | | | 7,294 | 7,294 | |||||||||||||||||||||
Income (loss) from
continuing operations
before income taxes |
$ | 157,405 | $ | 10,077 | $ | 82,809 | $ | 83,118 | $ | 51,054 | $ | (229,192 | ) | $ | 155,271 | |||||||||||||
Intuit- | ||||||||||||||||||||||||||||
Branded | ||||||||||||||||||||||||||||
QuickBooks | Small | Consumer | Professional | Other | ||||||||||||||||||||||||
(In thousands) | Related | Business | Tax | Tax | Businesses | Corporate | Consolidated | |||||||||||||||||||||
Six months ended January 31, 2005 | ||||||||||||||||||||||||||||
Product revenue |
$ | 295,151 | $ | 18,463 | $ | 103,405 | $ | 153,507 | $ | 80,675 | $ | | $ | 651,201 | ||||||||||||||
Service revenue |
67,598 | 95,603 | 42,489 | 4,539 | 9,338 | | 219,567 | |||||||||||||||||||||
Other revenue |
5,202 | 63 | 238 | 16 | 24,733 | | 30,252 | |||||||||||||||||||||
Total net revenue |
367,951 | 114,129 | 146,132 | 158,062 | 114,746 | | 901,020 | |||||||||||||||||||||
Segment operating
income |
157,768 | 7,728 | 44,585 | 84,600 | 46,157 | | 340,838 | |||||||||||||||||||||
Common expenses |
| | | | (191,024 | ) | (191,024 | ) | ||||||||||||||||||||
Subtotal |
157,768 | 7,728 | 44,585 | 84,600 | 46,157 | (191,024 | ) | 149,814 | ||||||||||||||||||||
Amortization of purchased
intangible assets |
| | | | | (5,167 | ) | (5,167 | ) | |||||||||||||||||||
Acquisition-related charges |
| | | | | (8,610 | ) | (8,610 | ) | |||||||||||||||||||
Interest and other income |
| | | | | 6,837 | 6,837 | |||||||||||||||||||||
Realized net gain on
marketable equity
securities |
| | | | | 218 | 218 | |||||||||||||||||||||
Income (loss) from
continuing operations
before income taxes |
$ | 157,768 | $ | 7,728 | $ | 44,585 | $ | 84,600 | $ | 46,157 | $ | (197,746 | ) | $ | 143,092 | |||||||||||||
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7. Other Current Liabilities
Other current liabilities were as follows at the dates indicated:
January 31, | July 31, | |||||||
(In thousands) | 2006 | 2005 | ||||||
Reserve for product returns |
$ | 62,831 | $ | 30,454 | ||||
Reserve for rebates |
25,860 | 18,482 | ||||||
Executive deferred compensation plan |
27,588 | 19,857 | ||||||
Other |
44,961 | 34,338 | ||||||
Total other current liabilities |
$ | 161,240 | $ | 103,131 | ||||
8. Long-Term Obligations
Long-term obligations were as follows at the dates indicated:
January 31, | July 31, | |||||||
(In thousands) | 2006 | 2005 | ||||||
Capital lease obligations: monthly installments through
2008; interest rates of 2.66% to 4.50% |
$ | 2,338 | $ | 3,718 | ||||
Deferred rent |
17,113 | 17,311 | ||||||
Other |
3,148 | 2,233 | ||||||
Total long-term obligations |
22,599 | 23,262 | ||||||
Less current portion (included in other current liabilities) |
(6,084 | ) | (5,954 | ) | ||||
Long-term obligations due after one year |
$ | 16,515 | $ | 17,308 | ||||
9. Income Taxes
We compute our provision for or benefit from income taxes by applying the estimated annual
effective tax rate to income or loss from recurring operations and other taxable items. The
following table reconciles our effective income tax rate to the statutory federal income tax rate
for the periods indicated.
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | January 31, | January 31, | |||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Statutory federal income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||||
State income tax, net of federal benefit |
3.5 | % | 2.1 | % | 3.5 | % | 2.0 | % | ||||||||
Federal research and experimental credits |
(0.6 | %) | (1.5 | %) | (0.6 | %) | (1.6 | %) | ||||||||
Tax exempt interest |
(1.8 | %) | (0.9 | %) | (1.8 | %) | (1.0 | %) | ||||||||
Manufacturer tax deduction |
(0.6 | %) | | (0.6 | %) | | ||||||||||
State credits related to prior periods |
| | | (2.0 | %) | |||||||||||
Other, net |
1.7 | % | (0.2 | %) | 1.6 | % | (1.9 | %) | ||||||||
Effective income tax rate |
37.2 | % | 34.5 | % | 37.1 | % | 30.5 | % | ||||||||
Beginning in fiscal 2006 we qualify for the annual domestic manufacturer tax deduction under
the American Jobs Creation Act of 2004. The federal research and experimental credit will not
apply to expenses incurred after December 31, 2005. Although the credit may be extended, in
accordance with SFAS 109 when estimating our effective tax rate for fiscal 2006 we have not assumed
tax benefits for any federal research and experimental credit after this expiration date.
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10. Stockholders Equity
Stock Repurchase Programs
Intuits Board of Directors has authorized a series of common stock repurchase programs. Shares of
common stock repurchased under these programs become treasury shares. During the three months ended
January 31, 2006 and 2005 we repurchased 5.6 million and 2.6 million shares of our common stock for
$300.2 million and $113.6 million under these programs. During the six months ended January 31,
2006 and 2005 we repurchased 9.9 million and 6.5 million shares of our common stock for $495.0
million and $284.2 million under these programs. At January 31, 2006, authorized funds of $295.8
million remained under our sixth repurchase program, under which we are authorized to repurchase up
to $500.0 million of our common stock from time to time over a three-year period ending on November
14, 2008.
Repurchased shares of our common stock are held as treasury shares until they are reissued or
retired. When we reissue treasury stock, if the proceeds from the sale are more than the average
price we paid to acquire the shares we record an increase in additional paid-in capital.
Conversely, if the proceeds from the sale are less than the average price we paid to acquire the
shares, we record a decrease in additional paid-in capital to the extent of increases previously
recorded for similar transactions and a decrease in retained earnings for any remaining amount.
Share-Based Compensation Plans
Description of Share-Based Compensation Plans
Under our 2005 Equity Incentive Plan, we are permitted to grant incentive and non-qualified stock
options, restricted stock awards, restricted stock units and stock bonus awards to our and our
subsidiaries employees, non-employee directors and consultants. There were a total of 6,500,000
shares authorized under the 2005 Plan at October 31, 2005. On December 16, 2005 our stockholders
authorized an additional 6,500,000 shares for a total of 13,000,000 shares under the 2005 Plan. On
that date our stockholders also amended the existing 2,000,000-share cap on equity awards that
could be granted at below fair market value on the date of grant (for example restricted stock or
restricted stock units) to allow that up to 50% of equity awards granted each year can be at less
than full fair market value. All options granted under the 2005 Plan through January 31, 2006 have
exercise prices equal to the fair market value of our stock on the date of grant. Options granted
under the 2005 Plan typically vest over three years based on continued service and have a
seven-year term. Outstanding awards that were originally granted under several predecessor plans
also remain in effect in accordance with their terms. In addition, we maintain an Employee Stock
Purchase Plan. The 2005 Plan, its predecessor plans and our Employee Stock Purchase Plan are
described more fully in our fiscal 2005 Annual Report on Form 10-K.
23
Table of Contents
Impact of the Adoption of SFAS 123(R)
See Note 1 for a description of our adoption of SFAS 123(R), Share-Based Payment, on August 1,
2005. The following table summarizes the share-based compensation expense for stock options and our
Employee Stock Purchase Plan that we recorded for continuing operations in accordance with SFAS
123(R) for the three and six months ended January 31, 2006. The impact of our adoption of SFAS
123(R) on discontinued operations was nominal for those periods.
Three | Six | |||||||
Months | Months | |||||||
Ended | Ended | |||||||
January 31, | January 31, | |||||||
(In thousands) | 2006 | 2006 | ||||||
Cost of product revenue |
$ | 245 | $ | 533 | ||||
Cost of service revenue |
496 | 1,133 | ||||||
Selling and marketing |
5,250 | 11,557 | ||||||
Research and development |
4,684 | 10,294 | ||||||
General and administrative |
5,746 | 12,003 | ||||||
Reduction of operating income from continuing
operations and income from continuing operations
before income taxes |
16,421 | 35,520 | ||||||
Income tax benefit |
(6,109 | ) | (13,170 | ) | ||||
Reduction of net income from continuing operations |
$ | 10,312 | $ | 22,350 | ||||
Reduction of net income per share from continuing operations: |
||||||||
Basic |
$ | 0.06 | $ | 0.13 | ||||
Diluted |
$ | 0.06 | $ | 0.12 | ||||
Prior to the adoption of SFAS 123(R), we presented deferred compensation as a separate
component of stockholders equity. In accordance with the provisions of SFAS 123(R), on August 1,
2005 we reclassified the balance in deferred compensation to additional paid-in capital on our
balance sheet.
Prior to the adoption of SFAS 123(R), we presented all tax benefits for deductions resulting from
the exercise of stock options as operating cash flows on our statement of cash flows. SFAS 123(R)
requires the cash flows resulting from the tax benefits for tax deductions in excess of the
compensation expense recorded for those options (excess tax benefits) to be classified as financing
cash flows. Accordingly, we classified the $12.4 million and $13.4 million in excess tax benefits
as financing cash inflows rather than as operating cash inflows on our statements of cash flows for
the three and six months ended January 31, 2006.
Determining Fair Value
Valuation and Amortization Method. We estimate the fair value of stock options granted using the
Black-Scholes option valuation model and a multiple option award approach. For options granted
before August 1, 2005, we amortize the fair value on an accelerated basis. For options granted on
or after August 1, 2005, we amortize the fair value on a straight-line basis. All options are
amortized over the requisite service periods of the awards, which are generally the vesting
periods.
Expected Term. The expected term of options granted represents the period of time that they are
expected to be outstanding. We estimate the expected term of options granted based on historical
exercise patterns, which we believe are representative of future behavior. We have examined our
historical pattern of option exercises in an effort to determine if there were any discernable
patterns of activity based on certain demographic characteristics. Demographic characteristics
tested included age, salary level, job level and geographic location. We have determined that there
were no meaningful differences in option exercise activity based on the demographic characteristics
tested.
24
Table of Contents
Expected Volatility. We estimate the volatility of our common stock at the date of grant based on
the implied volatility of one-year and two-year publicly traded options on our common stock,
consistent with SFAS 123(R) and SAB 107. Our decision to use implied volatility was based upon the
availability of actively traded options on our common stock and our assessment that implied
volatility is more representative of future stock price trends than historical volatility.
Risk-Free Interest Rate. We base the risk-free interest rate that we use in the Black-Scholes
option valuation model on the implied yield in effect at the time of option grant on U.S. Treasury
zero-coupon issues with equivalent remaining terms.
Dividends. We have never paid any cash dividends on our common stock and we do not anticipate
paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend
yield of zero in the Black-Scholes option valuation model.
Forfeitures. SFAS 123(R) requires us to estimate forfeitures at the time of grant and revise those
estimates in subsequent periods if actual forfeitures differ from those estimates. We use
historical data to estimate pre-vesting option forfeitures and record share-based compensation
expense only for those awards that are expected to vest. For purposes of calculating pro forma
information under SFAS 123 for periods prior to fiscal 2006, we accounted for forfeitures as they
occurred.
We used the following assumptions to estimate the fair value of options granted and shares
purchased under our Employee Stock Purchase Plan for the three and six months ended January 31,
2006 and 2005:
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | January 31, | January 31, | |||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Stock options: |
||||||||||||||||
Average expected term (years) |
2.35 | 3.03 | 2.41 | 3.03 | ||||||||||||
Expected volatility (range) |
22% - 25 | % | 41 | % | 22% - 25 | % | 41% - 42 | % | ||||||||
Weighted average expected volatility |
23 | % | 41 | % | 23 | % | 42 | % | ||||||||
Risk-free interest rate (range) |
4.22% - 4.57 | % | 2.63% - 3.37 | % | 3.70% - 4.57 | % | 2.09% - 3.37 | % | ||||||||
Expected dividend yield |
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Employee Stock Purchase Plan: |
||||||||||||||||
Average expected term (years) |
0.25 | 1.00 | 0.28 | 1.00 | ||||||||||||
Expected volatility (range) |
24 | % | 28 | % | 22% - 24 | % | 28% - 29 | % | ||||||||
Weighted average expected volatility |
24 | % | 28 | % | 23 | % | 29 | % | ||||||||
Risk-free interest rate (range) |
4.06 | % | 2.30 | % | 3.14% - 4.06 | % | 1.79% - 2.30 | % | ||||||||
Expected dividend yield |
0 | % | 0 | % | 0 | % | 0 | % |
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Stock Option Activity and Share-Based Compensation Expense
A summary of stock option activity under all share-based compensation plans during the six months
ended January 31, 2006 is as follows:
Weighted | ||||||||
Average | ||||||||
Exercise | ||||||||
Options | Shares | Price | ||||||
Outstanding at July 31, 2005 |
32,308,280 | $ | 39.18 | |||||
Granted |
1,513,850 | 46.78 | ||||||
Exercised |
(4,199,173 | ) | 32.67 | |||||
Cancelled / forfeited / expired |
(741,579 | ) | 45.60 | |||||
Outstanding at January 31, 2006 |
28,881,378 | 40.36 | ||||||
The weighted average fair value of options granted during the six months ended January 31,
2006 was $8.75.
Options outstanding and exercisable at January 31, 2006 were as follows:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||||
Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||
Average | Average | Aggregate | Average | Average | Aggregate | |||||||||||||||||||||||||||
Remaining | Exercise | Intrinsic | Remaining | Exercise | Intrinsic | |||||||||||||||||||||||||||
Number | Contractual | Price per | Value (in | Number | Contractual | Price per | Value (in | |||||||||||||||||||||||||
Exercise Price | Outstanding | Life (in Years) | Share | (thousands) | Exercisable | Life (in Years) | Share | (thousands) | ||||||||||||||||||||||||
$0.18-$26.31 |
3,219,606 | 2.14 | $ | 13.90 | $ | 123,722 | 3,219,606 | 2.14 | $ | 13.90 | $ | 123,722 | ||||||||||||||||||||
26.75 - 35.00 |
3,517,105 | 4.39 | 31.41 | 73,596 | 3,513,571 | 4.39 | 31.41 | 73,516 | ||||||||||||||||||||||||
35.31 - 39.45 |
5,666,828 | 5.45 | 37.39 | 84,639 | 3,789,265 | 5.42 | 37.35 | 56,771 | ||||||||||||||||||||||||
39.50 - 43.98 |
5,172,784 | 5.03 | 42.52 | 50,766 | 3,466,156 | 4.61 | 42.34 | 34,633 | ||||||||||||||||||||||||
44.03 - 49.92 |
7,788,959 | 5.72 | 47.20 | 39,942 | 2,695,804 | 4.40 | 46.48 | 15,781 | ||||||||||||||||||||||||
50.00 - 55.40 |
1,366,511 | 5.11 | 52.81 | 640 | 996,644 | 4.58 | 52.90 | 537 | ||||||||||||||||||||||||
58.75 - 64.81 |
848,455 | 4.37 | 60.04 | | 848,455 | 4.37 | 60.04 | | ||||||||||||||||||||||||
67.50 - 72.31 |
1,301,130 | 4.26 | 67.62 | | 1,301,130 | 4.26 | 67.62 | | ||||||||||||||||||||||||
$0.18-$72.31 |
28,881,378 | 4.85 | $ | 40.36 | $ | 373,305 | 19,830,631 | 4.26 | $ | 38.34 | $ | 304,960 | ||||||||||||||||||||
We define in-the-money options at January 31, 2006 as options that had exercise prices that
were lower than the $52.33 market price of our common stock at that date. The aggregate intrinsic
value of options outstanding at January 31, 2006 is calculated as the difference between the
exercise price of the underlying options and the market price of our common stock for the 25.8
million shares that were in-the-money at that date. There were 17.0 million in-the-money options
exercisable at January 31, 2006. The total intrinsic value of options exercised during the six
months ended January 31, 2006 was $79.9 million, determined as of the date of exercise.
At January 31, 2006, we had 303,282 non-vested restricted stock awards that had a weighted average
grant date fair value of $45.35. At July 31, 2005, we had 359,920 non-vested restricted stock
awards that had a weighted average grant date fair value of $45.20.
We recorded $16.4 million and $35.5 million in share-based compensation expense for stock options
and our Employee Stock Purchase Plan and $1.3 million and $2.7 million in share-based compensation
expense for restricted stock awards in continuing operations for the three and six months ended
January 31, 2006. The total tax benefits related to this share-based compensation were $6.3 million
and $13.9 million for the same periods. As of January 31, 2006, there was $78.7 million of total
unrecognized compensation cost related to non-vested share-based compensation arrangements granted
under all equity compensation plans. Total unrecognized compensation cost
will be adjusted for future changes in estimated forfeitures. We expect to recognize that cost over
a weighted average period of 2.1 years.
We received $120.9 million and $137.2 million in cash from option exercises under all share-based
payment arrangements for the three and six months ended January 31, 2006. The actual tax benefits
that we realized related to
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tax deductions for non-qualified option exercises and disqualifying
dispositions under all share-based payment arrangements and totaled $26.6 million and $29.1 million
for those periods.
Due primarily to our ongoing program of repurchasing our common stock on the open market, at
January 31, 2006 we had 40.5 million treasury shares. We satisfy option exercises from this pool of
treasury shares.
Comparable Disclosures
As discussed in Note 1, we accounted for share-based employee compensation under SFAS 123(R)s fair
value method during the three and six months ended January 31, 2006. Prior to August 1, 2005 we
accounted for share-based employee compensation under the provisions of APB 25. Accordingly, we
recorded no share-based compensation expense for stock options or our Employee Stock Purchase Plan
for the three and six months ended January 31, 2005. The following table illustrates the effect on
our net income and net income per share for the three and six months ended January 31, 2005 if we
had applied the fair value recognition provisions of SFAS 123 to share-based compensation using the
Black-Scholes valuation model.
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | January 31, | January 31, | |||||||||||||
(In thousands, except per share amounts) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Net income |
||||||||||||||||
Net income, as reported in prior year (1) |
$ | 147,252 | $ | 101,116 | ||||||||||||
Add: Share-based employee compensation
expense included in reported net income,
net of income taxes |
33 | 81 | ||||||||||||||
Deduct: Total share-based employee
compensation expense determined under
fair value method for all awards, net of
income taxes (2) |
(12,964 | ) | (26,918 | ) | ||||||||||||
Net income, including share-based employee
compensation (3) |
$ | 182,973 | $ | 134,321 | $ | 137,169 | $ | 74,279 | ||||||||
Net income per share |
||||||||||||||||
Basic - as reported in prior year (1) |
$ | 0.79 | $ | 0.54 | ||||||||||||
Basic - including share-based employee
compensation (3) |
$ | 1.04 | $ | 0.72 | $ | 0.78 | $ | 0.40 | ||||||||
Diluted - as reported in prior year (1) |
$ | 0.77 | $ | 0.53 | ||||||||||||
Diluted - including share-based employee
compensation (3) |
$ | 1.01 | $ | 0.71 | $ | 0.75 | $ | 0.39 | ||||||||
(1) | Net income and net income per share as reported for periods prior to fiscal 2006 did not include share-based compensation expense for stock options and our Employee Stock Purchase Plan because we did not adopt the recognition provisions of SFAS 123. | |
(2) | Share-based compensation expense for periods prior to fiscal 2006 is calculated based on the pro forma application of SFAS 123. | |
(3) | Net income and net income per share including share-based employee compensation for periods prior to fiscal 2006 are based on the pro forma application of SFAS 123. |
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Distribution and Dilutive Effect of Options
The following table shows certain information about option grants to Named Executives and all
option grants for the periods indicated. Named Executives are defined as our chief executive
officer and each of the four other most highly compensated executive officers during the fiscal
periods presented.
Six | ||||||||||||
Months | ||||||||||||
Ended | Twelve Months Ended | |||||||||||
January 31, | July 31, | July 31, | ||||||||||
2006 | 2005 | 2004 | ||||||||||
Net option grants during the period as a percentage of
outstanding shares |
0.7 | % | 2.8 | % | 2.9 | % | ||||||
Grants to Named Executives during the period as a percentage
of total options granted |
0.0 | % | 6.2 | % | 7.1 | % | ||||||
Grants to Named Executives during the period as a percentage
of outstanding shares |
0.0 | % | 0.2 | % | 0.3 | % | ||||||
Options held by Named Executives as a percentage of total
options outstanding |
14.3 | % | 13.0 | % | 12.7 | % |
We define net option grants as options granted less options canceled or expired and returned
to the pool of options available for grant. Options granted to our Named Executives as a percentage
of total options granted may vary significantly from quarter to quarter, due in part to the timing
of annual performance-based grants to Named Executives.
11. Litigation
Muriel Siebert & Co., Inc. v. Intuit Inc., Index No. 03-602942, Supreme Court of the State of New
York, County of New York.
On September 17, 2003 Muriel Siebert & Co., Inc. filed a complaint against Intuit alleging various
claims for breach of contract, breach of express and implied covenants of good faith and fair
dealing, breach of fiduciary duty, misrepresentation and/or fraud, and promissory estoppel. The
allegations relate to Quicken Brokerage powered by Siebert, a strategic alliance between the two
companies. The complaint seeks compensatory damages of up to $11.1 million, punitive damages of up
to $33.0 million, and other damages. Intuit unsuccessfully sought to compel the matter to
arbitration. On February 7, 2005 Intuit filed a motion to dismiss all but one of the plaintiffs
claims in New York state court. On September 6, 2005 the court dismissed Sieberts fraud and
punitive damages claims. The case is now stayed pending appellate review by the Appellate Division
of the New York Supreme Court of certain procedural issues in the case. Intuit believes this
lawsuit is without merit and will vigorously defend the litigation.
Other Litigation Matters
Intuit is subject to certain routine legal proceedings, as well as demands, claims and threatened
litigation, that arise in the normal course of our business, including assertions that we may be
infringing patents or other intellectual property rights of others. We currently believe that the
ultimate amount of liability, if any, for any pending claims of any type (either alone or combined)
will not materially affect our financial position, results of operations or cash flows. We also
believe that we would be able to obtain any necessary licenses or other rights to disputed
intellectual property rights on commercially reasonable terms. However, the ultimate outcome of any
litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on Intuit
because of defense costs, negative publicity, diversion of management resources and other factors.
Our failure to obtain necessary license or other rights, or litigation arising out of intellectual
property claims, could adversely affect our business.
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12. Related Party Transactions
Loans to Executive Officers and Other Employees
Prior to July 30, 2002, loans to executive officers were generally made in connection with their
relocation and purchase of a residence near their new place of work. Consistent with the
requirements of the Sarbanes-Oxley legislation enacted on July 30, 2002, we have not made or
modified any loans to executive officers since that date and we do not intend to make or modify any
loans to executive officers in the future. At January 31, 2006, no loans were in default and all
interest payments were current in accordance with the terms of the loan agreements.
At January 31, 2006 and July 31, 2005, loans to executive officers in the principal amount of $5.7
million and $6.0 million were outstanding and loans to other employees in the principal amount of
$3.2 million were outstanding. These amounts were classified as long-term assets on our balance
sheets in accordance with the terms of the loan agreements.
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ITEM 2
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
includes the following sections:
| Executive Overview that discusses at a high level our operating results and some of the trends that affect our business. | ||
| Critical Accounting Policies that we believe are important to understanding the assumptions and judgments underlying our financial statements. | ||
| Results of Operations that begins with a Financial Overview followed by a more detailed discussion of our revenue and expenses. | ||
| Liquidity and Capital Resources which discusses key aspects of our statements of cash flows, changes in our balance sheets and our financial commitments. | ||
| A section entitled Risks That Could Affect Future Results, which details important factors that may significantly impact our future financial performance. |
You should note that this MD&A discussion contains forward-looking statements that involve risks
and uncertainties. Please see the section entitled Caution Regarding Forward-Looking Statements at
the end of this Item 2 for important information to consider when evaluating such statements.
You should read this MD&A in conjunction with the financial statements and related notes in Item 1
and our Annual Report on Form 10-K for the fiscal year ended July 31, 2005. As discussed below, we
sold our Intuit Information Technology Solutions (ITS) business in December 2005 and our Intuit
Public Sector Solutions (IPSS) business in December 2004. We accounted for these businesses as
discontinued operations and have accordingly reclassified our financial statements for all periods
prior to the sales to reflect them as discontinued operations. Unless noted otherwise, the
following discussion pertains only to our continuing operations.
Executive Overview
The following overview discusses at a high level our operating results and some of the trends that
affect our business. We believe that an understanding of these trends is important in order to
understand our financial results for the first six months of fiscal 2006 as well as our future
prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for
the detailed discussion and analysis provided elsewhere in this Quarterly Report on Form 10-Q and
in our Annual Report on Form 10-K for the fiscal year ended July 31, 2005.
About Intuit
Intuit is a leading provider of business and financial management solutions for small business,
consumer and professional tax, and accountants. We organize our business into the following five
segments:
| QuickBooks-Related. This segment includes our QuickBooks accounting and business management software for small businesses as well as products and services that can be added on to QuickBooks. These include financial supplies, QuickBooks Payroll, merchant services and technical support. | ||
| Intuit-Branded Small Business. This segment includes products and services other than QuickBooks that are designed primarily for small and medium-sized businesses and includes Outsourced Payroll and solutions designed to meet the needs of businesses in selected industries. | ||
| Consumer Tax. This segment includes our TurboTax consumer tax return preparation products and services. | ||
| Professional Tax. This segment includes our Lacerte and ProSeries professional tax products and services. | ||
| Other Businesses. This segment consists primarily of our Quicken personal finance products and services and our business in Canada. |
Overview of Financial Results
Total net revenue for the first six months of fiscal 2006 was $1.0 billion, up 16% compared with
the first six months of fiscal 2005. The fiscal 2006 revenue increase was primarily due to growth
in our QuickBooks-Related and Consumer Tax segments. Revenue growth for the first six months of
fiscal 2006 was positively affected by changes in our TurboTax offering and pricing strategies,
including the elimination of rebates, which shifted approximately
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$35 million in Consumer Tax revenue into the second quarter of fiscal 2006. Had our Consumer Tax
offerings remained the same as they were in fiscal 2005, we would have recognized that revenue in
the third quarter of fiscal 2006. Excluding the $35 million revenue shift, total company net
revenue for the second quarter and first six months of fiscal 2006 would have grown 9% and 12%
compared with the same periods of fiscal 2005. We expect the revenue shift to cause revenue growth
to be slower in the third quarter of fiscal 2006 than in the second quarter of fiscal 2006.
We recorded operating income from continuing operations of $136.4 million in the first six months
of fiscal 2006 compared with $136.0 million in the first six months of fiscal 2005. Operating
income from continuing operations for the first six months of fiscal 2006 included $35.5 million in
pre-tax share-based compensation expense for stock options and our Employee Stock Purchase Plan
that we recorded as a result of our adoption of SFAS 123(R) on August 1, 2005. These additional
share-based compensation expenses offset the benefit of the $35 million revenue shift that we
experienced in the second quarter of fiscal 2006. The revenue growth that we experienced after
adjusting for that revenue shift was completely offset by higher spending for new product
development and customer support.
Our net income from continuing operations of $97.6 million for the first six months of fiscal 2006
decreased slightly compared with $99.5 million for the first six months of fiscal 2005. Diluted net
income per share from continuing operations of $0.54 for the first six months of fiscal 2006
increased 4% compared with $0.52 for the comparable fiscal 2005 period due to the net reduction in
average shares outstanding. Average shares outstanding declined as a result of repurchases of
common stock under our stock repurchase programs, partially offset by the issuance of shares in
connection with the exercise of stock options and purchases under our Employee Stock Purchase Plan.
In December 2005 we sold our Intuit Information Technology Solutions (ITS) business for
approximately $200 million in cash. The decision to sell ITS was a result of our desire to focus
resources on our core products and services. We recorded total net income from ITS discontinued
operations of $39.5 million or $0.21 per diluted share in the first six months of fiscal 2006,
including $34.3 million or $0.19 per share for the net gain on disposal of that business.
We ended the first six months of fiscal 2006 with cash and investments totaling $833.9 million. In
the first six months of fiscal 2006 we generated cash from continuing operations, from net sales of
investments, from the sale of our ITS business and by issuing common stock under employee stock
plans. In this period we used $495.0 million in cash for repurchases of common stock under our
stock repurchase programs. At January 31, 2006, authorized funds of $295.8 million remained
available under our sixth repurchase program. We expect to continue to repurchase shares under this
program during the remainder of fiscal 2006.
Seasonality
Our QuickBooks, Consumer Tax and Professional Tax businesses are highly seasonal. Some of our other
offerings are also seasonal, but to a lesser extent. Revenue from upgrades for many of our small
business software products, including QuickBooks, tends to be concentrated around calendar year
end. Sales of income tax preparation products and services are heavily concentrated in the period
from November through April. These seasonal patterns mean that our total net revenue is usually
highest during our second quarter ending January 31 and third quarter ending April 30. We typically
report losses in our first quarter ending October 31 and fourth quarter ending July 31, when
revenue from our tax businesses is minimal while operating expenses continue at relatively
consistent levels.
Strategy and Opportunities
Strategy. Our strategy is to be in good businesses and attractive new markets with large unmet or
underserved needs which we can solve well. Our core competency is customer-driven innovation that
provides simple solutions to complex problems. We apply this approach to existing solutions by
focusing on continuous improvement to deliver customer delight. Our approach to new opportunities
is to develop products and services which are designed to attract customers who do not use software
products (non-consumption) and offer solutions that have better value compared with higher priced
alternatives (disruption). This strategy allows us to build large user bases with durable
advantages. In fiscal 2005 we introduced three products that exemplify this approach: QuickBooks
Simple Start, which provides accounting functionality suitable for very small businesses; ProSeries
Express Edition, designed for tax practices that focus on helping taxpayers obtain their refunds
quickly; and ProSeries Basic Edition, designed for the needs of smaller and seasonal tax practices.
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Opportunities in Our Core Markets. While we have strong positions in our core markets for
QuickBooks and TurboTax software, we believe that there are more opportunities in the markets for
small businesses and individual consumers. Many small businesses and individuals are using other
methods, such as manual tools and processes or general-purpose software. We continue to explore
ways to meet the needs of consumers that we have never reached before. For example, in fiscal 2005
we introduced QuickBooks Simple Start with accounting functionality for very small businesses.
Importance of Developing and Introducing New Products and Services. To remain competitive and grow
in the future, we must continue to invest in initiatives aimed at uncovering and meeting new
customer needs while enhancing our existing offerings to make them even better.
Importance of Technology Infrastructure. Our Internet-based products and services include
QuickBooks Online Edition, QuickBooks Assisted Payroll Service, Complete web-based Payroll,
TurboTax Online and consumer and professional electronic tax filing services. As our businesses
continue to move toward delivering more web-based products and services, our technology
infrastructure will become even more critical in the future.
Competition. We have formidable competitors, and we expect competition to remain intense during
fiscal 2006 and beyond. For example, Microsoft Corporation recently launched accounting software
and associated services that directly target small business customers. Microsoft has indicated that
part of its growth strategy is to focus on the small business market.
In our Consumer Tax business, we also face the risk of federal and state taxing authorities
developing or contracting to provide software or other systems to facilitate tax return preparation
and electronic filing at no charge to taxpayers. Intuit is a member of the Free File Alliance, a
consortium of private sector companies that have been providing web-based federal tax preparation
and filing services to eligible taxpayers at no charge through voluntary public service
initiatives.
Critical Accounting Policies
In preparing our financial statements, we make estimates, assumptions and judgments that can have a
significant impact on our net revenue, operating income or loss and net income or loss, as well as
on the value of certain assets and liabilities on our balance sheet. We believe that the estimates,
assumptions and judgments involved in the accounting policies described below have the greatest
potential impact on our financial statements, so we consider these to be our critical accounting
policies. Senior management has reviewed the development and selection of these critical accounting
policies and their disclosure in this Quarterly Report on Form 10-Q with the Audit Committee of our
Board of Directors.
Net Revenue Revenue Recognition
We derive revenue from the sale of packaged software products, license fees, product support,
professional services, outsourced payroll services, merchant services, transaction fees and
multiple element arrangements that may include any combination of these items. We follow the
appropriate revenue recognition rules for each type of revenue. For additional information, see
Net Revenue in Note 1 to the financial statements. We generally recognize revenue when persuasive
evidence of an arrangement exists, we have delivered the product or performed the service, the fee
is fixed or determinable and collectibility is probable. However, determining whether and when some
of these criteria have been satisfied often involves assumptions and judgments that can have a
significant impact on the timing and amount of revenue we report. For example, for multiple element
arrangements we must make assumptions and judgments in order to allocate the total price among the
various elements we must deliver, to determine whether undelivered services are essential to the
functionality of the delivered products and services, to determine whether vendor-specific evidence
of fair value exists for each undelivered element and to determine whether and when each element
has been delivered. If we were to change any of these assumptions or judgments, it could cause a
material increase or decrease in the amount of revenue that we report in a particular period.
Amounts for fees collected or invoiced and due relating to arrangements where revenue cannot be
recognized are reflected on our balance sheet as deferred revenue and recognized when the
applicable revenue recognition criteria are satisfied.
Net Revenue Return and Rebate Reserves
As part of our revenue recognition policy, we estimate future product returns and rebate payments
and establish reserves against revenue at the time of sale based on these estimates. Our return
policy allows distributors and retailers, subject to contractual limitations, to return purchased
products. Product returns by distributors and retailers
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relate primarily to the return of obsolete products. In determining our product returns reserves,
we consider the volume and price mix of products in the retail channel, historical return rates for
prior releases of the product, trends in retailer inventory and economic trends that might impact
customer demand for our products (including the competitive environment and the timing of new
releases of our products). We fully reserve for obsolete products in the distribution channels.
Our rebate reserves include distributor and retailer sales incentive rebates and end-user rebates.
Our estimated reserves for distributor and retailer incentive rebates are based on distributors
and retailers actual performance against the terms and conditions of rebate programs, which we
typically establish annually. Our reserves for end-user rebates are estimated based on the terms
and conditions of the specific promotional rebate program, actual sales during the promotion, the
amount of redemptions received and historical redemption trends by product and by type of
promotional program.
In the past, actual returns and rebates have approximated and not generally exceeded the reserves
that we have established. However, actual returns and rebates in any future period are inherently
uncertain. If we were to change our assumptions and estimates, our revenue reserves would change,
which would impact the net revenue we report. If actual returns and rebates are significantly
greater than the reserves we have established, the actual results would decrease our future
reported revenue. Conversely, if actual returns and rebates are significantly less than our
reserves, this would increase our future reported revenue. For example, if we had increased our
fiscal 2005 returns reserves by 1% of non-consignment sales to retailers for QuickBooks, TurboTax
and Quicken, our fiscal 2005 total net revenue would have been $3.6 million lower.
Allowance for Doubtful Accounts
We make ongoing assumptions relating to the collectibility of our accounts receivable. The accounts
receivable amount on our balance sheet includes a reserve for accounts that might not be paid. In
determining the amount of the reserve, we consider our historical level of credit losses. We also
make judgments about the creditworthiness of significant customers based on ongoing credit
evaluations, and we assess current economic trends that might impact the level of credit losses in
the future. Our reserves have generally been adequate to cover our actual credit losses. However,
since we cannot reliably predict future changes in the financial stability of our customers, we
cannot guarantee that our reserves will continue to be adequate. If actual credit losses are
significantly greater than the reserve we have established, that would increase our general and
administrative expenses and reduce our reported net income. Conversely, if actual credit losses are
significantly less than our reserve, this would eventually decrease our general and administrative
expenses and increase our reported net income.
Goodwill, Purchased Intangible Assets and Other Long-Lived Assets Impairment Assessments
We make judgments about the recoverability of purchased intangible assets and other long-lived
assets whenever events or changes in circumstances indicate that an other-than-temporary impairment
in the remaining value of the assets recorded on our balance sheet may exist. We test the
impairment of goodwill annually in our fourth fiscal quarter or more frequently if indicators of
impairment arise. The timing of the formal annual test may result in charges to our statement of
operations in our fourth fiscal quarter that could not have been reasonably foreseen in prior
periods. In order to estimate the fair value of long-lived assets, we typically make various
assumptions about the future prospects for the business that the asset relates to, consider market
factors specific to that business and estimate future cash flows to be generated by that business.
We evaluate cash flows at the lowest operating level and the number of reporting units that we have
identified may make impairment more probable than it would be at a company with fewer reporting
units and integrated operations following acquisitions. Based on these assumptions and estimates,
we determine whether we need to record an impairment charge to reduce the value of the asset
carried on our balance sheet to reflect its estimated fair value. Assumptions and estimates about
future values and remaining useful lives are complex and often subjective. They can be affected by
a variety of factors, including external factors such as industry and economic trends, and internal
factors such as changes in our business strategy and our internal forecasts. Although we believe
the assumptions and estimates we have made in the past have been reasonable and appropriate,
different assumptions and estimates could materially affect our reported financial results. More
conservative assumptions of the anticipated future benefits from these businesses could result in
impairment charges, which would decrease net income and result in lower asset values on our balance
sheet. Conversely, less conservative assumptions could result in smaller or no impairment charges,
higher net income and higher asset values. At January 31, 2006, we had $529.8 million in goodwill
and $67.3 million in net purchased intangible assets on our balance sheet.
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Accounting for Share-Based Compensation
Prior to August 1, 2005, we accounted for our share-based employee compensation plans under the
measurement and recognition provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations, as permitted by Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation. We recorded no share-based employee compensation expense
for options granted under our 2005 Equity Incentive Plan or its predecessor plans prior to August
1, 2005 as all options granted under those plans had exercise prices equal to the fair market value
of our common stock on the date of grant. We also recorded no compensation expense in connection
with our Employee Stock Purchase Plan as the purchase price of the stock was not less than 85% of
the lower of the fair market value of our common stock at the beginning of each offering period or
at the end of each purchase period. In accordance with SFAS 123 and SFAS 148, Accounting for
Stock-Based Compensation Transition and Disclosure, we disclosed our net income or loss and net
income or loss per share as if we had applied the fair value-based method in measuring compensation
expense for our share-based incentive programs.
Effective August 1, 2005, we adopted the fair value recognition provisions of SFAS 123(R),
Share-Based Payment, using the modified prospective transition method. Under that transition
method, compensation expense that we recognize beginning on that date includes: (a) compensation
expense for all share-based payments granted prior to, but not yet vested as of, August 1, 2005,
based on the grant date fair value estimated in accordance with the original provisions of SFAS
123, and (b) compensation expense for all share-based payments granted on or after August 1, 2005,
based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).
Because we elected to use the modified prospective transition method, results for prior periods
have not been restated. At January 31, 2006, there was $78.7 million of total unrecognized
compensation cost related to non-vested share-based compensation arrangements granted under all
equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes
in estimated forfeitures. We expect to recognize that cost over a weighted average period of 2.1
years.
We estimate the fair value of options granted using the Black-Scholes option valuation model and
the assumptions shown in Note 10 to the financial statements. We estimate the expected term of
options granted based on historical exercise patterns, which we believe are representative of
future behavior. We estimate the volatility of our common stock at the date of grant based on the
implied volatility of publicly traded one-year and two-year options on our common stock, consistent
with SFAS 123(R) and Securities and Exchange Commission Staff Accounting Bulletin No. 107. Our
decision to use implied volatility was based upon the availability of actively traded options on
our common stock and our assessment that implied volatility is more representative of future stock
price trends than historical volatility. We base the risk-free interest rate that we use in the
Black-Scholes option valuation model on the implied yield in effect at the time of option grant on
U.S. Treasury zero-coupon issues with equivalent remaining terms. We have never paid any cash
dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable
future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option
valuation model. SFAS 123(R) requires us to estimate forfeitures at the time of grant and revise
those estimates in subsequent periods if actual forfeitures differ from those estimates. We use
historical data to estimate pre-vesting option forfeitures and record share-based compensation
expense only for those awards that are expected to vest. For options granted before August 1, 2005,
we amortize the fair value on an accelerated basis. For options granted on or after August 1, 2005,
we amortize the fair value on a straight-line basis. All options are amortized over the requisite
service periods of the awards, which are generally the vesting periods. We may elect to use
different assumptions under the Black-Scholes option valuation model in the future, which could
materially affect our net income or loss and net income or loss per share.
Legal Contingencies
We are subject to certain legal proceedings, as well as demands, claims and threatened litigation
that arise in the normal course of our business. We review the status of each significant matter
quarterly and assess our potential financial exposure. If the potential loss from any claim or
legal proceeding is considered probable and the amount can be reasonably estimated, we record a
liability and an expense for the estimated loss. Significant judgment is required in both the
determination of probability and the determination of whether an exposure is reasonably estimable.
Our accruals are based on the best information available at the time. As additional information
becomes available, we reassess the potential liability related to our pending claims and litigation
and may revise our estimates. Potential legal liabilities and the revision of estimates of
potential legal liabilities could have a material impact on our results of operations and financial
position.
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Table of Contents
Income Taxes Estimates of Effective Tax Rates, Deferred Taxes and Valuation Allowance
When we prepare our financial statements, we estimate our income taxes based on the various
jurisdictions where we conduct business. Significant judgment is required in determining our
worldwide income tax provision. We recognize liabilities for anticipated tax audit issues in the
United States and other tax jurisdictions based on our estimate of whether, and the extent to
which, additional taxes will be due. We record an additional amount in our provision for income
taxes in the period in which we determine that our recorded tax liability is less than we expect
the ultimate tax assessment to be. If in a later period we determine that payment of this
additional amount is unnecessary, we reverse the liability and recognize a tax benefit in that
later period. As a result, our ongoing assessments of the probable outcomes of the audit issues and
related tax positions require judgment and can materially increase or decrease our effective tax
rate and materially affect our operating results. This also requires us to estimate our current tax
exposure and to assess temporary differences that result from differing treatments of certain items
for tax and accounting purposes. These differences result in deferred tax assets and liabilities,
which we show on our balance sheet. We must then assess the likelihood that our deferred tax assets
will be realized. To the extent we believe that realization is not likely, we establish a valuation
allowance. When we establish a valuation allowance or increase this allowance in an accounting
period, we record a corresponding tax expense on our statement of operations.
Our net deferred tax asset at January 31, 2006 was $175.9 million, net of the valuation allowance
of $5.5 million. We recorded the valuation allowance to reflect uncertainties about whether we will
be able to utilize some of our deferred tax assets (consisting primarily of certain state capital
loss and net operating loss carryforwards) before they expire. The valuation allowance is based on
our estimates of taxable income for the jurisdictions in which we operate and the period over which
our deferred tax assets will be realizable. While we have considered future taxable income in
assessing the need for the valuation allowance, we could be required to increase the valuation
allowance to take into account additional deferred tax assets that we may be unable to realize. An
increase in the valuation allowance would have an adverse impact, which could be material, on our
income tax provision and net income in the period in which we make the increase.
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Results of Operations
Financial Overview
Impact of | ||||||||||||||||||||||||
Q2 FY06 | ||||||||||||||||||||||||
Option/ESPP | ||||||||||||||||||||||||
Expense | ||||||||||||||||||||||||
Q2 | Q2 | Q2 $ | Q2 % | % | ||||||||||||||||||||
(Dollars in millions, except per share amounts) | FY06 | FY05 | Change | Change | Amount | Change | ||||||||||||||||||
Total net revenue |
$ | 742.7 | $ | 648.2 | $ | 94.5 | 15 | % | $ | | | |||||||||||||
Operating income from continuing operations |
239.0 | 218.2 | 20.8 | 10 | % | (16.4 | ) | (8 | %) | |||||||||||||||
Net income from continuing operations |
155.2 | 145.0 | 10.2 | 7 | % | (10.3 | ) | (7 | %) | |||||||||||||||
Diluted net income per share from
continuing operations |
$ | 0.86 | $ | 0.76 | $ | 0.10 | 13 | % | $ | (0.06 | ) | (8 | %) | |||||||||||
Net cash provided by operating activities of
continuing operations |
$ | 167.1 | $ | 213.7 | $ | (46.6 | ) | (22 | %) |
Impact of | ||||||||||||||||||||||||
YTD Q2 FY06 | ||||||||||||||||||||||||
Option/ESPP | ||||||||||||||||||||||||
YTD | YTD | YTD | YTD | Expense | ||||||||||||||||||||
Q2 | Q2 | Q2 $ | Q2 % | % | ||||||||||||||||||||
(Dollars in millions, except per share amounts) | FY06 | FY05 | Change | Change | Amount | Change | ||||||||||||||||||
Total net revenue |
$ | 1,046.8 | $ | 901.0 | $ | 145.8 | 16 | % | $ | | | |||||||||||||
Operating income from continuing operations |
136.4 | 136.0 | 0.4 | 0 | % | (35.5 | ) | (26 | %) | |||||||||||||||
Net income from continuing operations |
97.6 | 99.5 | (1.9 | ) | (2 | %) | (22.4 | ) | (23 | %) | ||||||||||||||
Diluted net income per share from
continuing operations |
$ | 0.54 | $ | 0.52 | $ | 0.02 | 4 | % | $ | (0.12 | ) | (23 | %) | |||||||||||
Net cash provided by operating activities of
continuing operations |
$ | 72.3 | $ | 121.5 | $ | (49.2 | ) | (40 | %) |
Total net revenue increased 15% and 16% in the second quarter and first six months of fiscal
2006 compared with the same periods of fiscal 2005 primarily due to growth in our
QuickBooks-Related and Consumer Tax segments. In our QuickBooks-Related segment, revenue from
QuickBooks software, QuickBooks Payroll and merchant services revenue was higher in the second
quarter and first six months of fiscal 2006 compared with the same periods of fiscal 2005. In our
Consumer Tax segment, revenue growth for the second quarter and first six months of fiscal 2006 was
positively affected by changes in our TurboTax offering and pricing strategies that included
eliminating rebates and bundling federal and state consumer tax products. These changes were
designed to simplify our offerings in response to customer feedback. We recorded approximately $35
million of Consumer Tax revenue in the second quarter of fiscal 2006 that we would have recognized
in the third quarter of fiscal 2006 if our offerings had remained the same as they were in fiscal
2005. Excluding the $35 million revenue shift, total company net revenue for the second quarter and
first six months of fiscal 2006 would have grown 9% and 12% compared with the same periods of
fiscal 2005. We expect the revenue shift to cause revenue growth to be slower in the third quarter
of fiscal 2006 than in the second quarter of fiscal 2006.
Net cash provided by operating activities of continuing operations declined by 22% and 40% in the
second quarter and first six months of fiscal 2006 compared with the same periods of fiscal 2005.
The elimination of rebates in our Quickbooks-Related segment resulted in a reduction in up front
cash paid by our customers that has historically been returned in later periods when rebates were
claimed and paid. In addition, the reduction in deferred revenue associated with the $35 million
revenue shift described above was the primary cause of the remainder of the decrease in fiscal 2006
operating cash flow.
Effective August 1, 2005, we adopted the fair value recognition provisions of SFAS 123(R),
Share-Based Payment, using the modified prospective transition method. Under that transition
method, compensation expense that we recognized for the three and six months ended January 31, 2006
included: (a) compensation expense for all share-based payments granted prior to, but not yet
vested as of, August 1, 2005, based on the grant date fair value
36
Table of Contents
estimated in accordance with the original provisions of SFAS 123, and (b) compensation expense for
all share-based payments granted on or after August 1, 2005, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R). In the second quarter and first six
months of fiscal 2006 we recorded share-based compensation expense for stock options and our
Employee Stock Purchase Plan totaling $16.4 million or $0.06 per diluted share and $35.5 million or
$0.12 per diluted share as a result of our adoption of SFAS 123(R). Because we elected to use the
modified prospective transition method, results for prior periods have not been restated.
At January 31, 2006, there was $78.7 million of total unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under all equity compensation plans. Total
unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We
expect to recognize that cost over a weighted average period of 2.1 years.
Excluding the revenue shift that we experienced in the second quarter of fiscal 2006 and the
share-based compensation expense for stock options and our Employee Stock Purchase Plan that we
recorded in accordance with SFAS 123(R), higher spending for new product development and customer
support partially offset higher revenue in the second quarter of fiscal 2006 and completely offset
higher revenue in the first six months of fiscal 2006. Interest and other income and gains on
marketable equity securities and other investments were higher in the fiscal 2006 periods. Our
effective tax rate was 37% for the second quarter and first six months of fiscal 2006, compared
with 34% and 30% for the same periods of fiscal 2005. The lower fiscal 2005 effective tax rates
were due to state credits claimed and other discrete tax items. The effect of this rate difference
was to decrease net income for the first six months of fiscal 2006 by approximately $10 million.
Our diluted net income per share from continuing operations increased slightly even though our net
income from continuing operations decreased slightly in the first six months of fiscal 2006 due to
the net reduction of average shares outstanding. Average shares outstanding declined as a result of
repurchases of common stock under our stock repurchase programs, partially offset by the issuance
of shares in connection with the exercise of stock options and purchases under our Employee Stock
Purchase Plan.
In December 2005 we sold our Intuit Information Technology Solutions (ITS) business for
approximately $200 million in cash. The buyer deposited approximately $20 million of the total
purchase price in a third-party escrow account to be held through December 2006 to cover breaches
of representations and warranties set forth in the purchase agreement, should they arise. The full
escrow amount is in other current assets on our balance sheet at January 31, 2006. We recorded
total net income from ITS discontinued operations of $39.5 million or $0.21 per diluted share in
the first six months of fiscal 2006, including $34.3 million or $0.19 per diluted share for the net
gain on disposal of that business.
At January 31, 2006, our cash, cash equivalents and investments totaled $833.9 million, a decrease
of $160.4 million from July 31, 2005. We generated cash in the first six months of fiscal 2006
primarily from continuing operations, from net sales of investments, from the sale of our ITS
business and by issuing common stock under employee stock plans. We used cash in the first six
months of fiscal 2006 for repurchases of common stock under our stock repurchase programs. In the
first six months of fiscal 2006 we bought 9.9 million shares of our common stock under our fifth
and sixth repurchase programs at an average price of $49.93 for a total price of $495.0 million. At
January 31, 2006, our fifth repurchase program was complete and authorized funds of $295.8 million
remained available under our sixth repurchase program, under which we are authorized to repurchase
up to $500.0 million of our common stock from time to time over a three-year period ending on
November 14, 2008. We expect to continue to repurchase shares under this program during the
remainder of fiscal 2006.
37
Table of Contents
Total Net Revenue
The table below and the discussion of net revenue by business segment that follows it are organized
in accordance with our five reportable business segments. See Note 6 to the financial statements
for descriptions of product, service and other revenue for each segment.
% Total | % Total | % Total | % Total | ||||||||||||||||||||||||||||||||||||||
Net | Net | Q2 % | YTD Q2 | Net | YTD Q2 | Net | YTD % | ||||||||||||||||||||||||||||||||||
(Dollars in millions) | Q2 | FY06 | Revenue | Q2 FY05 | Revenue | Change | FY06 | Revenue | FY05 | Revenue | Change | ||||||||||||||||||||||||||||||
QuickBooks-
Related |
|||||||||||||||||||||||||||||||||||||||||
Product |
$ | 209.7 | $ | 183.1 | $ | 343.2 | $ | 295.2 | |||||||||||||||||||||||||||||||||
Service |
45.8 | 36.5 | 87.7 | 67.6 | |||||||||||||||||||||||||||||||||||||
Other |
3.5 | 2.7 | 6.2 | 5.2 | |||||||||||||||||||||||||||||||||||||
Subtotal |
259.0 | 35 | % | 222.3 | 34 | % | 16 | % | 437.1 | 42 | % | 368.0 | 41 | % | 19 | % | |||||||||||||||||||||||||
Intuit-Branded
Small Business |
|||||||||||||||||||||||||||||||||||||||||
Product |
8.7 | 9.6 | 16.3 | 18.4 | |||||||||||||||||||||||||||||||||||||
Service |
60.8 | 51.1 | 111.4 | 95.6 | |||||||||||||||||||||||||||||||||||||
Other |
0.1 | | 0.1 | 0.1 | |||||||||||||||||||||||||||||||||||||
Subtotal |
69.6 | 9 | % | 60.7 | 10 | % | 15 | % | 127.8 | 12 | % | 114.1 | 13 | % | 12 | % | |||||||||||||||||||||||||
Consumer Tax |
|||||||||||||||||||||||||||||||||||||||||
Product |
139.0 | 102.2 | 141.8 | 103.4 | |||||||||||||||||||||||||||||||||||||
Service |
51.2 | 38.9 | 56.2 | 42.5 | |||||||||||||||||||||||||||||||||||||
Other |
0.1 | | 0.2 | 0.2 | |||||||||||||||||||||||||||||||||||||
Subtotal |
190.3 | 26 | % | 141.1 | 22 | % | 35 | % | 198.2 | 19 | % | 146.1 | 16 | % | 36 | % | |||||||||||||||||||||||||
Professional Tax |
|||||||||||||||||||||||||||||||||||||||||
Product |
147.0 | 146.4 | 155.1 | 153.5 | |||||||||||||||||||||||||||||||||||||
Service |
3.5 | 4.2 | 4.3 | 4.6 | |||||||||||||||||||||||||||||||||||||
Other |
| | | | |||||||||||||||||||||||||||||||||||||
Subtotal |
150.5 | 20 | % | 150.6 | 23 | % | 0 | % | 159.4 | 15 | % | 158.1 | 17 | % | 1 | % | |||||||||||||||||||||||||
Other
Businesses |
|||||||||||||||||||||||||||||||||||||||||
Product |
52.7 | 55.9 | 83.1 | 80.7 | |||||||||||||||||||||||||||||||||||||
Service |
5.6 | 4.7 | 11.9 | 9.3 | |||||||||||||||||||||||||||||||||||||
Other |
15.0 | 12.9 | 29.3 | 24.7 | |||||||||||||||||||||||||||||||||||||
Subtotal |
73.3 | 10 | % | 73.5 | 11 | % | 0 | % | 124.3 | 12 | % | 114.7 | 13 | % | 8 | % | |||||||||||||||||||||||||
Total Company
|
|||||||||||||||||||||||||||||||||||||||||
Product |
557.1 | 497.2 | 739.5 | 651.2 | |||||||||||||||||||||||||||||||||||||
Service |
166.9 | 135.4 | 271.5 | 219.6 | |||||||||||||||||||||||||||||||||||||
Other |
18.7 | 15.6 | 35.8 | 30.2 | |||||||||||||||||||||||||||||||||||||
Total net revenue |
$ | 742.7 | 100 | % | $ | 648.2 | 100 | % | 15 | % | $ | 1,046.8 | 100 | % | $ | 901.0 | 100 | % | 16 | % | |||||||||||||||||||||
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Table of Contents
Total Net Revenue by Business Segment
QuickBooks-Related
QuickBooks-Related total net revenue increased in the second quarter and first six months of fiscal
2006 compared with the same periods of fiscal 2005 primarily due to higher QuickBooks software,
QuickBooks Payroll and merchant services revenue. Lower average selling prices for QuickBooks
software due to price reductions in conjunction with the elimination of rebates were more than
offset by higher unit volume. We believe that the higher unit volume was primarily a result of
product improvements, successful execution of our QuickBooks 2006 product launch and growth in the
category that was driven by publicity surrounding a significant new market entrant. For the first
six months of fiscal 2006, there was unit growth in our QuickBooks Pro and Premier products as well
as in QuickBooks Enterprise Solutions and QuickBooks Online Edition. QuickBooks Payroll revenue was
higher in the second quarter and first six months of fiscal 2006 compared with the same periods of
fiscal 2005 primarily because of price increases, a favorable product mix and growth in the
customer base. The increase in merchant services revenue in those periods was primarily due to
growth in the customer base and higher transaction volume per customer.
Intuit-Branded Small Business
Intuit-Branded Small Business total net revenue increased in the second quarter and first six
months of fiscal 2006 compared with the same periods of fiscal 2005 primarily due to growth in our
Outsourced Payroll and Intuit Real Estate solutions businesses. Higher Outsourced Payroll revenue
was driven by growth in the number of QuickBooks Assisted Payroll and Complete Payroll customers
processing payrolls, price increases and increased interest income on funds held for payroll
customers, partially offset by attrition in the Premier Payroll Service customer base. Intuit Real
Estate Solutions revenue was higher primarily due to increased customer demand for software
customization and implementation services.
Consumer Tax
Consumer Tax total net revenue increased in the second quarter and first six months of fiscal 2006
compared with the same periods of fiscal 2005. Revenue growth was positively affected by changes in
our offering and pricing strategies that included eliminating rebates and bundling federal and
state consumer tax products. These changes were designed to simplify our offerings in response to
customer feedback. We recorded approximately $35 million of revenue in the second quarter of fiscal
2006 that we would have recognized in the third quarter of fiscal 2006 if our offerings had
remained the same as they were in fiscal 2005. Excluding this $35 million revenue shift, Consumer
Tax total net revenue would have increased 10% and 12% in the second quarter and first six months
of fiscal 2006 compared with the same periods of fiscal 2005 primarily due to growth in TurboTax
Online. We expect the revenue shift to cause Consumer Tax revenue growth to be slower in the third
quarter of fiscal 2006 than in the second quarter of fiscal 2006. Due to the seasonal nature of our
Consumer Tax business, revenue for the first quarter of fiscal 2006 and 2005 was nominal. We will
not have substantially complete results for the 2005 tax season until late in fiscal 2006.
Professional Tax
Professional Tax total net revenue was flat in the second quarter and first six months of fiscal
2006 compared with the same periods of fiscal 2005. We believe that more of our Professional Tax
revenue is shifting from our second fiscal quarter to our third fiscal quarter, reflecting changes
in our product offerings such as unlimited electronic filing, for which revenue is recognized over
the electronic filing period. Due to the seasonal nature of our Professional Tax business, revenue
for the first quarter of fiscal 2006 and 2005 was nominal. We will not have substantially complete
results for the 2005 tax season until late in fiscal 2006.
Other Businesses
Other Businesses total net revenue was flat in the second quarter of fiscal 2006 and increased in
the first six months of fiscal 2006 compared with the same periods of fiscal 2005. Revenue from our
Quicken Solutions Group was down slightly in the fiscal 2006 periods, with lower revenue from
Quicken personal finance software partially offset by higher revenue from online services and from
new offerings such as Quicken Rental Property Manager and Quicken Medical Expense Manager. Canadian
revenue increased slightly in the second quarter of fiscal 2006 primarily due to changes in foreign
currency exchange rates. Canadian revenue increased in the first six months of
39
Table of Contents
fiscal 2006 primarily due to higher subscription revenue for payroll services that was driven by
improvements in service levels.
Cost of Revenue
% of | % of | YTD | % of | YTD | % of | |||||||||||||||||||||||||||
Q2 | Related | Q2 | Related | Q2 | Related | Q2 | Related | |||||||||||||||||||||||||
(Dollars in millions) | FY06 | Revenue | FY05 | Revenue | FY06 | Revenue | FY05 | Revenue | ||||||||||||||||||||||||
Cost of product revenue |
$ | 71.7 | 13 | % | $ | 63.9 | 13 | % | $ | 104.2 | 14 | % | $ | 93.7 | 14 | % | ||||||||||||||||
Cost of service revenue |
57.3 | 34 | % | 47.5 | 35 | % | 110.7 | 41 | % | 87.2 | 40 | % | ||||||||||||||||||||
Cost of other revenue |
6.1 | 33 | % | 5.1 | 33 | % | 12.0 | 33 | % | 10.9 | 36 | % | ||||||||||||||||||||
Amortization of purchased
intangible assets |
2.8 | n/a | 2.6 | n/a | 5.7 | n/a | 5.2 | n/a | ||||||||||||||||||||||||
Total cost of revenue |
$ | 137.9 | 19 | % | $ | 119.1 | 18 | % | $ | 232.6 | 22 | % | $ | 197.0 | 22 | % | ||||||||||||||||
Our cost of revenue has four components: (1) cost of product revenue, which includes the
direct costs of manufacturing and shipping our software products; (2) cost of service revenue,
which reflects direct costs associated with providing services, including data center costs related
to delivering Internet-based services; (3) cost of other revenue, which includes costs associated
with generating advertising and online transactions revenue; and (4) amortization of purchased
intangible assets, which represents the cost of amortizing over their useful lives developed
technologies that we obtained through acquisitions.
Total cost of revenue for the second quarter and first six months of fiscal 2006 included $0.7
million and $1.7 million in share-based compensation expense for stock options and our Employee
Stock Purchase Plan that we recorded as a result of our adoption of SFAS 123(R) on August 1, 2005.
Subsequent to our earnings release on February 16, 2006, we recorded an additional $3.3 million in
freight and delivery expenses identified after our earnings release. As a result of this under
accrual of freight and delivery expenses diluted net income per share was $1.01 rather than $1.02
(as reported in our earnings release) for the quarter ended January 31, 2006 and $0.75 rather than
$0.76 for the six months ended January 31, 2006 and operating income from continuing operations was
$239.0 million rather than $242.2 million for the quarter ended January 31, 2006 and $136.4 million
rather than $139.6 million for the six months ended January 31, 2006.
40
Table of Contents
Operating Expenses
Impact of | ||||||||||||||||||||||||
Q2 FY06 | ||||||||||||||||||||||||
Option/ESPP | ||||||||||||||||||||||||
Expense | ||||||||||||||||||||||||
% of | % of | % of | ||||||||||||||||||||||
Total | Total | Total | ||||||||||||||||||||||
Q2 | Net | Q2 | Net | Net | ||||||||||||||||||||
(Dollars in millions) | FY06 | Revenue | FY05 | Revenue | Amount | Revenue | ||||||||||||||||||
Selling and marketing |
$ | 196.9 | 27 | % | $ | 173.5 | 27 | % | $ | 5.3 | 1 | % | ||||||||||||
Research and development |
100.1 | 13 | % | 76.9 | 12 | % | 4.7 | 0 | % | |||||||||||||||
General and administrative |
65.3 | 9 | % | 56.4 | 9 | % | 5.7 | 1 | % | |||||||||||||||
Acquisition-related charges |
3.6 | 0 | % | 4.2 | 0 | % | | 0 | % | |||||||||||||||
Total operating expenses |
$ | 365.9 | 49 | % | $ | 311.0 | 48 | % | $ | 15.7 | 2 | % | ||||||||||||
Impact of | ||||||||||||||||||||||||
YTD Q2 FY06 | ||||||||||||||||||||||||
Option/ESPP | ||||||||||||||||||||||||
Expense | ||||||||||||||||||||||||
% of | % of | % of | ||||||||||||||||||||||
YTD | Total | YTD | Total | Total | ||||||||||||||||||||
Q2 | Net | Q2 | Net | Net | ||||||||||||||||||||
(Dollars in millions) | FY06 | Revenue | FY05 | Revenue | Amount | Revenue | ||||||||||||||||||
Selling and marketing |
$ | 344.3 | 33 | % | $ | 302.0 | 33 | % | $ | 11.6 | 1 | % | ||||||||||||
Research and development |
197.4 | 19 | % | 151.3 | 17 | % | 10.3 | 1 | % | |||||||||||||||
General and administrative |
128.9 | 12 | % | 106.1 | 12 | % | 12.0 | 1 | % | |||||||||||||||
Acquisition-related charges |
7.3 | 1 | % | 8.6 | 1 | % | | 0 | % | |||||||||||||||
Total operating expenses |
$ | 677.9 | 65 | % | $ | 568.0 | 63 | % | $ | 33.9 | 3 | % | ||||||||||||
Total operating expenses increased in the second quarter and first six months of fiscal 2006
compared with the same periods of fiscal 2005 due in part to the share-based compensation expense
for stock options and our Employee Stock Purchase Plan that we recorded as a result of our adoption
of SFAS 123(R) on August 1, 2005. Total operating expenses also increased due to spending for new
product development and customer support. Selling and marketing expenses include the cost of
providing customer service and technical support to customers who have not purchased support plans.
We continue to invest in research and development and expect that our fiscal 2006 research and
development expenses as a percentage of total net revenue will increase compared with fiscal 2005.
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Segment Operating Income (Loss)
Segment operating income or loss is segment net revenue less segment cost of revenue and operating
expenses. Segment expenses do not include certain costs, such as corporate general and
administrative expenses and share-based compensation expenses, that are not allocated to specific
segments. These unallocated costs totaled $116.7 million and $235.1 million in the second quarter
and first six months of fiscal 2006 and $96.1 million and $191.0 in the same periods of fiscal
2005. Unallocated costs increased primarily as a result of share-based compensation expenses for
stock options and our Employee Stock Purchase Plan that we began recording in the first quarter of
fiscal 2006. See Note 1 and Note 10 to the financial statements. In addition, segment expenses do
not include amortization of purchased intangible assets, acquisition-related charges and impairment
of goodwill and purchased intangible assets. Segment expenses also do not include interest and
other income and realized net gains or losses on marketable equity securities and other
investments. See Note 6 to the financial statements for reconciliations of total segment operating
income or loss to income or loss from continuing operations for each fiscal period presented.
% of | % of | % of | % of | |||||||||||||||||||||||||||||
Q2 | Related | Q2 | Related | YTD Q2 | Related | YTD Q2 | Related | |||||||||||||||||||||||||
(Dollars in millions) | FY06 | Revenue | FY05 | Revenue | FY06 | Revenue | FY05 | Revenue | ||||||||||||||||||||||||
QuickBooks-Related |
$ | 106.8 | 41 | % | $ | 108.4 | 49 | % | $ | 157.4 | 36 | % | $ | 157.8 | 43 | % | ||||||||||||||||
Intuit-Branded Small
Business |
10.6 | 15 | % | 5.6 | 9 | % | 10.1 | 8 | % | 7.7 | 7 | % | ||||||||||||||||||||
Consumer Tax |
107.1 | 56 | % | 65.0 | 46 | % | 82.8 | 42 | % | 44.6 | 31 | % | ||||||||||||||||||||
Professional Tax |
105.1 | 70 | % | 105.7 | 70 | % | 83.1 | 52 | % | 84.6 | 54 | % | ||||||||||||||||||||
Other Businesses |
32.4 | 44 | % | 36.3 | 49 | % | 51.1 | 41 | % | 46.1 | 40 | % | ||||||||||||||||||||
Total segment
operating income |
$ | 362.0 | 49 | % | $ | 321.0 | 50 | % | $ | 384.5 | 37 | % | $ | 340.8 | 38 | % | ||||||||||||||||
QuickBooks-Related
QuickBooks-Related segment operating income as a percentage of related revenue decreased in the
second quarter and first six months of fiscal 2006 compared with the same periods of fiscal 2005.
Higher QuickBooks revenue resulted from lower average selling prices that were more than offset by
higher unit volume in the fiscal 2006 periods. Higher unit volume resulted in higher fulfillment
costs compared with fiscal 2005. We also spent more on QuickBooks product development, technical
support and marketing in the fiscal 2006 periods compared with the same periods of fiscal 2005.
Intuit-Branded Small Business
Intuit-Branded Small Business (IBSB) segment operating income as a percentage of related revenue
increased in the second quarter and first six months of fiscal 2006 compared with the same periods
of fiscal 2005. In our Outsourced Payroll business, higher revenue combined with relatively stable
operating expenses produced higher operating income. Increased product development costs for
QuickBooks Assisted Payroll partially offset efficiencies that resulted from coordinating
Outsourced Payroll marketing programs with QuickBooks Payroll marketing programs. Higher revenue in
our other IBSB businesses was more than offset by relatively higher expenses for providing software
implementation services in our Intuit Distribution Management Solutions business and by higher
sales and consulting expenses in our Intuit Real Estate Solutions business.
Consumer Tax
Consumer Tax segment operating income as a percentage of related revenue for the second quarter and
first six months of fiscal 2006 increased compared with the same periods of fiscal 2005 due
primarily to the $35 million revenue shift that we experienced in the second quarter of fiscal
2006. Excluding that additional revenue, which had relatively small associated costs, operating
income as a percentage of related revenue for the second quarter and first six months of fiscal
2006 was lower than for the same periods of fiscal 2005. Higher revenue and lower rebate processing
fees were more than offset by higher expenses for product development and customer support in the
fiscal 2006 periods.
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Professional Tax
Professional Tax segment operating income as a percentage of related revenue for the second quarter
and first six months of fiscal 2006 was comparable with the same periods of fiscal 2005. Both
revenue and operating expenses were flat in the fiscal 2006 periods.
Other Businesses
Other Businesses segment operating income as a percentage of related revenue decreased in the
second quarter of fiscal 2006 and was stable in the first six months of fiscal 2006 compared with
the same periods of fiscal 2005. Total revenue from our Quicken Solutions Group was slightly lower
while expenses to develop and market new offerings increased in the fiscal 2006 periods. Higher
revenue combined with relatively stable spending in the first six months of fiscal 2006 produced
better operating margins in Canada.
Non-Operating Income and Expenses
Interest and Other Income
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | January 31, | January 31, | |||||||||||||
(In millions) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Interest income |
$ | 5.0 | $ | 2.9 | $ | 10.7 | $ | 5.8 | ||||||||
Quicken Loans royalties and fees |
0.3 | 0.6 | 0.9 | 1.2 | ||||||||||||
Net foreign exchange gain (loss) |
(0.1 | ) | 0.1 | (0.1 | ) | 0.3 | ||||||||||
Other |
0.1 | (0.6 | ) | 0.1 | (0.5 | ) | ||||||||||
$ | 5.3 | $ | 3.0 | $ | 11.6 | $ | 6.8 | |||||||||
Slightly lower average invested balances were more than offset by higher interest rates,
resulting in an increase in interest income in the second quarter and first six months of fiscal
2006 compared with the same periods of fiscal 2005.
Income Taxes
Our effective tax rate for the second quarter and first six months of fiscal 2006 was approximately
37% and differed from the federal statutory rate due to state income taxes, which were partially
offset by the benefit we received from federal and state research and experimental credits and tax
exempt interest income. Our effective tax rates for the second quarter and first six months of
fiscal 2005 were approximately 34% and 30%. Those rates differed from the federal statutory rate
primarily due to state income taxes, offset by the benefit we received from federal research and
experimental credits and tax exempt interest income. In addition, we benefited from state credits
claimed and other discrete items that reduced those effective tax rates in fiscal 2005. See Note 9
to the financial statements.
At January 31, 2006 we had net deferred tax assets of $175.9 million, which included a valuation
allowance of $5.5 million for certain state capital loss and net operating loss carryforwards. The
allowance reflects managements assessment that we may not receive the benefit of capital loss
carryforwards in certain state jurisdictions. While we believe our current valuation allowance is
sufficient, it may be necessary to increase this amount if it becomes more likely that we will not
realize a greater portion of the net deferred tax assets. We assess the need for an adjustment to
the valuation allowance on a quarterly basis.
Discontinued Operations
Intuit Information Technology Solutions
In May 2005 our Board of Directors formally approved a plan to sell our Intuit Information
Technology Solutions (ITS) business. In December 2005 we sold ITS for approximately $200 million in
cash. In accordance with the provisions of SFAS 144, we determined that ITS became a long-lived
asset held for sale and a discontinued operation in the fourth quarter of fiscal 2005.
Consequently, we have segregated the operating results of ITS from
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continuing operations on our statement of operations for all periods prior to the sale. See Note 5
to the financial statements.
Intuit Public Sector Solutions
In December 2004 we sold our Intuit Public Sector Solutions (IPSS) business for approximately $11
million in cash and accounted for the sale as a discontinued operation. In accordance with SFAS
144, we have segregated the operating results of IPSS from continuing operations on our statement
of operations for all periods prior to the sale. See Note 5 to the financial statements.
Liquidity and Capital Resources
Statement of Cash Flows
At January 31, 2006 our cash, cash equivalents and investments totaled $833.9 million, a decrease
of $160.4 million from July 31, 2005. We generated cash from continuing operations during the first
six months of fiscal 2006. We also generated cash from investing activities during the first six
months of fiscal 2006, primarily from net sales of investments and from the sale of our ITS
business for approximately $200 million in cash. We used cash for financing activities during the
first six months of fiscal 2006, primarily for the repurchase of $495.0 million in common stock
under our stock repurchase programs. See Stock Repurchase Programs below and Note 10 to the
financial statements. This was partially offset by proceeds that we received from the issuance of
common stock in connection with the exercise of stock options and purchases under our Employee
Stock Purchase Plan.
Cash provided by operating activities of continuing operations declined by 22% and 40% in the
second quarter and first six months of fiscal 2006 compared with the same periods of fiscal 2005.
The elimination of rebates in our Quickbooks Business Segment resulted in a reduction in up front
cash paid by our customers that has historically been returned in later periods when rebates were
claimed and paid. In addition, the reduction in deferred revenue associated with the $35 million
revenue shift described above was the primary cause of the remainder of the decrease in fiscal 2006
operating cash flow.
Stock Repurchase Programs
Our Board of Directors has authorized a series of common stock repurchase programs. Shares of
common stock repurchased under these programs become treasury shares. During the first six months
of fiscal 2006 we repurchased 9.9 million shares of our common stock for $495.0 million under our
fifth and sixth repurchase programs. At January 31, 2006, authorized funds of $295.8 million
remained under our sixth repurchase program, under which we are authorized to repurchase up to
$500.0 million of our common stock from time to time over a three-year period ending on November
14, 2008. We expect to continue to repurchase shares under this repurchase program during the
remainder of fiscal 2006.
Loans to Executive Officers and Other Employees
Outstanding loans to executive officers and other employees totaled $8.9 million at January 31,
2006 and $9.2 million at July 31, 2005. Loans to executive officers are relocation loans that are
secured by real property and have original maturity dates of 10 years. At January 31, 2006, no
loans were in default and all interest payments were current in accordance with the terms of the
loan agreements. Consistent with the requirements of the Sarbanes-Oxley Act of 2002, no loans to
executive officers have been made or modified since July 30, 2002 and we do not intend to make or
modify loans to executive officers in the future. See Note 12 to the financial statements.
Other
We evaluate, on an ongoing basis, the merits of acquiring technology or businesses, or establishing
strategic relationships with and investing in other companies. We may decide to use cash, cash
equivalents and investments to fund such activities in the future.
We believe that our cash, cash equivalents and investments will be sufficient to meet anticipated
seasonal working capital and capital expenditure requirements for at least the next 12 months.
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Reserves for Returns and Rebates
Activity in our reserves for product returns and for rebates during the first six months of fiscal
2006 and comparative balances at January 31, 2005 were as follows:
Additions | ||||||||||||||||||||
Balance | Charged | Balance | Balance | |||||||||||||||||
July 31, | Against | Returns/ | January 31, | January 31, | ||||||||||||||||
(In thousands) | 2005 | Revenue | Redemptions | 2006 | 2005 | |||||||||||||||
Reserve for product returns |
$ | 30,454 | $ | 60,466 | $ | (28,089 | ) | $ | 62,831 | $ | 75,290 | |||||||||
Reserve for rebates |
$ | 18,482 | $ | 40,352 | $ | (32,974 | ) | $ | 25,860 | $ | 53,012 |
Due to the seasonality of our business, we compare our returns and rebate reserve balances at
January 31, 2006 to the reserve balances at January 31, 2005. The fiscal 2006 decrease in our
reserve for product returns was due primarily to improved inventory management. The fiscal 2006
decrease in our reserve for rebates was due to the elimination of rebate programs for many of our
products.
Off-Balance Sheet Arrangements
At January 31, 2006, we did not have any significant off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of Regulation S-K.
Recent Accounting Pronouncements
SFAS 154, Accounting Changes and Error Corrections
On June 1, 2005 the FASB issued SFAS 154, Accounting Changes and Error Corrections, which
replaces APB 20, Accounting Changes, and SFAS 3, Reporting Accounting Changes in Interim
Financial Statements. SFAS 154 applies to all voluntary changes in accounting principle, and
changes the requirements for accounting for and reporting of a change in accounting principle. SFAS
154 requires retrospective application to prior periods financial statements of a voluntary change
in accounting principle unless it is impracticable. APB 20 previously required that most voluntary
changes in accounting principle be recognized by including in net income of the period of the
change the cumulative effect of changing to the new accounting principle. SFAS 154 is effective for
accounting changes made in fiscal years beginning after December 15, 2005. Earlier application is
permitted for accounting changes made in fiscal years beginning after June 1, 2005. We do not
expect our adoption of this new standard to have a material impact on our financial position,
results of operations or cash flows.
SFAS
155, Accounting for Certain Hybrid Instruments
On February 16, 2006 the FASB issued SFAS 155, Accounting for Certain Hybrid Instruments, which
amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole
(eliminating the need to bifurcate the derivative from its host) if the holder elects to account
for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other
provisions of SFAS 133 and SFAS 140. This statement is effective for all financial instruments
acquired or issued in fiscal years beginning after September 15, 2006. We do not expect our
adoption of this new standard to have a material impact on our financial position, results of
operations or cash flows.
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RISKS THAT COULD AFFECT FUTURE RESULTS
In evaluating Intuit and our business, you should consider the following factors in addition to the
other information in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for
the fiscal year ended July 31, 2005. Forward-looking statements in this report are subject to risks
and uncertainties that could cause our actual results to differ materially from the results
expressed or implied in the forward-looking statements. Any of the following risks could seriously
harm our business, financial condition, and results of operations.
We face intense competitive pressures in all of our businesses that may negatively impact our
revenue, profitability and market position.
We have formidable competitors, and we expect competition to remain intense during fiscal 2006 and
beyond. The number, resources and sophistication of the companies with whom we compete have
increased as we continue to expand our product and service offerings. Microsoft Corporation, in
particular, presents a significant threat to a number of our businesses due to its market position,
strategic focus and superior financial resources. Our competitors may introduce new and improved
products and services, bundle new offerings with market-leading products, reduce prices, gain
better access to distribution channels, advertise aggressively or beat us to market with new
products and services. Any of these competitive actions taken over any prolonged period could
diminish our revenue and profitability and could affect our ability to keep existing customers and
acquire new customers. Some additional competitive factors that may impact our businesses are
discussed below.
QuickBooks-Related. Losing existing or potential QuickBooks customers to competitors causes us to
lose potential software revenue and limits our opportunities to sell related products and services
such as our financial supplies, QuickBooks Payroll and merchant service offerings. Many
competitors provide accounting and business management products and services to small businesses.
For example, Microsoft has indicated that part of its growth strategy is to focus on small business
offerings. In September 2005 Microsoft launched a number of product and service offerings aimed
directly at small business customers. These include Microsoft Office Small Business Accounting,
which is available as a stand-alone offering or integrated with the Microsoft Office product suite.
In partnership with ADP, Microsoft also launched a payroll solution for small businesses.
Microsoft is collaborating with merchant acquiring institutions to offer credit and debit card
processing for Microsoft Office Small Business Accounting and with Deluxe to offer business checks,
forms, envelopes and related printed products. Accordingly, we expect that competition from
Microsoft in the small business area will intensify over time with the introduction of these and
other offerings that directly compete with our QuickBooks and other offerings. Although we have
successfully competed with Microsoft in the past, given its market position and resources,
Microsofts small business product and service offerings may have a significant negative impact on
our revenue and profitability.
Consumer Tax. Our consumer tax business faces significant competition from both the public and
private sector. In the public sector we face the risk of federal and state taxing authorities
developing or contracting to provide software or other systems to facilitate tax return preparation
and electronic filing at no charge to taxpayers.
| Federal Government. Agencies of the U.S. government have made several attempts during the two most recent presidential administrations to initiate a program to offer taxpayers free online tax preparation and filing services. However, in October 2002 the Internal Revenue Service agreed not to provide its own competing tax software product or service so long as participants in a consortium of private tax preparation software companies, including Intuit, agreed to provide web-based federal tax preparation and filing services at no cost to qualified taxpayers under an arrangement called the Free File Alliance. In October 2005 the federal government and the Free File Alliance signed a new four-year agreement that continues to restrict the Internal Revenue Service from entering the tax preparation business. In addition, this agreement specifies that the free services will be available to 70% of U.S. taxpayers, which the IRS currently defines as taxpayers with less than approximately $50,000 in adjusted gross income. The agreement also limits any individual participating company to free offerings that target no more than 50% of all taxpayers. Although, for the time being, the Free File Alliance has kept the federal government from being a direct competitor to our tax offerings, it has fostered additional web-based competition and has the potential to cause us to lose revenue opportunities for a large percentage of the tax base. Over time, a growing number of competitors have used the Free File Alliance as a marketing tool by giving away services at the federal level and attempting to make money by selling state filing and other services. In addition, persons who formerly have paid for our products may elect to use our unpaid federal offering instead. The federal government has the right to terminate the agreement with the Free File Alliance upon 24 months written notice. If the federal government were to terminate the agreement and elect to provide its own software and electronic filing services to taxpayers at no charge it could negatively impact our revenue and profits. |
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| State Governments. State taxing authorities have also actively pursued various strategies to provide free online tax return preparation and electronic filing services for state taxpayers. To date, 21 states have entered into agreements with the private sector based on the federal Free File Alliance agreement and have agreed not to provide direct state services. However, 22 other states, including California, directly offer their own online tax preparation and filing services to taxpayers. In addition, for the 2004 tax year, California tested a limited pilot program under which a state-operated electronic system automatically prepared and filed approximately 10,000 state income tax returns with no individual transaction charge to those taxpayers. Legislation enacted in the summer of 2005 limited the program to only a second year of the same limited pilot. The legislation mandated that any continuation of the program thereafter required further authorization from the California state legislature. In spite of this policy direction, this program could be expanded in the future. It is also possible that other governmental entities that currently do not offer such services could elect to pursue similar competitive offerings in the future. These publicly sponsored programs could cause us to lose customers to free offerings and enable competitors to gain market share at our expense by using participation in the free alliances as an effective tool to attract customers to ancillary paid offerings. Given the efficiencies that electronic tax filing provides to taxing authorities, we anticipate that governmental competition will present a continued competitive threat to our business for the foreseeable future. | ||
| Private Sector. In the private sector we face intense competition primarily from H&R Block, the makers of TaxCut software, and increasingly from web-based competitive offerings where we are subject to significant and increasing price pressure. We also compete for customers with low-cost assisted tax preparation businesses, such as H&R Block. |
Other Segments (Intuit-Branded Small Business, Professional Tax and Other Businesses). Our
professional tax offerings face pricing pressure from competitors seeking to obtain our customers
through deep product discounts and loss of customers to competitors offering no-frills offerings at
low prices, such as Kleinrock Publishings ATX product line. This business also faces competition
from competitively-priced tax and accounting solutions that include integration with non-tax
functionality. Our principal competitors in the outsourced payroll services business benefit from
greater economies of scale due to their substantial size, which may result in pricing pressure for
our offerings. In addition, in September 2005 Microsoft launched a payroll solution for small
businesses. The growth of electronic banking and other electronic payment systems is decreasing
the demand for checks and consequently causing pricing pressure for our supplies products as
competitors aggressively compete for share of this shrinking market. Our Quicken products compete
both with Microsoft Money, which is aggressively promoted and priced, and with web-based electronic
banking and personal finance tracking and management tools that are becoming increasingly available
at no cost to consumers. These competitive pressures may result in reduced revenue and lower
profitability for our Quicken product line and related bill payment service offering.
Future revenue growth for our core products depends upon our introduction of new and enhanced
products and services.
Our customer-driven invention and associated product development efforts are critical to our
success. The introduction of new offerings and product and service enhancements are necessary for
us to differentiate our offerings from those of our competitors and to motivate our existing
customers to purchase upgrades, or current year products in the case of our tax offerings. A
number of our businesses derive a significant amount of their revenue through one-time upfront
license fees and rely on customer upgrades and service offerings that include upgrades to generate
a significant portion of their revenues. As our existing products mature, encouraging customers to
purchase product upgrades becomes more challenging unless new product releases provide features and
functionality that have meaningful incremental value. If we are not able to develop and clearly
demonstrate the value of upgraded products to our customers, our upgrade and service revenues will
be negatively impacted. Similarly, our business will be harmed if we are not successful in our
efforts to develop and introduce new products and services to retain our existing customers, expand
our customer base and increase revenues per customer.
Our new product and service offerings may not achieve market success or may cannibalize sales of
our existing products, causing our revenue and earnings to decrease.
Our future success depends in large part upon our ability to identify emerging opportunities in our
target markets and our capacity to quickly develop, and sell products and services that satisfy
these demands in a cost effective manner. Successfully predicting demand trends is difficult, and
we may expend a significant amount of resources and management attention on products or services
that do not ultimately succeed in their markets. We have encountered difficulty in launching new
products and services in the past. For example, in 2004 we discontinued our QuickBooks Premier
Healthcare offering due to lack of customer demand. If we misjudge customer needs, our
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new products and services will not succeed and our revenues and earnings will be negatively
impacted. In addition, as we expand our offerings to new customer categories we run the risk of
customers shifting from higher priced and higher margin products to newly introduced lower priced
offerings. For instance, our new QuickBooks Simple Start offering and our new ProSeries Basic and
ProSeries Express offerings may attract users that would otherwise have purchased our higher
priced, more full featured offerings.
The nature of our products necessitates timely product launches and if we experience significant
product quality problems or delays, it will harm our revenue, earnings and reputation.
All of our tax products and many of our non-tax products have rigid development timetables that
increase the risk of errors in our products and the risk of launch delays. Many of our products
are highly complex and require interoperability with other software products and services. Our tax
preparation software product development cycle is particularly challenging due to the need to
incorporate unpredictable tax law and tax form changes each year and because our customers expect
high levels of accuracy and a timely launch of these products to prepare and file their taxes by
April 15th. Due to this complexity and the condensed development cycles under which we operate,
our products sometimes contain bugs that can unexpectedly interfere with the operation of the
software. For example, our software may face interoperability difficulties with software operating
systems or programs being used by our customers. When we encounter problems we may be required to
modify our code, distribute patches to customers who have already purchased the product and recall
or repackage existing product inventory in our distribution channels. If we encounter development
challenges or discover errors in our products late in our development cycle it may cause us to
delay our product launch date. Any major defects or launch delays could lead to the following:
| loss of customers to competitors, which could also deprive us of future revenue attributable to repeat purchases, product upgrades and purchases of related services; | ||
| negative publicity and damage to our brands; | ||
| customer dissatisfaction; | ||
| reduced retailer shelf space and product promotions; and | ||
| increased operating expenses, such as inventory replacement costs and in our Consumer Tax business, expenses resulting from our commitment to reimburse penalties and interest paid by customers due solely to calculation errors in our consumer tax preparation products. |
The growth of our business depends on our ability to adapt to rapid technological change.
The software industry in which we operate is characterized by rapidly changing technology, evolving
industry standards and frequent new product introductions and enhancements. Our Right for Me
marketing approach increases the importance for us of developing additional versions of our
products to meet specific customer needs. Our ability to succeed in this rapidly changing
environment requires that we continuously invest resources to enhance our software architecture and
developer tools. We must make this investment in order to continue to enhance our current products
and develop new products to meet changing customer needs and to attract and retain talented
software developers. We are currently in the process of modernizing the software platforms for a
number of our product lines, including our QuickBooks, TurboTax and Quicken products. Completing
these upgrades and adapting to other technological developments may require considerable time and
expense. If we experience prolonged delays or unforeseen difficulties in upgrading our software
architecture, our ability to develop new products and enhancements to our current products would
suffer.
If we fail to maintain reliable and responsive service levels for our electronic tax offerings, or
if the IRS or other governmental agencies experience difficulties in receiving customer
submissions, we could lose customers and our revenue and earnings could decrease.
Our web-based tax preparation services, electronic filing services and pay-as-you-go services are
an important and growing part of our tax businesses and must effectively handle extremely heavy
customer demand during the peak tax season from January to April. We face significant risks and
challenges in maintaining these services and maintaining adequate service levels, particularly
during peak volume service times. Similarly, governmental entities receiving electronic tax
filings must also handle large volumes of data and may experience difficulties with their systems
preventing the receipt of electronic filings. If customers are unable to file their returns
electronically they may elect to make paper filings. This would result in reduced electronic tax
return preparation and filing revenues and profits and would negatively impact our reputation and
ability to keep and attract customers who demand a reliable electronic filing experience. We have
experienced relatively brief unscheduled interruptions in our electronic filing and/or tax
preparation services during past tax years. For example, on April 15, 2003 we experienced a
relatively brief unscheduled interruption in our electronic filing service during which certain
users of our professional tax products were unable to receive confirmation from us that their
electronic filing had been
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accepted and on April 15, 2002 we reached maximum capacity for processing e-filings for a short
period of time. If we experience any prolonged difficulties with our web-based tax preparation or
electronic filing service at any time during the tax season, we could lose current and future
customers, receive negative publicity and incur increased operating costs, any of which could have
a significant negative impact on the financial and market success of these businesses and have a
negative impact on our near-term and long-term financial results.
If actual product returns exceed returns reserves, or if actual customer rebate redemptions exceed
rebate reserves, our financial results would be harmed.
We ship more desktop software products to our distributors and retailers than we expect them to
sell, in order to reduce the risk that distributors or retailers will run out of products. This is
particularly true for our Consumer Tax products, which have a short selling season and for which
returns occur primarily in our fiscal third and fourth quarters. Like many software companies that
sell their products through distributors and retailers, we have historically accepted significant
product returns. We establish reserves against revenue for product returns in our financial
statements, based on estimated future returns of products. We closely monitor levels of product
sales and inventory in the retail channel in an effort to maintain reserves that are adequate to
cover expected returns. In the past, returns have not generally exceeded these reserves. However,
if we do experience actual returns that significantly exceed reserves, it would result in lower net
revenue. For example, if we had increased our fiscal 2005 returns reserves by 1% of
non-consignment sales to retailers for QuickBooks, TurboTax and Quicken, our fiscal 2005 total net
revenue would have been approximately $3.6 million lower. In addition, our policy of recognizing
revenue from distributors and retailers upon delivery of product for non-consignment sales is
predicated upon our ability to reasonably estimate returns. If we do not continue to demonstrate
our ability to estimate returns then our revenue recognition policy for these types of sales may no
longer be appropriate. We also offer customer rebates as part of our selling efforts and establish
reserves through a charge to revenue for estimated future payments of rebates. Historically, a
percentage of customers do not submit requests for their rebates. Rebate redemption rates are
going up because we, along with certain retailers, are making it easier for customers to claim
rebates. While we have taken this trend into account in determining our rebate reserves, if a
greater number of eligible customers seek rebates than for which we have provided reserves our
margins will be adversely affected.
Changes in pricing and rebate practices may not be positively received by retail channel partners
or consumers.
We have recently modified pricing and eliminated rebates on certain products that have historically
been offered with rebates, and we may elect to expand this practice to other products in the
future. These changes to date have generally involved a reduction in list price of less than the
face value of the rebate, and elimination of the rebate offer. While we have discussed these
changes with our retail channel partners, our partners and consumers may have grown accustomed to
rebate-based offers and may view this change as a net price increase. There can be no assurance
that these changes will be received positively by our retail channel partners or consumers. If
these changes are received negatively by either, our revenues could be adversely impacted.
We may not be able to successfully implement our new TurboTax refund bonus program.
In November 2005 we announced a new offering in connection with our TurboTax product that allows
customers to convert all or a portion of their federal tax refunds into gift cards with a greater
dollar value than the tax refunds. This program could create several new risks for our business,
any of which could harm our financial condition and results of operations. For example, systems
used by Intuit or our third-party vendors may be unable to process the volume of refund bonuses or
fulfill the gift card issuances under this program. This program may subject us to other risks
related to cash management and card security, including the risk of loss or theft of gift cards,
and to additional laws and regulations related to the distribution of gift cards. Because this new
business model is untested, we may not be able to execute successfully, which could harm our
financial condition and results of operations.
We are continuing to enhance our new information systems, which we use to manage our business and
finance operations, and problems with the design or implementation of these enhancements could
interfere with our business and operations.
In September 2004 we implemented new information systems that manage our business and finance
operations. During the course of the conversion we upgraded significant financial systems,
order-taking systems, middleware systems (systems that allow for interoperability of different
databases) and network security systems. While we were able to complete the processing
requirements of our peak business season in fiscal 2005, we experienced some system-related
slowdowns. Consequently, we believe that we need to continue to enhance and upgrade the systems to
improve performance and support our future growth. In the event that we are unable to expand the
capabilities of
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our systems, our ability to grow our business will be limited. The expenditures associated with the
expansion and upgrade of our systems could be significant. Problems with the design or
implementation of these system enhancements could adversely impact our ability to do the following
in a timely and accurate manner: take customer orders, ship products, provide services and support
to our customers, bill and track our customers, fulfill contractual obligations and otherwise run
our business.
Our revenue and earnings are highly seasonal and our quarterly results fluctuate significantly.
Several of our businesses are highly seasonal causing significant quarterly fluctuations in our
financial results. Revenue and operating results are usually strongest during the second and third
fiscal quarters ending January 31 and April 30 due to our tax businesses contributing most of their
revenue during those quarters and the timing of the release of our small business software
upgrades. We experience lower revenues, and significant operating losses, in the first and fourth
quarters ending October 31 and July 31. For example, in the second and third quarters of fiscal
2004 and 2005 we had total net revenue of between $620.6 million and $834.9 million while in our
first and fourth fiscal quarters we had total net revenue of between $227.1 million and $301.8
million. Our financial results can also fluctuate from quarter to quarter and year to year due to
a variety of factors, including changes in product sales mix that affect average selling prices,
product release dates, the timing of our discontinuance of support for older product offerings, the
timing of sales of our higher-priced Intuit-Branded Small Business offerings, our methods for
distributing our products, including the shift to a consignment model for some of our desktop
products sold through retail distribution channels, the inclusion of upgrades with certain
offerings (which can impact the pattern of revenue recognition), and the timing of acquisitions,
divestitures, and goodwill and purchased intangible asset impairment charges.
As our product and service offerings become more complex our revenue streams may become less
predictable.
Our expanding range of products and services generates more varied revenue streams than our
traditional desktop software businesses. The accounting policies that apply to these revenue
streams are more complex than those that apply to our traditional products and services. We expect
this trend to continue as we acquire additional companies and expand our offerings. For example,
as we begin to offer additional features and options as part of multiple-element revenue
arrangements, we could be required to defer a higher percentage of our product revenue at the time
of sale than we do for traditional products. This would decrease recognized revenue at the time
products are shipped, but result in increased recognized revenue in fiscal periods after shipment.
Acquisition-related costs and impairment charges can cause significant fluctuation in our net
income.
Our acquisitions have resulted in significant expenses, including amortization of purchased
intangible assets (which is reflected in cost of revenue), as well as charges for in-process
research and development, impairment of goodwill, amortization and impairment of purchased
intangible assets and charges for deferred compensation (which are reflected in operating
expenses). Total acquisition-related costs in the categories identified above were $26.8 million
in fiscal 2005, $33.6 million in fiscal 2004 and $45.1 million in fiscal 2003. Although under
current accounting rules goodwill is no longer amortized, we may incur impairment charges related
to the goodwill already recorded and to goodwill arising out of future acquisitions. We test the
impairment of goodwill annually in our fourth fiscal quarter or more frequently if indicators of
impairment arise. The timing of the formal annual test may result in charges to our statement of
operations in our fourth fiscal quarter that could not have been reasonably foreseen in prior
periods. For example, at the end of fiscal 2004 we incurred a goodwill impairment charge of $18.7
million related to our Intuit Public Sector Solutions business. At January 31, 2006, we had
goodwill of $529.8 million and unamortized purchased intangible assets of $67.3 million on our
balance sheet, both of which could be subject to impairment charges in the future. New
acquisitions, and any impairment of the value of purchased assets, could have a significant
negative impact on our future operating results.
If we do not respond promptly and effectively to customer service and technical support inquiries
we will lose customers and our revenue and earnings will decline.
The effectiveness of our customer service and technical support operations are critical to customer
satisfaction and our financial success. If we do not respond effectively to service and technical
support requests we will lose customers and miss revenue opportunities, such as paid service,
product renewals and new product sales. In our service offerings, such as our merchant card
processing and Outsourced Payroll businesses, customer service delivery is fundamental to retaining
and maintaining existing customers and acquiring new customers. We occasionally experience
customer service and technical support problems, including longer than expected waiting times for
customers when our staffing and systems are inadequate to handle a higher-than-anticipated volume
of
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requests. We also risk losing service at any one of our customer contact centers and our
redundancy systems could prove inadequate to provide backup support. Training and retaining
qualified customer service and technical support personnel is particularly challenging due to the
expansion of our product offerings and the seasonality of our tax business. For example, in fiscal
2005 the number of our consumer tax service representatives ranged from 15 during off-season months
to about 715 at the peak of the season. If we do not adequately train our support representatives
our customers will not receive the level of support that they demand and we strive to deliver. To
improve our performance in this area, we must eliminate underlying causes of service and support
requests through product improvements, better order fulfillment processes, more robust self-help
tools, and improved ability to accurately anticipate demand for support. Implementing any of these
improvements can be expensive, time consuming and ultimately prove unsuccessful. If we do not
deliver the high level of support that our customers expect for any of the reasons stated above we
will lose customers and our financial results will suffer.
If we encounter problems with our third-party customer service and technical support providers our
business will be harmed and our margins will decline.
We outsource a substantial portion of our customer service and technical support activities to
domestic and international third-party service providers, including to service providers in India.
During fiscal 2004 we greatly increased the number of third-party customer service representatives
working on our behalf and we expect to continue to rely heavily on third parties in the future.
This strategy provides us with lower operating costs and greater flexibility, but also presents
risks to our business, including the following:
| International outsourcing has received considerable negative attention in the media and there are indications that the U.S. Congress may pass legislation that would impact how we operate and impact customer perceptions of our service. For example, in Congress legislators have discussed restricting the flow of personal information to overseas providers and requiring representatives in foreign jurisdictions to affirmatively identify themselves by name and location; | ||
| Customers may react negatively to providing information to and receiving support from overseas organizations; | ||
| We may not be able to impact the quality of support that we provide as directly as we are able to in our company-run call centers; | ||
| In recent years India has experienced political instability and changing policies that may impact our operations. In addition, for a number of years India and Pakistan have been in conflict and an active state of war between the two countries could disrupt our services; and | ||
| We rely on a global communications infrastructure that may be interrupted in a number of ways. For example, in fiscal 2004 we had to reroute calls to India due to an underwater cable being cut in the Mediterranean Sea. |
We depend upon a small number of larger retailers to generate a significant portion of our sales
volume for our desktop software products.
We sell most of our desktop software products through our retail distribution channel and a
relatively small number of larger retailers generate a significant portion of our sales volume.
Our principal retailers have significant bargaining leverage due to their size and available
resources. Any change in principal business terms, termination or major disruption of our
relationship with these resellers could result in a potentially significant decline in our revenues
and earnings. For example, the sourcing decisions, product display locations and promotional
activities that retailers undertake can greatly impact the sales of our products. Due to its
seasonal nature, sales of TurboTax are particularly impacted by such decisions and if our principal
distribution sources were to elect to carry or promote competitive products our revenues would
decline. The fact that we also sell our products directly could cause retailers to reduce their
efforts to promote our products or stop selling our products altogether. If any of our retailers
run into financial difficulties we may be unable to collect amounts that we are owed. At January
31, 2006, in the midst of the 2005 consumer tax season, amounts due from our eight largest
retailers and distributors represented approximately 47% of total accounts receivable.
Selling new products may be more challenging and costlier than selling our historical products,
causing our margins to decline.
Because our strategy for some of our products involves the routine introduction of new products at
retail, if retailers do not offer our new products we will not be able to grow as planned. An
outcome of our Right for Me marketing approach is the introduction of additional versions of our
products. Retailers may be reluctant to stock unproven products, or products that sell at higher
prices, but more slowly. Retailers may also choose to place less emphasis on software as a
category within their stores. In addition, it may be costlier for us to market and sell some of
our higher
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priced products due to our need to convey the more customer-specific value of the products to
customers rather than communicating more generalized benefits. This may require us to develop
other marketing programs that supplement our traditional in-store promotional efforts to sell these
products to customers causing our margins to shrink. If retail distribution proves an ineffective
channel for certain of our new offerings it could adversely impact our growth, revenue and
profitability.
If our manufacturing and distribution suppliers execute poorly our business will be harmed.
We have chosen to outsource the manufacturing and distribution of many of our desktop software
products to a small number of third party providers and we use a single vendor to produce and
distribute our check and business forms supplies products. Although our reliance on a small number
of suppliers, or a single supplier, provides us with efficiencies and enhanced bargaining power,
poor performance by or lack of effective communication with these parties can significantly harm
our business. This risk is amplified by the fact that we carry very little inventory and rely on
just-in-time manufacturing processes. We mitigate this risk by managing our second tier vendors
and maintaining contingency plans. We have experienced problems with our suppliers in the past.
For example, during fiscal 2004 one of our suppliers was unable to fulfill orders for some of our
software products for a number of days due to operational difficulties and communication errors.
Although together we were able to mitigate the impact of that delay with minimal disruption to our
business, if we experience longer delays, delays during a peak demand period or significant quality
issues our business could be significantly harmed.
Failure to maintain the availability and security of the systems, networks, databases and software
required to operate and deliver our Internet-based products and services could adversely affect our
operating results.
Our Internet-based product and service offerings, including QuickBooks Online Edition, QuickBooks
Assisted Payroll Service, Complete web-based Payroll, Turbo Tax for the Web, consumer and
professional electronic tax filing services, Quicken.com and QuickBase, rely on a variety of
systems, networks and databases, many of which are maintained by us at our data centers. In order
to prevent interruptions to the availability of our Internet-based products and services, we
generally follow industry-standard practices for creating a fault-tolerant environment. However,
we do not have complete redundancy for all of our systems. We do not maintain real-time back-up of
our data, and in the event of significant system disruption, particularly during peak tax filing
season, we could experience loss of data or tax return processing capabilities, which could cause
us to lose customers and could materially harm our operating results. We maintain back-up
processing capabilities that are designed to protect us against site-related disasters for many of
our mission-critical applications. Notwithstanding our efforts to protect against down time for
our Internet-based products and services, we do occasionally experience unplanned outages or
technical difficulties. In order to provide our Internet-based products and services, we must
protect the security of our systems, networks, databases and software.
Like all companies that deliver products and services via the Internet, we are subject to attack by
computer hackers who develop and deploy software that is designed to penetrate the security of our
systems and networks. If hackers were able to penetrate our security systems, they could
misappropriate or damage our proprietary information or cause disruptions in the delivery of our
products and services. We believe that we have taken steps to protect against such attacks.
However, there can be no assurance that our security measures will not be penetrated by experienced
hackers. In the event that the systems, networks, databases and software required to deliver our
Internet-based products and services become unavailable or suffer technical difficulties or a
breach in security, we may be required to expend significant resources to alleviate these problems,
and our operating results could suffer. In addition, any such interruption or breach of security
could damage our reputation and lead to the loss of customers.
Failure of our information technology systems or those of our service providers could adversely
affect our future operating results.
We rely on a variety of internal technology systems and technology systems maintained by our
outside manufacturing and distribution suppliers to take and fulfill customer orders, handle
customer service requests, host our web-based activities, support internal operations, and store
customer and company data. These systems could be damaged or interrupted, preventing us or our
service providers from accepting and fulfilling customer orders or otherwise interrupting our
business. In addition, these systems could suffer security breaches, causing company and customer
data to be unintentionally disclosed. Any of these occurrences could adversely impact our
operations. We have experienced system challenges in the past. For example, during fiscal 2004
some of our non-critical systems were interrupted due to computer viruses that caused loss of
productivity and added expense. We also experience computer server failures from time to time. To
prevent interruptions we must continually upgrade our systems and
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processes to ensure that we have adequate recoverability both of which are costly and time
consuming. While we and our outside service partners have backup systems for certain aspects of
our operations, not all systems upon which we rely are fully redundant and disaster recovery
planning may not be sufficient for all eventualities.
Possession and use of personal customer information by our businesses presents risks and expenses
that could harm our business.
A number of our businesses possess personal customer information, including credit card numbers.
We use commercially available encryption technology to transmit customer information when orders
are placed over the Internet. However, a third party may be able to circumvent these security
measures or errors may occur in the storage or transmission of this data that could result in a
breach of customer privacy. Possession and use of personal customer information in conducting our
business subjects us to regulatory burdens and potential lawsuits. We have incurred and will
continue to incur significant expenses to comply with mandatory privacy and security standards
and protocols imposed by law, regulation, industry standards or contractual obligations.
In the past we have experienced lawsuits and negative publicity relating to privacy issues and we
could face similar suits in the future. A major breach of customer privacy or security could have
serious negative consequences for our businesses, including possible fines, penalties and damages,
reduced customer demand for our services, harm to our reputation, further regulation and oversight
by federal or state agencies, and loss of our ability to accept and process customer credit card
orders. Although we have sophisticated network security, internal control measures, and physical
security procedures to safeguard customer information, there can be no assurance that a data
security breach or theft will not occur resulting in harm to our business and results of
operations.
We are exposed to risks associated with credit card fraud and credit card processing and payment.
Many of our customers use credit cards to pay for our services. We have suffered losses, and may
continue to suffer losses, as a result of orders placed with fraudulent credit card data. Under
current credit card practices, we may be liable for fraudulent credit card transactions if we do
not obtain a cardholders signature, a frequent practice in Internet sales. We employ technology
solutions to help us detect fraudulent credit card transactions. However, the failure to detect or
control credit card fraud could have an adverse effect on our results of operations.
If we fail to adequately protect our intellectual property rights, competitors may exploit our
innovations, which could weaken our competitive position and reduce our revenue and earnings.
Our success depends upon our proprietary technology. We rely on a combination of copyright, trade
secret, trademark, patent, confidentiality procedures and licensing arrangements to establish and
protect our proprietary rights. As part of our confidentiality procedures, we generally enter into
non-disclosure agreements with our employees, contractors, distributors and corporate partners and
into license agreements with respect to our software, documentation and other proprietary
information. Effectively creating and protecting our proprietary rights is expensive and may
require us to engage in costly and distracting litigation. Despite these precautions, third
parties could copy or otherwise obtain and use our products or technology without authorization.
Because we outsource significant aspects of our product development, manufacturing and distribution
we are at risk that confidential portions of our intellectual property could become public by
lapses in security by our contractors. We have licensed in the past, and expect to license in the
future, certain of our proprietary rights, such as trademarks or copyrighted material, to others.
These licensees may take actions that diminish the value of our proprietary rights or harm our
reputation. It is also possible that other companies could successfully challenge the validity or
scope of our patents and that our patent portfolio, which is relatively small, may not provide us
with a meaningful competitive advantage. Ultimately, our attempts to secure legal protection for
our proprietary rights may not be adequate and our competitors could independently develop similar
technologies, duplicate our products, or design around patents and other intellectual property
rights. If our intellectual property protection proves inadequate we could lose our competitive
advantage and our financial results will suffer.
We expect copying and misuse of our intellectual property to be a persistent problem causing lost
revenue and increased expenses.
Our intellectual property rights are among our most valuable assets. Policing unauthorized use and
copying of our products is difficult, expensive, and time consuming. Current U.S. laws that
prohibit copying give us only limited practical protection from software piracy and the laws of
many other countries provide very little protection. We may not be able to prevent
misappropriation of our technology. For example, we frequently encounter unauthorized copies of
our software being sold through online auction sites and other online marketplaces. In addition,
efforts to
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protect our intellectual property may be misunderstood and perceived negatively by our customers.
For example, during 2003 we employed technology to prohibit unauthorized sharing of our TurboTax
products. These efforts were not effectively communicated causing a negative reaction by some of
our customers who misunderstood our actions. Although we continue to evaluate technology solutions
to piracy, and we continue to increase our civil and criminal enforcement efforts, we expect piracy
to be a persistent problem that results in lost revenues and increased expenses.
Although we are unable to quantify the extent of piracy of our software products, software piracy
may depress our net revenues. We engage in efforts to educate consumers on the benefits of
licensing genuine products and to educate lawmakers on the advantages of a business climate where
intellectual property rights are protected, and we cooperate with the Software & Information
Industry Association in their efforts to combat piracy. However, these efforts may not
affect the piracy of our products.
We do not own all of the software, other technologies and content used in our products and
services.
Many of our products are designed to include intellectual property owned by third parties. We
believe we have all of the necessary licenses from third parties to use and distribute third party
technology and content that we do not own that is used in our current products and services. From
time to time we may be required to renegotiate with these third parties or negotiate with new
third parties to include their technology or content in our existing products, in new versions of
our existing products or in wholly new products. We may not be able to negotiate or renegotiate
licenses on reasonable terms, or at all. If we are unable to obtain the rights necessary to use or
continue to use third-party technology or content in our products and services, we may not be able
to sell the affected products, which would in turn have a negative impact on our revenue and
operating results.
Third parties claiming that we infringe their proprietary rights could cause us to incur
significant legal expenses and prevent us from selling our products.
From time to time, we have received claims that we have infringed the intellectual property rights
of others. As the number of products in the software industry increases and the functionality of
these products further overlap, and as we acquire technology through acquisitions or licenses, we
believe that we may become increasingly subject to infringement claims, including patent,
copyright, and trademark infringement claims. We expect that software products in general will
increasingly be subject to these claims as the number of products and competitors increase, the
functionality of products overlap and as the patenting of software functionality continues to grow.
We have, from time to time, received allegations of patent infringement claims in the past and may
receive more claims in the future based on allegations that our products infringe upon patents held
by third parties. The receipt of a notice alleging infringement may require us to obtain a costly
opinion of counsel to prevent an allegation of intentional infringement. Future claims could
present an exposure of uncertain magnitude. We believe that we would be able to obtain any
necessary licenses or other rights to disputed intellectual property rights on commercially
reasonable terms. However, the ultimate outcome of any allegation is uncertain and, regardless of
outcome, any such claim, with or without merit, could be time consuming to defend, result in costly
litigation, divert managements time and attention from our business, require us to stop selling,
to delay shipping or to redesign our products, or require us to pay monetary damages for royalty or
licensing arrangements, or to satisfy indemnification obligations that we have with some of our
customers. Our failure to obtain necessary license or other rights, or litigation arising out of
intellectual property claims could adversely affect our business.
In addition, we license and use software from third parties in our business. These third party
software licenses may not continue to be available to us on acceptable terms. Also, these third
parties may from time to time receive claims that they have infringed the intellectual property
rights of others, including patent and copyright infringement claims, which may affect our ability
to continue licensing their software. Our inability to use any of this third party software could
result in shipment delays or other disruptions in our business, which could materially and
adversely affect our operating results.
Our acquisition activity could disrupt our ongoing business and may present risks not contemplated
at the time of the transactions.
We have acquired and may continue to acquire companies, products and technologies that complement
our strategic direction. These acquisitions may involve significant risks and uncertainties,
including:
| inability to successfully integrate the acquired technology and operations into our business and maintain uniform standards, controls, policies, and procedures; | ||
| distraction of managements attention away from normal business operations; |
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| challenges retaining the key employees of the acquired operation; | ||
| insufficient revenue generation to offset liabilities assumed; | ||
| expenses associated with the acquisition; and | ||
| unidentified issues not discovered in our due diligence process, including product quality issues and legal contingencies. |
Acquisitions are inherently risky. We can not be certain that our previous or future acquisitions
will be successful and will not materially adversely affect the conduct, operating results or
financial condition of our business. We have generally paid cash for our recent acquisitions. If
we issue common stock or other equity related purchase rights as consideration in an acquisition,
current shareholders percentage ownership and earnings per share may become diluted.
If we fail to operate our Outsourced Payroll business effectively our revenue and earnings will be
harmed.
Our payroll business handles a significant amount of dollar and transaction volume. Due to the
size and volume of transactions that we handle effective processing systems and controls are
essential to ensure that transactions are handled appropriately. Despite our efforts, it is
possible that we may make errors or that funds may be misappropriated. In addition to any direct
damages and fines that any such problems would create, which could be substantial, the loss of
customer confidence in our accuracy and controls would seriously harm our business. Our payroll
business has grown largely through acquisitions and our systems are comprised of multiple
technology platforms that are difficult to scale. We must constantly continue to upgrade our
systems and processes to ensure that we process customer data in an accurate, reliable and timely
manner. These upgrades must also meet the various regulatory requirements and deadlines associated
with employer-related payroll activities. Any failure of our systems or processes in critical
switch-over times, such as in January when many businesses elect to change payroll service
providers, would be detrimental to our business. If we failed to timely deliver any of our payroll
products, it could cause our current and prospective customers to choose a competitors product for
that years payroll and not to purchase Intuit products in the future. To generate sustained
growth in our payroll business we must successfully develop and manage a more proactive inside and
field sales operation. If these efforts are not successful our revenue growth and profitability
will decline.
Interest income attributable to payroll customer deposits may fluctuate or be eliminated, causing
our revenue and earnings to decline.
We currently record revenue from interest earned on customer deposits that we hold pending payment
of funds to taxing authorities or to customers employees. If interest rates decline, or there are
regulatory changes that diminish the amount of time that we are required or permitted to hold such
funds, our interest revenue will decline.
We face a number of risks in our merchant card processing business that could result in a reduction
in our revenue and earnings.
Our merchant card processing service business is subject to the following risks:
| if merchants for whom we process credit card transactions are unable to pay refunds due to their customers in connection with disputed or fraudulent merchant transactions we may be required to pay those amounts and our payments may exceed the amount of the customer reserves we have established to make such payments; | ||
| we will not be able to conduct our business if the bank sponsors and card payment processors and other service providers that we rely on to process bank card transactions terminate their relationships with us and we are not able to secure or successfully migrate our business elsewhere; | ||
| we could be required to stop providing payment processing services for Visa and MasterCard if we or our bank sponsors fail to adhere to the standards of the Visa and MasterCard credit card associations; | ||
| we depend on independent sales organizations, some of which do not serve us exclusively, to acquire and retain merchant accounts; | ||
| our profit margins will be reduced if for competitive reasons we cannot increase our fees at times when Visa and MasterCard increase the fees that we pay to process merchant transactions through their systems; | ||
| unauthorized disclosure of merchant and cardholder data, whether through breach of our computer systems or otherwise, could expose us to protracted and costly litigation; and | ||
| we may encounter difficulties scaling our business systems to support our growth. |
Should any of these risks be realized our business could be harmed and our financial results will
suffer.
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Increased state tax filing mandates, such as the required use of specific technologies, could
significantly increase our costs.
We are required to comply with a variety of state revenue agency standards in order to successfully
operate our tax preparation and electronic filing services. Changes in state-imposed requirements
by one or more of the states, including the required use of specific technologies or technology
standards, could significantly increase the costs of providing those services to our customers and
could prevent us from delivering a quality product to our customers in a timely manner.
We may be unable to attract and retain key personnel.
Much of our future success depends on the continued service and availability of skilled personnel,
including members of our executive team, and those in technical, marketing and staff positions.
Experienced personnel in the software and services industries are in high demand and competition
for their talents is intense, especially in Silicon Valley and San Diego, California, where the
majority of our employees are located. Although we strive to be an employer of choice, we may not
be able to continue to successfully attract and retain key personnel which would cause our business
to suffer.
Our insurance policies are costly, may be inadequate and potentially expose us to unrecoverable
risks.
Insurance availability, coverage terms and pricing continue to vary with market conditions. We
endeavor to obtain appropriate insurance coverage for insurable risks that we identify, however, we
may fail to correctly anticipate or quantify insurable risks, we may not be able to obtain
appropriate insurance coverage, and insurers may not respond as we intend to cover insurable events
that may occur. We have observed rapidly changing conditions in the insurance markets relating to
nearly all areas of traditional corporate insurance. Such conditions have resulted in higher
premium costs, higher policy deductibles, and lower coverage limits. For some risks, because of
cost or availability, we do not have insurance coverage. For these reasons, we are retaining a
greater portion of insurable risks than we have in the past at relatively greater cost.
We are frequently a party to litigation that is costly to defend and consumes the time of our
management.
Due to our financial position and the large number of customers that we serve we are often forced
to defend litigation. For example, we are currently being sued in an action for claims related to
Quicken Brokerage powered by Siebert, a strategic alliance between the two companies. Although we
believe that this case has no merit and we are defending the matter vigorously, defending such
matters consumes the time of our management and is expensive for Intuit. Even though we often seek
insurance coverage for litigation defense costs, there is no assurance that our defense costs,
which can be substantial, will be covered in all cases. In addition, by its nature, litigation is
unpredictable and we may not prevail even in cases where we strongly believe a plaintiffs case has
no valid claims. If we do not prevail in litigation we may be required to pay substantial monetary
damages or alter our business operations. Regardless of the outcome, litigation is expensive and
consumes the time of our management and may ultimately reduce our income.
Unanticipated changes in our tax rates could affect our future financial results.
Our future effective tax rates could be favorably or unfavorably affected by unanticipated changes
in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or their
interpretation. In addition, we are subject to the continuous examination of our income tax
returns by the Internal Revenue Service and other tax authorities. We regularly assess the
likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our
provision for income taxes. There can be no assurance that the outcomes from these continuous
examinations will not have an adverse effect on our operating results and financial condition.
Our stock price may be volatile.
Our stock has at times experienced substantial price volatility as a result of variations between
our actual and anticipated financial results and as a result of our announcements and those of our
competitors. In addition, the stock market has experienced extreme price and volume fluctuations
that have affected the market price of many technology companies in ways that have been unrelated
to the operating performance of these companies. These factors, as well as general economic and
political conditions, may materially adversely affect the market price of our stock in the future.
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If we fail to maintain an effective system of internal controls, we may not be able to detect fraud
or report our financial results accurately, which could harm our business and the trading price of
our common stock.
Effective internal controls are necessary for us to provide reliable financial reports and to
detect and prevent fraud. We periodically assess our system of internal controls, and the internal
controls of service providers upon which we rely, to review their effectiveness and identify
potential areas of improvement. These assessments may conclude that enhancements, modifications or
changes to our system of internal controls are necessary. In addition, from time to time we
acquire businesses, many of which have limited infrastructure and systems of internal controls.
Performing assessments of internal controls, implementing necessary changes, and maintaining an
effective internal controls process is expensive and requires considerable management attention,
particularly in the case of newly acquired entities. Internal control systems are designed in part
upon assumptions about the likelihood of future events, and all such systems, however well designed
and operated, can provide only reasonable, and not absolute, assurance that the objectives of the
system are met. Because of these and other inherent limitations of control systems, there can be
no assurance that any design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote. If we fail to implement and maintain an effective system of
internal controls or prevent fraud, we could suffer losses, could be subject to costly litigation,
investors could lose confidence in our reported financial information and our brand and operating
results could be harmed, which could have a negative effect on the trading price of our common
stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act, we and our independent registered public
accounting firm must certify the adequacy of our internal controls over financial reporting
annually. Identification of material weaknesses in internal controls over financial reporting by us
or our independent registered public accounting firm could adversely affect our competitive
position in our business, especially our Outsourced Payroll business, and the market price for our
common stock.
Business interruptions could adversely affect our future operating results.
Several of our major business operations are subject to interruption by earthquake, fire, power
shortages, terrorist attacks and other hostile acts, and other events beyond our control. The
majority of our research and development activities, our corporate headquarters, our principal
information technology systems, and other critical business operations are located near major
seismic faults. We do not carry earthquake insurance for direct quake-related losses. While we
maintain disaster recovery facilities for key data centers that support the information systems,
networks and databases that are necessary to operate our business, we are still in the process of
establishing disaster recovery facilities for some of our data centers. Our operating results and
financial condition could be materially adversely affected in the event of a major earthquake or
other natural or man-made disaster.
Caution Regarding Forward-Looking Statements
This Report contains forward-looking statements. All statements in this Report, other than
statements that are purely historical, are forward-looking statements. Words such as expects,
anticipates, intends, plans, believes, forecasts, estimates, seeks, 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; the assumptions underlying our Critical Accounting Policies, including
our estimates regarding product rebate and return reserves and stock volatility and other
assumptions used to estimate the fair value of share-based compensation; our expected future
amortization of purchased intangible assets; our expectation that we will continue to repurchase
shares under our stock repurchase programs during the remainder of fiscal 2006; our expectations
regarding competition and our ability to compete effectively; our expectations regarding revenue
growth rates in third quarter of fiscal 2006; our belief that more Professional Tax revenue is
shifting from our second quarter to our third quarter; all statements relating to guidance,
including our expectation that we will achieve our full year fiscal 2006 guidance; our belief that
the investments that we hold are not other-than-temporarily impaired; our belief that we will be
able to obtain any necessary licenses or other rights to any disputed intellectual property rights
on commercially reasonable terms; our belief that our exposure to currency exchange fluctuation
risk will not be significant in the future; our belief that our income tax valuation allowance is
sufficient; our belief that our cash, cash equivalents and investments will be sufficient to meet
our working capital and capital expenditure requirements for the next 12 months; our expectations
regarding research and development efforts and expenses and the introduction of new or upgraded
products and related services and features; our expectations regarding the growth opportunities for
our business; our assessments and estimates that determine our effective tax rate; our assessments
and beliefs regarding the future outcome of pending legal proceedings and the
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liability, if any, that Intuit may incur as a result of those proceedings; and the expected effects
of the adoption of new accounting standards.
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. Because these
forward-looking statements involve risks and uncertainties that are difficult to predict, there are
important factors that could cause our actual results to differ materially from those expressed or
implied by the forward-looking statements. These factors include those discussed in this Item 2
under the caption Risks That Could Affect Future Results. We encourage you to read that section
carefully along with the other information provided in this Report, in our Annual Report on Form
10-K for the fiscal year ended July 31, 2005 and in our other filings with the SEC 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 Report, and we undertake no obligation to
revise or update any forward-looking statement for any reason.
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ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment and Funds Held for Payroll Customers Portfolio
We do not hold derivative financial instruments in our portfolio of investments and funds held for
payroll customers. Our investments and funds held for payroll customers consist of instruments that
meet quality standards consistent with our investment policy. This policy specifies that, except
for direct obligations of the United States government, securities issued by agencies of the United
States government, and money market or cash management funds, we diversify our holdings by limiting
our investments and funds held for payroll customers with any individual issuer.
Interest Rate Risk
Our cash equivalents and our portfolio of investments and funds held for payroll customers are
subject to market risk due to changes in interest rates. Interest rate movements affect the
interest income we earn on cash equivalents, investments and funds held for payroll customers and
the value of those investments. Should interest rates increase by 10% or about 30 basis points from
the levels of January 31, 2006, the value of our investments and funds held for payroll customers
would decline by approximately $0.6 million. Should interest rates increase by 100 basis points
from the levels of January 31, 2006, the value of our investments and funds held for payroll
customers would decline by approximately $2.0 million.
Impact of Foreign Currency Rate Changes
The functional currency of our international operating subsidiaries is the local currency. Assets
and liabilities of our foreign subsidiaries are translated at the exchange rate on the balance
sheet date. Revenue, costs and expenses are translated at average rates of exchange in effect
during the period. We report translation gains and losses as a separate component of stockholders
equity. We include net gains and losses resulting from foreign exchange transactions on our
statement of operations.
Since we translate foreign currencies (primarily Canadian dollars and British pounds) into U.S
dollars for financial reporting purposes, currency fluctuations can have an impact on our financial
results. The historical impact of currency fluctuations on our financial results has generally been
immaterial. We believe that our exposure to currency exchange fluctuation risk is not significant
primarily because our international subsidiaries invoice customers and satisfy their financial
obligations almost exclusively in their local currencies. Although the impact of currency
fluctuations on our financial results has generally been immaterial in the past and we believe that
for the reasons cited above currency fluctuations will not be significant in the future, there can
be no guarantee that the impact of currency fluctuations will not be material in the future. As of
January 31, 2006, we did not engage in foreign currency hedging activities.
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ITEM 4
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based upon an evaluation of the effectiveness of disclosure controls and procedures, Intuits Chief
Executive Officer (CEO) and Chief Financial Officer (CFO) have concluded that as of the end of the
period covered by this Quarterly Report on Form 10-Q our disclosure controls and procedures (as
defined in Exchange Act Rule 13a-15(e) or 15d-15(e)) were effective to provide reasonable assurance
that information required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified by the rules and forms of the Securities
and Exchange Commission and is accumulated and communicated to management, including the CEO and
CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During our most recent fiscal quarter, there has not occurred any change in our internal control
over financial reporting that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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PART II
ITEM 1
LEGAL PROCEEDINGS
Muriel Siebert & Co., Inc. v. Intuit Inc., Index No. 03-602942, Supreme Court of the State of New
York, County of New York.
On September 17, 2003 Muriel Siebert & Co., Inc. filed a complaint against Intuit alleging various
claims for breach of contract, breach of express and implied covenants of good faith and fair
dealing, breach of fiduciary duty, misrepresentation and/or fraud, and promissory estoppel. The
allegations relate to Quicken Brokerage powered by Siebert, a strategic alliance between the two
companies. The complaint seeks compensatory damages of up to $11.1 million, punitive damages of up
to $33.0 million, and other damages. Intuit unsuccessfully sought to compel the matter to
arbitration. On February 7, 2005 Intuit filed a motion to dismiss all but one of the plaintiffs
claims in New York state court. On September 6, 2005, the court dismissed Sieberts fraud and
punitive damages claims. The case is now stayed pending appellate review by the Appellate Division
of the New York Supreme Court of certain procedural issues in the case. Intuit believes this
lawsuit is without merit and will vigorously defend the litigation.
Other Litigation Matters
Intuit is subject to certain routine legal proceedings, as well as demands, claims and threatened
litigation, that arise in the normal course of our business, including assertions that we may be
infringing patents or other intellectual property rights of others. We currently believe that the
ultimate amount of liability, if any, for any pending claims of any type (either alone or combined)
will not materially affect our financial position, results of operations or cash flows. We also
believe that we would be able to obtain any necessary licenses or other rights to disputed
intellectual property rights on commercially reasonable terms. However, the ultimate outcome of any
litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on Intuit
because of defense costs, negative publicity, diversion of management resources and other factors.
Our failure to obtain necessary license or other rights, or litigation arising out of intellectual
property claims, could adversely affect our business.
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ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Stock repurchase activity during the three months ended January 31, 2006 was as follows:
Total Number | Approximate | |||||||||||||||||||||
of Shares | Dollar Value of | |||||||||||||||||||||
Total Number | Average | Purchased as | Shares That May | |||||||||||||||||||
of Shares | Price Paid | Part of Publicly | Yet Be Purchased | |||||||||||||||||||
Period | Purchased | per Share | Announced Plans | Under the Plans | ||||||||||||||||||
November 1, 2005 through November 30, 2005 |
955,000 | $ | 53.38 | 955,000 | $ | 545,002,729 | ||||||||||||||||
December 1, 2005 through December 31, 2005 |
4,378,913 | $ | 53.67 | 4,378,913 | $ | 309,983,167 | ||||||||||||||||
January 1, 2006 through January 31, 2006 |
265,000 | $ | 53.53 | 265,000 | $ | 295,798,986 | ||||||||||||||||
Total |
5,598,913 | $ | 53.61 | 5,598,913 | ||||||||||||||||||
Notes:
1. | All shares repurchased as part of publicly announced plans during the three months ended January 31, 2006 were purchased under our fifth and sixth stock repurchase programs, which were for $500.0 million each. Our fifth repurchase program was announced on May 18, 2005 and was completed in December 2005 and our sixth repurchase program was announced on November 16, 2005 and expires on November 14, 2008. We expect to continue to repurchase shares under our sixth repurchase program during the remainder of fiscal 2006. |
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ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Intuits Annual Meeting of Stockholders held on December 16, 2005, our stockholders voted as
follows on the proposals below:
1. | Proposal to elect directors: |
For | Withheld | |||||||
Stephen M. Bennett |
150,824,779 | 6,139,556 | ||||||
Christopher W. Brody |
140,256,990 | 16,707,345 | ||||||
William V. Campbell |
150,448,261 | 6,516,074 | ||||||
Scott D. Cook |
150,453,332 | 6,511,003 | ||||||
L. John Doerr |
148,991,897 | 7,972,438 | ||||||
Donna L. Dubinsky |
155,425,042 | 1,539,293 | ||||||
Michael R. Hallman |
139,866,659 | 17,097,676 | ||||||
Dennis D. Powell |
155,430,439 | 1,533,896 | ||||||
Stratton D. Sclavos |
126,793,884 | 30,170,451 |
2. | Proposal to ratify the selection of Ernst & Young LLP as Intuits independent registered public accounting firm for fiscal 2006: |
For |
155,517,183 | |||
Against |
493,158 | |||
Abstain |
953,994 | |||
Broker Non-Votes |
0 |
3. | Proposal to approve amendment of Intuits 2005 Equity Incentive Plan: |
For |
90,165,608 | |||
Against |
49,193,887 | |||
Abstain |
1,018,157 | |||
Broker Non-Votes |
16,586,683 |
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ITEM 5
OTHER INFORMATION
OTHER INFORMATION
Amendment to the Intuit Inc. 2005 Equity Incentive Plan
Intuits stockholders approved an amendment to the Intuit Inc. 2005 Equity Incentive Plan at
Intuits Annual Meeting of Stockholders held on December 16, 2005. The effects of the amendment to
the plan include: (1) extending the term of the plan by one additional year, through December 9,
2007; (2) adding 6,500,000 shares to cover awards under the plan through its amended term; and (3)
amending the pre-existing 2,000,000-share cap on equity awards that can be granted at below fair
market value (for example, restricted stock or restricted stock units) to allow that up to 50% of
the equity awards granted under the plan each fiscal year can be below fair market value awards.
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ITEM 6
EXHIBITS
EXHIBITS
We have filed the following exhibits as part of this report:
Incorporated by Reference | ||||||||||
Exhibit No. | Exhibit Description | Filed with this 10-Q |
Form | File No. | Date Filed | |||||
10.01+ |
Intuit Inc. 2005 Equity Incentive Plan, as amended through December 16, 2005 | S-8 | 333-130453 | 12/19/05 | ||||||
31.01 |
Certification of Chief Executive Officer | X | ||||||||
31.02 |
Certification of Chief Financial Officer | X | ||||||||
32.01 |
Section 1350 Certification (Chief Executive Officer) | X | ||||||||
32.02 |
Section 1350 Certification (Chief Financial Officer) | X | ||||||||
+ | Indicates a management contract or compensatory plan or arrangement. |
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SIGNATURES
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 9, 2006
|
By: | /s/ KIRAN M. PATEL | ||
Kiran M. Patel | ||||
Senior Vice President and Chief Financial Officer | ||||
(Authorized Officer and Principal Financial Officer) |
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