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, 2007

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     .

INTUIT INC.

Delaware		77-0034661
(State of incorporation)		(IRS employer identification no.)

2700 Coast Avenue, Mountain View, CA 94043
(Address of principal executive offices)

(650) 944-6000
(Registrant’s telephone number, including area code)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes o No þ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o

Indicate by check mark whether the registrant 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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 342,568,181 shares of Common Stock, $0.01 par value, were outstanding at February 23, 2007.

 

 

INTUIT INC.
FORM 10-Q

				Page
				Number
PART I		FINANCIAL INFORMATION
ITEM 1:		Financial Statements
		Condensed Consolidated Statements of Operations for the three and six months ended January 31, 2007 and 2006			3
		Condensed Consolidated Balance Sheets at January 31, 2007 and July 31, 2006			4
		Condensed Consolidated Statements of Stockholders’ Equity for the six months ended January 31, 2007 and 2006			5
		Condensed Consolidated Statements of Cash Flows for the three and six months ended January 31, 2007 and 2006			6
		Notes to Condensed Consolidated Financial Statements			7
ITEM 2:		Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
ITEM 3:		Quantitative and Qualitative Disclosures about Market Risk			35
ITEM 4:		Controls and Procedures			36
PART II		OTHER INFORMATION
ITEM 1:		Legal Proceedings			37
ITEM 1A:		Risk Factors			38
ITEM 2:		Unregistered Sales of Equity Securities and Use of Proceeds			45
ITEM 4:		Submission of Matters to a Vote of Security Holders			46
ITEM 5:		Other Information			47
ITEM 6:		Exhibits			48
		Signatures			49
EXHIBIT 31.01
EXHIBIT 31.02
EXHIBIT 32.01
EXHIBIT 32.02

Intuit, the Intuit logo, QuickBooks, TurboTax, Lacerte, ProSeries and Quicken, 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. QuickBooks: Simple Start Edition, Innovative Merchant Solutions, 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.

PART I

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)		2007				2006				2007				2006
Net revenue:
Product		$	549,539			$	557,079			$	761,959			$	739,533
Service and other			213,768				185,625				363,419				307,242
Total net revenue			763,307				742,704				1,125,378				1,046,775
Costs and expenses:
Cost of revenue:
Cost of product revenue			68,253				71,739				105,596				104,170
Cost of service and other revenue			70,293				63,393				138,665				122,641
Amortization of purchased intangible assets			2,583				2,763				4,891				5,712
Selling and marketing			221,440				196,903				376,538				344,333
Research and development			115,474				100,084				235,688				197,364
General and administrative			68,606				65,297				145,994				128,892
Acquisition-related charges			2,334				3,553				5,176				7,312
Total costs and expenses			548,983				503,732				1,012,548				910,424
Operating income from continuing operations			214,324				238,972				112,830				136,351
Interest and other income			11,046				5,566				21,336				11,870
Gains on marketable equity securities and other investments, net			—				3,027				1,221				7,294
Income from continuing operations before income taxes			225,370				247,565				135,387				155,515
Income tax provision			79,673				92,074				48,405				57,635
Minority interest, net of tax			335				244				550				244
Net income from continuing operations			145,362				155,247				86,432				97,636
Net income from discontinued operations			—				27,726				—				39,533
Net income		$	145,362			$	182,973			$	86,432			$	137,169
Basic net income per share from continuing operations		$	0.42			$	0.44			$	0.25			$	0.28
Basic net income per share from discontinued operations			—				0.08				—				0.11
Basic net income per share		$	0.42			$	0.52			$	0.25			$	0.39
Shares used in basic per share calculation			347,185				350,292				346,700				352,552
Diluted net income per share from continuing operations		$	0.40			$	0.43			$	0.24			$	0.27
Diluted net income per share from discontinued operations			—				0.07				—				0.11
Diluted net income per share		$	0.40			$	0.50			$	0.24			$	0.38
Shares used in diluted per share calculation			360,573				363,582				360,654				365,200

See accompanying notes.

INTUIT INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

		January 31,				July 31,
(In thousands; unaudited)		2007				2006
ASSETS
Current assets:
Cash and cash equivalents		$	286,328			$	179,601
Investments			849,228				1,017,599
Accounts receivable, net			310,506				97,797
Income taxes receivable			9,318				64,178
Deferred income taxes			56,016				47,199
Prepaid expenses and other current assets			100,824				53,357
Current assets before funds held for payroll customers			1,612,220				1,459,731
Funds held for payroll customers			411,774				357,299
Total current assets			2,023,994				1,817,030
Property and equipment, net			205,377				194,434
Goodwill, net			555,023				504,991
Purchased intangible assets, net			57,350				59,521
Long-term deferred income taxes			135,358				144,697
Loans to officers			8,865				8,865
Other assets			48,032				40,489
Total assets		$	3,033,999			$	2,770,027
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	120,300			$	70,808
Accrued compensation and related liabilities			138,145				171,903
Deferred revenue			295,463				293,113
Income taxes payable			35,984				33,560
Other current liabilities			189,328				89,291
Current liabilities before payroll customer fund deposits			779,220				658,675
Payroll customer fund deposits			411,774				357,299
Total current liabilities			1,190,994				1,015,974
Long-term obligations			18,378				15,399
Commitments and contingencies
Minority interest			978				568
Stockholders’ equity:
Preferred stock			—				—
Common stock and additional paid-in capital			2,170,715				2,092,914
Treasury stock, at cost			(2,015,164	)			(1,944,036	)
Accumulated other comprehensive income			13,790				1,084
Retained earnings			1,654,308				1,588,124
Total stockholders’ equity			1,823,649				1,738,086
Total liabilities and stockholders’ equity		$	3,033,999			$	2,770,027

See accompanying notes.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

																						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, 2006			344,170,779			$	3,442			$	2,089,472			$	(1,944,036	)		$	—			$	1,084			$	1,588,124			$	1,738,086
Components of comprehensive income:
Net income			—				—				—				—				—				—				86,432				86,432
Other comprehensive income, net of tax			—				—				—				—				—				12,706				—				12,706
Comprehensive net income			—				—				—				—				—				—				—				99,138
Issuance of common stock upon exercise of options and other – post-split			6,026,114				60				10,202				122,379				—				—				(20,639	)			112,002
Issuance of common stock pursuant to Employee Stock Purchase Plan – post-split			490,297				5				—				11,795				—				—				395				12,195
Issuance of common stock pursuant to vesting of restricted stock units – post-split			172				—				—				4				—				—				(4	)			—
Stock repurchases under stock repurchase programs – post-split			(6,660,000	)			(67	)			—				(205,306	)			—				—				—				(205,373	)
Tax benefit from employee stock option transactions			—				—				29,430				—				—				—				—				29,430
Share-based compensation			—				—				38,171				—				—				—				—				38,171
Balance at January 31, 2007			344,027,362			$	3,440			$	2,167,275			$	(2,015,164	)		$	—			$	13,790			$	1,654,308			$	1,823,649
																						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 – pre-split			4,199,173				42				—				191,326				—				—				(54,187	)			137,181
Issuance of common stock pursuant to Employee Stock Purchase Plan – pre-split			271,581				2				—				12,453				—				—				(2,085	)			10,370
Stock repurchases under stock repurchase programs – pre-split			(9,913,913	)			(99	)			—				(494,882	)			—				—				—				(494,981	)
Tax benefit from employee stock option transactions			—				—				29,076				—				—				—				—				29,076
Share-based compensation (1)			—				—				38,450				—				—				—				—				38,450
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 $38,173 for continuing operations and $277 for Intuit Information Technology Solutions discontinued operations.

Note: We effected a two-for-one stock split in the form of a 100% stock dividend on July 6, 2006.

See accompanying notes.

INTUIT INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months Ended								Six Months Ended
		January 31,				January 31,				January 31,				January 31,
(In thousands)		2007				2006				2007				2006
Cash flows from operating activities:
Net income		$	145,362			$	182,973			$	86,432			$	137,169
Net income from discontinued operations			—				(27,726	)			—				(39,533	)
Net income from continuing operations			145,362				155,247				86,432				97,636
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation			21,061				22,616				43,336				45,761
Acquisition-related charges			2,334				3,553				5,176				7,312
Amortization of purchased intangible assets			2,583				2,763				4,891				5,712
Amortization of other purchased intangible assets			2,734				2,259				5,305				4,290
Share-based compensation			19,312				17,749				38,171				38,173
Amortization of premiums and discounts on available-for-sale debt securities			1,071				972				1,961				2,066
Net gains on marketable equity securities and other investments			—				(3,027	)			(1,221	)			(7,294	)
Deferred income taxes			(6,552	)			(4,128	)			(9,399	)			(1,608	)
Tax benefit from share-based compensation plans			12,634				26,554				29,430				29,076
Excess tax benefit from share-based compensation plans			(7,967	)			(12,446	)			(16,720	)			(13,385	)
Other			394				302				743				701
Subtotal			192,966				212,414				188,105				208,440
Changes in operating assets and liabilities:
Accounts receivable			(215,488	)			(245,772	)			(212,884	)			(232,851	)
Prepaid expenses, taxes and other current assets			66,985				70,864				8,727				32,370
Accounts payable			22,619				28,937				48,970				59,602
Accrued compensation and related liabilities			47,436				43,917				(33,726	)			(20,482	)
Deferred revenue			19,052				(17,825	)			2,273				(23,062	)
Income taxes payable			18,415				8,343				2,702				(8,428	)
Other liabilities			91,152				66,473				102,264				57,002
Total changes in operating assets and liabilities			50,171				(45,063	)			(81,674	)			(135,849	)
Net cash provided by operating activities of continuing operations			243,137				167,351				106,431				72,591
Net cash provided by operating activities of discontinued operations			—				3,109				—				14,090
Net cash provided by operating activities			243,137				170,460				106,431				86,681
Cash flows from investing activities:
Purchases of available-for-sale debt securities			(479,703	)			(392,673	)			(880,578	)			(681,792	)
Liquidation of available-for-sale debt securities			495,550				271,213				985,747				826,282
Maturity of available-for-sale debt securities			26,784				31,665				61,614				52,440
Proceeds from the sale of marketable equity securities			—				4,235				858				4,235
Net change in funds held for payroll customers’ money market funds and other cash equivalents			24,438				(78,576	)			(54,475	)			(66,170	)
Purchases of property and equipment			(23,683	)			(22,855	)			(52,906	)			(47,912	)
Proceeds from sale of property			22				334				22				334
Change in other assets			(2,026	)			(1,925	)			(6,704	)			(6,379	)
Net change in payroll customer fund deposits			(24,438	)			78,576				54,475				66,170
Acquisitions of businesses and intangible assets, net of cash acquired			(1,991	)			(23,733	)			(61,993	)			(33,881	)
Net cash provided by (used in) investing activities of continuing operations			14,953				(133,739	)			46,060				113,327
Net cash provided by investing activities of discontinued operations			20,989				171,833				20,989				171,833
Net cash provided by investing activities			35,942				38,094				67,049				285,160
Cash flows from financing activities:
Change in long-term obligations			(874	)			(260	)			(1,315	)			(894	)
Net proceeds from issuance of common stock under stock plans			41,299				126,083				124,197				147,551
Purchase of treasury stock			(205,373	)			(300,181	)			(205,373	)			(494,981	)
Excess tax benefit from share-based compensation plans			7,967				12,446				16,720				13,385
Net cash used in financing activities			(156,981	)			(161,912	)			(65,771	)			(334,939	)
Effect of exchange rates on cash and cash equivalents			(1,844	)			1,090				(982	)			1,962
Net increase in cash and cash equivalents			120,254				47,732				106,727				38,864
Cash and cash equivalents at beginning of period			166,074				74,974				179,601				83,842
Cash and cash equivalents at end of period		$	286,328			$	122,706			$	286,328			$	122,706

See accompanying notes.

INTUIT INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Description of Business and Summary of Significant Accounting Policies

Description of Business

Intuit Inc. provides business, financial management and tax solutions for small businesses, consumers and accountants. Our flagship software products include QuickBooks, TurboTax, Lacerte, ProSeries and Quicken. Founded in 1983 and headquartered in Mountain View, California, we sell our products and services primarily in the United States. At January 31, 2007, we had approximately 8,100 employees in the United States and internationally in Canada and several other locations.

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. The condensed consolidated financial statements also include the financial position, results of operations and cash flows of Superior Bankcard Services, LLC (SBS), an entity that acquires merchant accounts for our Innovative Merchant Solutions business. We are allocated 51% of the earnings and losses of this entity and 100% of the losses in excess of the minority interest capital balances. We therefore eliminate the portion of the SBS financial results that pertain to the minority interests on a separate line in our statements of operations and balance sheets.

We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation, including amounts related to discontinued operations and reportable segments. We have also combined other revenue and cost of other revenue with service revenue and cost of service revenue. Other revenue was less than 5% of total net revenue for the three and six months ended January 31, 2007 and 2006.

Our Board of Directors authorized a two-for-one stock split which was effected in the form of a 100% stock dividend on July 6, 2006 to stockholders of record on June 21, 2006. All share and per share figures in the statements of operations and the notes to the financial statements retroactively reflect this stock split.

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 included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2006. Results for the three and six months ended January 31, 2007 do not necessarily indicate the results we expect for the fiscal year ending July 31, 2007 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 many of our small business software products, including QuickBooks, tends to be at its peak around calendar year end, although the timing of new product releases or changes in our offerings can materially shift revenue between quarters. Sales of income tax preparation products and services are heavily concentrated in the period from November through April. These seasonal patterns mean that our total net revenue is usually highest during our second quarter ending January 31 and third quarter ending April 30. We typically report losses in our first quarter ending October 31 and fourth quarter ending July 31, when revenue from our tax businesses is minimal while operating expenses continue at relatively consistent levels.

Computation of Net Income (Loss) Per Share

We compute basic net income or loss per share using the weighted average number of common shares outstanding during the period. We compute diluted net income per share using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of the shares issuable upon the exercise of stock options and upon the vesting of restricted stock units under the treasury stock method. In loss periods, basic net loss per share and diluted net loss per share are identical since the effect of potential common shares is anti-dilutive and therefore excluded.

We include stock options with combined exercise prices and unrecognized compensation expense that are less than the average market price for our common stock in the calculation of diluted net income per share. We exclude stock options with combined exercise prices and unrecognized compensation expense that are greater than the average market price for our common stock from the calculation of diluted net income per share because their effect is anti-dilutive. Under the treasury stock method, the amount that must be paid to exercise stock options, the amount of compensation expense for future service that we have not yet recognized, and the amount of tax benefits that will be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.

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)		2007				2006				2007				2006
Numerator:
Net income from continuing operations		$	145,362			$	155,247			$	86,432			$	97,636
Net income from discontinued operations			—				27,726				—				39,533
Net income		$	145,362			$	182,973			$	86,432			$	137,169
Denominator:
Shares used in basic per share amounts:
Weighted average common shares outstanding			347,185				350,292				346,700				352,552
Shares used in diluted per share amounts:
Weighted average common shares outstanding			347,185				350,292				346,700				352,552
Dilutive common equivalent shares from stock options and restricted stock awards			13,388				13,290				13,954				12,648
Dilutive weighted average common shares outstanding			360,573				363,582				360,654				365,200
Basic and diluted net income per share:
Basic net income per share from continuing operations		$	0.42			$	0.44			$	0.25			$	0.28
Basic net income per share from discontinued operations			—				0.08				—				0.11
Basic net income per share		$	0.42			$	0.52			$	0.25			$	0.39
Diluted net income per share from continuing operations		$	0.40			$	0.43			$	0.24			$	0.27
Diluted net income per share from discontinued operations			—				0.07				—				0.11
Diluted net income per share		$	0.40			$	0.50			$	0.24			$	0.38
Weighted average stock options and restricted stock awards 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 during the period			9,805				15,174				9,697				18,410

Share-Based Compensation Plans

Effective August 1, 2006, we began using a lattice binomial model to estimate the fair value of stock options granted. Prior to that date we used the Black Scholes valuation model. This change did not have a material impact on our financial position, results of operations or cash flows. Our stock options have various restrictions, including vesting provisions and restrictions on transfer, and are often exercised prior to their contractual maturity. We therefore believe that lattice binomial models are more capable of incorporating the features of our stock options than closed-form models such as the Black Scholes model. The use of a lattice binomial model requires the use of extensive actual employee exercise behavior data and a number of complex assumptions including the expected volatility of our stock price over the term of the options, risk-free interest rates and expected dividends.

Significant Customers

No customer accounted for 10% or more of total net revenue in the three and six months ended January 31, 2007 or 2006. At January 31, 2007, the account of one retail customer represented approximately 18% of total accounts receivable and the account of another retail customer represented approximately 17% of total accounts receivable. No customer accounted for 10% or more of total accounts receivable at July 31, 2006. Amounts due from Rock Acquisition Corporation, the purchaser of our Quicken Loans mortgage business, under certain licensing and distribution agreements comprised approximately 10% of accounts receivable at July 31, 2006. Amounts due from Rock at January 31, 2007 were not significant.

Recent Accounting Pronouncements

FIN 48, “Accounting for Uncertainty in Income Taxes”

In June 2006 the Financial Accounting Standards Board (FASB) issued Financial Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The requirements of FIN 48 are effective for our fiscal year beginning August 1, 2007. We are in the process of evaluating this guidance and therefore have not yet determined the impact that the adoption of FIN 48 will have on our financial position, results of operations or cash flows.

SFAS 157, “Fair Value Measurements”

In September 2006 the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require or permit assets or liabilities to be measured at fair value. This standard does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are in the process of evaluating this standard and therefore have not yet determined the impact that the adoption of SFAS 157 will have on our financial position, results of operations or cash flows.

SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities”

In February 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The standard’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. The standard requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires companies to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The new standard does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS 157, “Fair Value Measurements,” and SFAS 107, “Disclosures about Fair Value of Financial Instruments.” SFAS 159 is effective as

of the start of fiscal years beginning after November 15, 2007. Early adoption is permitted. We are in the process of evaluating this standard and therefore have not yet determined the impact that the adoption of SFAS 159 will have on our financial position, results of operations or cash flows.

2. Cash and Cash Equivalents, Investments and Funds Held for Payroll Customers

We consider highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist primarily of money market funds in all periods presented. Investments consist of available-for-sale investment-grade debt securities that we carry at fair value. Funds held for payroll customers consist of cash, cash equivalents and available-for-sale investment-grade debt 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.

The following table summarizes our cash and cash equivalents, investments and funds held for payroll customers by balance sheet classification at the dates indicated.

		January 31, 2007								July 31, 2006
(In thousands)		Cost				Fair Value				Cost				Fair Value
Classification on balance sheets:
Cash and cash equivalents		$	286,328			$	286,328			$	179,601			$	179,601
Investments			849,570				849,228				1,018,364				1,017,599
Funds held for payroll customers			411,825				411,774				357,299				357,299
Total cash and cash equivalents, investments and funds held for payroll customers		$	1,547,723			$	1,547,330			$	1,555,264			$	1,554,499

 

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

		January 31, 2007								July 31, 2006
(In thousands)		Cost				Fair Value				Cost				Fair Value
Type of issue:
Total cash and cash equivalents		$	604,006			$	604,006			$	442,880			$	442,880
Available-for-sale debt securities:
Municipal bonds			933,717				933,353				1,102,384				1,101,719
U.S. government securities			10,000				9,971				10,000				9,900
Total available-for-sale debt securities			943,717				943,324				1,112,384				1,111,619
Total cash and cash equivalents, investments and funds held for payroll customers		$	1,547,723			$	1,547,330			$	1,555,264			$	1,554,499

 

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 sheets. 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)		2007				2006
Gross unrealized gains		$	63			$	20
Gross unrealized losses			(456	)			(785	)
Net unrealized losses		$	(393	)		$	(765	)

The following table summarizes the fair value and gross unrealized losses related to 67 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, 2007:

		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
Municipal bonds		$	182,975			$	(230	)		$	44,925			$	(197	)		$	227,900			$	(427	)
U.S. government securities			59				—				9,941				(29	)			10,000				(29	)
Total		$	183,034			$	(230	)		$	54,866			$	(226	)		$	237,900			$	(456	)

 

We periodically review our investment portfolios to determine if any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. We believe that the investments we held at January 31, 2007 were not other-than-temporarily impaired. While certain available-for-sale debt securities have fair values that are below cost, we believe that if the securities were held to maturity it is probable that principal and interest would be collected in accordance with contractual terms. We believe that the unrealized losses at January 31, 2007 are 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 in our statements 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)		2007				2006				2007				2006
Gross realized gains		$	21			$	—			$	21			$	10
Gross realized losses			(12	)			(98	)			(20	)			(488	)
Net realized losses		$	9			$	(98	)		$	1			$	(478	)

 

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, 2007
(In thousands)		Cost				Fair Value
Due within one year		$	196,090			$	195,881
Due within two years			38,181				38,114
Due within three years			6,715				6,711
Due after three years			702,731				702,618
Total available-for-sale debt securities		$	943,717			$	943,324

 

Approximately 94% of our available-for-sale debt securities at January 31, 2007 had an interest reset date, put date or mandatory call date within one year.

3. Goodwill and Purchased Intangible Assets

Our August 2006 acquisition of StepUp Commerce, Inc. increased the cost basis of goodwill and intangible assets by $50.4 million and $8.9 million during the six months ended January 31, 2007. StepUp became part of our QuickBooks segment. See Note 5.

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 in our statements 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				Derivative				Currency
(In thousands)		Investments				Securities				Instruments				Translation				Total
Balance at July 31, 2006		$	(462	)		$	—			$	—			$	1,546			$	1,084
Unrealized gains, net of income tax provisions of $148 and $8,805			225				—				13,459				—				13,684
Reclassification adjustment for realized gain included in net income, net of income tax benefit			(1	)			—				—				—				(1	)
Translation adjustment, net of income tax provision of $641			—				—				—				(977	)			(977	)
Other comprehensive income			224				—				13,459				(977	)			12,706
Balance at January 31, 2007		$	(238	)		$	—			$	13,459			$	569			$	13,790
Balance July 31, 2005		$	(582	)		$	1,451			$	—			$	(695	)		$	174
Unrealized losses, 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

 

Comprehensive net income (loss) was as follows for the periods indicated:

		Three Months Ended								Six Months Ended
		January 31,				January 31,				January 31,				January 31,
(In thousands)		2007				2006				2007				2006
Net income		$	145,362			$	182,973			$	86,432			$	137,169
Other comprehensive income			11,991				21				12,706				1,138
Comprehensive net income, net of income taxes		$	157,353			$	182,994			$	99,138			$	138,307
Income tax provision (benefit) netted against other comprehensive income		$	9,381			$	(953	)		$	9,594			$	(951	)

5. Acquisitions

StepUp Commerce, Inc.

In August 2006 we acquired all of the outstanding shares of StepUp Commerce, Inc. (StepUp) for a total purchase price of approximately $60 million in cash. We deposited $7.5 million of the total purchase price in a third-party escrow account to be held through January 2008 to cover breaches of representations and warranties set forth in the purchase agreement, should they arise. StepUp provides services that allow small businesses to present their product information and images to online shoppers. We acquired StepUp as part of our Right for Me initiative to offer a wider range of business solutions for small businesses. StepUp became part of our QuickBooks segment. Tangible assets and liabilities acquired were not significant. We allocated $8.9 million of the purchase price to identified intangible assets and recorded the excess purchase price of $50.4 million as goodwill, none of which is deductible for income tax purposes. The identified intangible assets are being amortized over terms ranging from three to five years. In accordance with purchase accounting rules, we have included StepUp’s results of operations in our consolidated results of operations from the date of acquisition. StepUp’s results of operations for periods prior to the date of acquisition were not material when compared with our consolidated results.

Digital Insight Corporation

In November 2006 we entered into a definitive agreement to acquire all of the outstanding shares of common stock of Digital Insight Corporation (Digital Insight) for $39.00 per share, for a total purchase price of approximately $1.35 billion including the value of assumed vested options. The transaction was completed on February 6, 2007. We partially financed the transaction with a $1.0 billion 364-day bridge credit facility (see Note 8) and funded the remainder of the purchase price with our existing cash balances. Subject to market conditions, we intend to refinance the bridge credit facility with longer-term non-convertible debt during the third quarter of fiscal 2007. Digital Insight is a provider of outsourced online banking applications and services to banks, credit unions and savings and loan associations and together with our existing financial institutions business, which was part of our Other Businesses segment, will become a separate reportable segment beginning in the third quarter of fiscal 2007.

As a result of our acquisition of Digital Insight, we may incur restructuring costs during the year commencing with the closing of the acquisition. In accordance with Emerging Issues Task Force Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” these costs will be recognized as assumed liabilities with a resulting increase in goodwill. Should they occur, the restructuring costs will primarily consist of severance payments associated with Digital Insight employees and costs to vacate certain Digital Insight facilities that existed prior to the closing of the Acquisition. Intuit may also incur costs associated with canceling or reducing Digital Insight’s existing purchase commitments for materials, equipment and services. Management is continuing to assess and formulate the restructuring plan and the timing and financial impact cannot yet be fully determined.

Electronic Clearing House Inc.

In December 2006 we entered into a definitive agreement to acquire all of the outstanding shares of common stock of Electronic Clearing House Inc. (ECHO) for $18.75 per share, for a total purchase price of approximately $142 million. ECHO is a provider of electronic payment services and will become part of our Payroll and Payments segment. The transaction is subject to ECHO shareholder approval and other customary closing conditions and is expected to close during the third quarter of fiscal 2007.

6. Discontinued Operations

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. We received the full escrow amount in January 2007.

In accordance with the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” we accounted for the sale of ITS as discontinued operations. We have therefore segregated the operating results and cash flows of ITS from continuing operations in our financial statements for all periods prior to the sale. For the three and six months ended January 31, 2006, we recorded net revenue from ITS of $5.8 million and $20.2 million

and net income from ITS operations of $1.9 million and $5.2 million. We recorded a net gain on disposal of ITS of $34.3 million in the six months ended January 31, 2006.

7. 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. We have aggregated two operating segments to form our Payroll and Payments reportable segment.

QuickBooks product revenue is derived primarily from QuickBooks desktop software products and financial supplies such as paper checks, envelopes and invoices. QuickBooks service and other revenue is derived primarily from QuickBooks Online Edition, QuickBooks support plans and royalties from small business online services.

Payroll and Payments product revenue is derived primarily from QuickBooks Payroll, a family of products sold on a subscription basis offering payroll tax tables, forms and electronic tax payment and filing to small businesses that prepare their own payrolls. Payroll and Payments service and other revenue is derived from small business payroll services as well as from merchant services such as credit and debit card processing provided by our Innovative Merchant Solutions business. Service and other revenue for this segment also includes interest earned on funds held for payroll customers.

Consumer Tax product revenue is derived primarily from TurboTax federal and state consumer and small business desktop tax return preparation software. Consumer Tax service and other revenue is derived primarily from TurboTax Online tax return preparation services and electronic filing services.

Professional Tax product revenue is derived primarily from Lacerte and ProSeries professional tax preparation software products. Professional Tax service and other revenue is derived primarily from electronic filing services, bank product transmission services and training services.

Other Businesses consist primarily of Quicken and Canada. Quicken product revenue is derived primarily from Quicken desktop software products. Quicken service and 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 and other revenue in Canada consists primarily of revenue from payroll services and QuickBooks support plans.

Our QuickBooks, Payroll and Payments, 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 less than 5% 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 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended July 31, 2006, as updated in Note 1 to the financial statements in this Quarterly Report on Form 10-Q. Except for goodwill and purchased intangible assets, we do not generally track assets by reportable segment and, consequently, we do not disclose total assets by reportable segment.

The following tables show our financial results by reportable segment for the three and six months ended January 31, 2007 and 2006. We have combined other revenue with service revenue. Other revenue was less than 5% of total net revenue for each of those periods.

						Payroll
						and				Consumer				Professional				Other
(In thousands)		QuickBooks				Payments				Tax				Tax				Businesses				Corporate				Consolidated
Three Months Ended January 31, 2007
Product revenue		$	144,338			$	51,274			$	168,256			$	125,585			$	60,086			$	—			$	549,539
Service and other revenue			20,069				86,896				57,207				5,130				44,466				—				213,768
Total net revenue			164,407				138,170				225,463				130,715				104,552				—				763,307
Segment operating income			53,680				60,252				111,772				80,471				34,584				—				340,759
Common expenses			—				—				—				—				—				(121,518	)			(121,518	)
Subtotal			53,680				60,252				111,772				80,471				34,584				(121,518	)			219,241
Amortization of purchased intangible assets			—				—				—				—				—				(2,583	)			(2,583	)
Acquisition-related charges			—				—				—				—				—				(2,334	)			(2,334	)
Interest and other income			—				—				—				—				—				11,046				11,046
Realized net gain on marketable equity securities			—				—				—				—				—				—				—
Income (loss) from continuing operations before income taxes		$	53,680			$	60,252			$	111,772			$	80,471			$	34,584			$	(115,389	)		$	225,370