10-K: Annual report pursuant to Section 13 and 15(d)
Published on September 12, 2008
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended July 31, 2008
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, including zip code)
(Address of principal executive offices, including zip code)
(650) 944-6000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of Each Class
|
Name of Exchange on Which Registered | |
Common Stock, $0.01 par value
|
NASDAQ Global Select Market | |
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of large accelerated filer,
accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The aggregate market value of Intuit Inc. outstanding common stock held by non-affiliates of Intuit
as of January 31, 2008, based on the closing price of $30.69 reported by the NASDAQ Global Select
Market on that date, was $9.33 billion. Shares of Intuit common stock held by each executive
officer and director and by each entity or person that, to our knowledge, owned 5% or more of
Intuits outstanding common stock as of January 31, 2008 have been excluded in that such persons
may be deemed to be affiliates of Intuit. This determination of affiliate status is not necessarily
a conclusive determination for other purposes.
There were 323,962,762 shares of Intuit voting common stock outstanding as of August 31, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for its Annual Meeting of Stockholders to
be held on December 16, 2008 are incorporated by reference in Parts II and III of this Annual
Report on Form 10-K.
INTUIT INC.
FISCAL 2008 FORM 10-K
FISCAL 2008 FORM 10-K
INDEX
Item | Page | |||||||
PART I | ||||||||
ITEM 1: | 3 | |||||||
ITEM 1A: | 16 | |||||||
ITEM 1B: | 31 | |||||||
ITEM 2: | 31 | |||||||
ITEM 3: | 32 | |||||||
ITEM 4: | 32 | |||||||
PART II | ||||||||
ITEM 5: | 33 | |||||||
ITEM 6: | 35 | |||||||
ITEM 7: | 37 | |||||||
ITEM 7A: | 58 | |||||||
ITEM 8: | 60 | |||||||
ITEM 9: | 107 | |||||||
ITEM 9A: | 107 | |||||||
ITEM 9B: | 107 | |||||||
PART III | ||||||||
ITEM 10: | 108 | |||||||
ITEM 11: | 110 | |||||||
ITEM 12: | 110 | |||||||
ITEM 13: | 110 | |||||||
ITEM 14: | 110 | |||||||
PART IV | ||||||||
ITEM 15: | 111 | |||||||
116 | ||||||||
EXHIBIT 10.12 | ||||||||
EXHIBIT 10.16 | ||||||||
EXHIBIT 10.29 | ||||||||
EXHIBIT 10.30 | ||||||||
EXHIBIT 10.86 | ||||||||
EXHIBIT 21.01 | ||||||||
EXHIBIT 23.01 | ||||||||
EXHIBIT 31.01 | ||||||||
EXHIBIT 31.02 | ||||||||
EXHIBIT 32.01 | ||||||||
EXHIBIT 32.02 |
Intuit, QuickBooks, TurboTax, Lacerte, ProSeries, Digital Insight, 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. Other parties marks are the property of their
respective owners.
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This Annual Report on Form 10-K contains forward-looking statements that involve risks and
uncertainties. Please see the section entitled Forward-Looking Statements and Risk Factors in
Item 1A of this Report for important information to consider when evaluating these statements.
PART I
ITEM 1
BUSINESS
CORPORATE BACKGROUND
General
Intuit Inc. is a leading provider of business and financial management solutions for small and
medium sized businesses, financial institutions, consumers, and accounting professionals. Our
flagship products and services, including QuickBooks, Quicken and TurboTax, simplify small business
management and payroll processing, personal finance, and tax preparation and filing. ProSeries and
Lacerte are Intuits leading tax preparation offerings for professional accountants. Our financial
institutions division, anchored by Digital Insight, provides on-demand banking services that help
banks and credit unions serve businesses and consumers with innovative solutions. Founded in 1983
and based in Mountain View, California, we had revenue of $3.1 billion in our fiscal year ended
July 31, 2008. We had approximately 8,200 employees in major offices in the United States, Canada,
India, the United Kingdom and other locations as of July 31, 2008.
Intuit was incorporated in California in March 1984. In March 1993 we reincorporated in Delaware
and completed our initial public offering. Our principal executive offices are located at 2700
Coast Avenue, Mountain View, California, 94043, and our telephone number at that location is
650-944-6000. We maintain our corporate Web site at www.intuit.com. On our Web site we publish
information for investors and information relating to Intuits corporate governance. The content on
any Web site referred to in this filing is not incorporated by reference into this filing unless
expressly noted otherwise. When we refer to we, our or Intuit in this Annual Report on Form
10-K, we mean the current Delaware corporation (Intuit Inc.) and its California predecessor, as
well as all of our consolidated subsidiaries.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
proxy statements and other reports, and amendments to these reports, required of public companies
with the Securities and Exchange Commission (SEC). The public may read and copy the materials we
file with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington, D.C. 20549.
The public may obtain information on the operation of the Public Reference Room by calling the SEC
at 202-551-8090. The SEC also maintains a Web site at www.sec.gov that contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the
SEC. Through a link to the SEC Web site, we make available free of charge on the Investor Relations
section of our corporate Web site all of the reports we file with the SEC as soon as reasonably
practicable after the reports are filed. Copies of Intuits fiscal 2008 Annual Report on Form 10-K
may also be obtained without charge by contacting Investor Relations, Intuit Inc., P.O. Box 7850,
Mountain View, California 94039-7850 or by calling 650-944-6000.
BUSINESS OVERVIEW
Intuits Mission
For 25 years, Intuits mission has been to revolutionize peoples lives by solving their important
business and financial management problems. Whether helping to balance a checkbook, run a small business or pay
income taxes, we believe our innovative solutions have simplified millions of peoples lives.
Solving
important business and financial management problems is still our goal. We are finding new ways to solve
them in an Internet-connected world, where emerging technology and market trends are changing the
way people live and work. As a result, we are acquiring new customers, connecting them to our
solutions, and helping them
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communicate in new ways with each other and with us. We are doing this in a global environment,
where our customers personal and professional lives often transcend geographic borders.
As we begin this new chapter, our mission is simple: We seek to be a premier innovative growth
company that empowers individuals and businesses to achieve their dreams.
Our Business Portfolio
We organize our portfolio of businesses into four principal categories Small Business, Tax,
Financial Institutions and Other Businesses. These categories include six financial reporting
segments.
Small Business: This category includes two segments QuickBooks, and Payroll and Payments.
| Our QuickBooks segment includes QuickBooks financial and business management software and services, technical support, financial supplies, and Web site design and hosting services for small businesses. | ||
| Our Payroll and Payments segment includes small business payroll products and services. This segment also includes merchant services provided by our Innovative Merchant Solutions business that include credit and debit card processing, electronic check conversion and automated clearing house services. |
Tax: This category also includes two segments Consumer Tax and Accounting Professionals.
| Our Consumer Tax segment includes TurboTax income tax preparation products and services for consumers and small business owners. | ||
| Our Accounting Professionals segment includes Lacerte and ProSeries professional tax products and services. This segment also includes QuickBooks Premier Accountant Edition and the QuickBooks ProAdvisor Program for accounting professionals. |
Financial Institutions: This segment consists primarily of outsourced online banking services for
banks and credit unions provided by our Digital Insight business.
Other Businesses: This segment includes Quicken personal finance products and services, Intuit Real
Estate Solutions, and our businesses in Canada and the United Kingdom.
Our Growth Strategy
Our core growth strategy remains unchanged: To be in growth businesses, high-profit businesses and
attractive new markets with large unmet or underserved needs that we can solve well.
In an evolving world, we are adapting our approach to meet changing demographics, technology and
market trends. In fiscal 2008 we announced our new Connected Services strategy. This strategy
reflects a world where people and businesses are increasingly connected, whether through desktop,
laptop or handheld devices. With this expanded connectivity, people increasingly expect access to
services any time, any place. By implementing this strategy, we intend to create customer delight
by offering easy-to-use connected services that solve customers problems while building durable
competitive advantage.
Nearly 50 million people use our QuickBooks, Payroll, Payments, TurboTax, Digital Insight and
Quicken products and services. This positions us to succeed in this environment by connecting these
people to our services and to each other. We do this in three different ways:
| Connecting customers directly to our online services: We host services such as QuickBooks Online, QuickBooks Online Payroll, Web site services for small businesses, TurboTax Online and outsourced banking services for financial institutions. Sometimes referred to as Software as a Service, or SaaS, these offerings are designed to deliver clear benefits and value to customers. | ||
| Connecting our services to our software: We offer services, such as small business payroll and merchant services, that can be connected with software, such as QuickBooks. This can create powerful solutions that we believe give us a competitive advantage. | ||
| Connecting people to people: We are increasingly using our products as a platform to connect people to each other and to us, allowing them to share information and solve problems together. For example, our TurboTax Live Community allows participants to submit and answer each others questions while preparing their income tax returns. |
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We have already made progress in this connected services environment. Over half of our $3 billion
in fiscal 2008 revenue came from connected services.
To compete in this connected world, our strategy is to take advantage of three emerging technology
and market trends:
| Social: Linked by a connected world to businesses and each other, people are able to shape product development, share their expertise and influence opinion like never before. Through our TaxAlmanac service, for example, tax professionals can research tax laws and create and share knowledge. In a social world, people are connecting and contributing to our product offerings. | ||
| Mobile: As technology moves from the desktop to the palmtop, we are focusing on mobile services that deliver in the pocket any place at any time thats convenient for customers. For example, QuickBooks Online is now available for the iPhone. | ||
| Global: As geographic borders become less important to businesses, we are working to help customers take advantage of a global marketplace and find new customers in new markets. |
Summary
As our strategy evolves, we remain committed to developing innovative products and services that
are so convenient and easy to use that customers actively recommend them to others. We call these
customers promoters people who create positive word-of-mouth by promoting our brand to others.
For 25 years weve worked to solve their important business and financial management problems. As we begin this
new chapter, we will increasingly work to help them solve each others problems, connecting people
to people and to solutions.
PRODUCTS AND SERVICES
We offer our products and services in the six business segments discussed in Business Overview
above. The following table shows the classes of similar products or services that accounted for 10%
or more of total net revenue in fiscal 2008, 2007 and 2006.
Fiscal | Fiscal | Fiscal | ||||||||||
2008 | 2007 | 2006 | ||||||||||
QuickBooks |
20 | % | 22 | % | 23 | % | ||||||
Payroll and Payments |
18 | % | 19 | % | 20 | % | ||||||
Consumer Tax |
30 | % | 30 | % | 31 | % | ||||||
Accounting Professionals |
11 | % | 12 | % | 13 | % | ||||||
Financial Institutions |
10 | % | 6 | % | 1 | % | ||||||
Our products and services are sold mainly in the United States and are described below.
International total net revenue was less than 5% of consolidated total net revenue for fiscal 2008,
2007 and 2006. For financial information about these segments, see Managements Discussion and
Analysis of Financial Condition and Results of Operations in Item 7 and Note 8 to the financial
statements in Item 8.
QuickBooks
QuickBooks Software. Our QuickBooks product line brings bookkeeping capabilities and business
management tools to small business users in an easy-to-use design that does not require them to be
familiar with debit and credit accounting. We offer a range of products to suit the needs of
different types of small businesses. Our desktop software products include QuickBooks Simple Start,
which provides accounting functionality suitable for very small, less complex businesses and is
offered in both free and paid versions; QuickBooks Pro, which provides accounting functionality
suitable for slightly larger businesses, including those with payroll needs; QuickBooks Pro for
Mac; QuickBooks Premier, which provides small businesses with advanced accounting functionality and
business planning tools; and QuickBooks Enterprise Solutions, designed for larger businesses. Our
Premier and Enterprise products also come in a range of industry-specific editions, including
Manufacturing, Wholesale and
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Distribution, Retail, Non-Profit, Contractors, and Professional Services. In addition, we offer a
Web-based version of QuickBooks called QuickBooks Online that is suitable for multiple users
working in various locations.
QuickBooks Technical Support. We offer several technical support options to our QuickBooks
customers. These include support plans that are sold separately and priced based on the length of
the plan. QuickBooks customers may choose one-time support or support plans that last for one
month, three months, six months or one year. We also offer a free self-help information section on
our QuickBooks.com Web site and free access to the QuickBooks Community, an online forum where
QuickBooks users can share information with each other.
Web Services for Small Businesses. With our December 2007 acquisition of Homestead, we offer
services to small businesses that help them establish a presence on the Web, maintain and promote
their Web sites, and sell or market their products online.
Financial Supplies. We offer a range of financial supplies designed for small businesses and
individuals for use with QuickBooks. These include paper checks, envelopes, invoices and deposit
slips. In addition, we offer business identity services that include business cards and stationery.
We also offer tax forms, tax return presentation folders and other supplies for professional tax
preparers. Our customers can personalize many products to incorporate their logos and use a variety
of color, font and design options.
QuickBooks Point of Sale Solutions. Our QuickBooks Point of Sale offering helps retailers manage
customer transactions and inventories. The Basic version is suitable for single stores that want to
process sales using barcodes and track inventory and customer purchases. The Pro version offers
more advanced functionality such as serial number tracking and the ability to process layaways and
special orders. The Pro Multi-Store version allows the transfer of information between stores. We
sell this software with or without the accompanying hardware.
QuickBase. Our QuickBase offering is a Software as a Service (SaaS) platform based on a robust
database that allows business users to select ready-made online workgroup applications or create
custom solutions for their businesses. The most common solutions include project collaboration,
sales team management and employee management. QuickBase customers pay a monthly or yearly
subscription fee that varies based on the number of users and the amount of data and file storage
they need.
Intuit Developer Network. The Intuit Developer Network is an initiative that encourages
third-party software developers to build applications that exchange data with QuickBooks and other
Intuit products by giving them access to certain application programming interfaces. In addition,
the Intuit Developer Network has launched in closed beta testing the QuickBase Developer Program,
which allows developers to create SaaS applications without the need to host the applications,
manage billing, or build connections to QuickBooks. Developers who register with the Intuit
Developer Network have access to the latest QuickBooks software development kit, the QuickBase Web
development platform, QuickBooks software downloads, and member benefits such as marketing tools,
developer forums and one-on-one engineering support. At the end of fiscal 2008, approximately 300
third-party applications were available for QuickBooks and other Intuit products at
www.marketplace.intuit.com.
Payroll and Payments
Payroll. QuickBooks Payroll is a family of products sold on a subscription basis to small
businesses that use QuickBooks and prepare their own payroll or want some assistance with preparing
their payroll. It is also sold to accountants who use QuickBooks and help their clients manage
their payrolls. The product family includes QuickBooks Basic Payroll, which provides payroll tax
tables and payroll reports; QuickBooks Enhanced Payroll, which provides payroll tax tables, payroll
reports, federal and state payroll tax forms, workers compensation tracking, and eFile & Pay for
federal and state payroll taxes; QuickBooks Enhanced Payroll for Accountants, which has several
accountant-specific features in addition to the features in QuickBooks Enhanced Payroll; and
QuickBooks Online Payroll, for use with QuickBooks Online. We also offer QuickBooks Assisted
Payroll, through which we provide the back-end aspects of payroll processing, including tax
payments and filings, for customers who process their payrolls using QuickBooks. Direct deposit is
available with all of these offerings for additional fees. Intuit Online Payroll provides small
business payroll services on a subscription basis that do not require customers to use QuickBooks.
This offering includes online payroll tax calculation, payroll reports, direct deposit, electronic
payment of federal and state payroll taxes, and federal and state payroll tax forms.
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Payments. Our Innovative Merchant Solutions business and our recently acquired Electronic
Clearing House business offer a full range of merchant services to small businesses. These include
credit card, debit card, electronic benefits, check guarantee and gift card processing services;
electronic check conversion and automated clearing house (ACH) capabilities; and Web-based
transaction processing services for online merchants. In addition to processing services, we
provide a full range of support for our merchants that includes customer service, charge-back
retrieval and support, and fraud and loss prevention screening.
Consumer Tax
Our Consumer Tax business offers a number of tax return preparation products and services for
customers whose returns have varying levels of complexity. Our current solutions include:
Tax Return Preparation Offerings. Our TurboTax products and services are designed to enable
individuals and small business owners to prepare their own federal and state personal and small
business income tax returns easily, quickly and accurately. They are designed to be easy to use,
yet sophisticated enough for complex tax returns. For the 2007 tax season we offered a range of
software products and services that included desktop and online versions of TurboTax Basic,
TurboTax Deluxe, TurboTax Premier, and TurboTax Home and Business. We also offered TurboTax
Business desktop software and TurboTax Free Edition online. These offerings are subject to change
for the 2008 tax season. Our online offerings are interactive tax preparation services that enable
individual taxpayers to prepare and electronically file their federal and state income tax returns
entirely online. In addition, our Instant Data Entry feature enables taxpayers to import data
directly into their tax returns from Form W-2 (wages) and Form 1099 (interest, dividends and stock
transactions) from participating financial institutions and payroll service companies. This feature
saves TurboTax users time and increases accuracy. TurboTax Live Community is an online forum where
participants can learn from and share information with other users while preparing their income tax
returns.
Electronic Filing and Other Services. Through our electronic filing center, our desktop and online
tax preparation customers can electronically file their federal income tax returns, as well as
state returns in all states that support electronic filing. For the 2007 tax year our online tax
services were offered through the Web sites of approximately 1,100 financial institutions,
electronic retailers and other merchants and on Yahoo!® Finance Tax Center. We also offer services
that enable taxpayers to pay for their tax products and services from their anticipated refund.
Intuit Tax Freedom Project. Under the Intuit Tax Freedom Project, we provide online federal and
state income tax return preparation and electronic filing services at no charge to eligible
taxpayers. In fiscal 2008 we provided approximately 1.6 million free federal returns under this
initiative. We are a member of the Free File Alliance, a consortium of private sector companies
that has entered into an agreement with the federal government to provide free online federal tax
preparation and filing services to eligible taxpayers. The agreement is scheduled to expire in
October 2009. See also Competition Consumer Tax later in this Item 1.
Accounting Professionals
Our Accounting Professionals segment provides software and services for accountants and tax
preparers in public practice. These include offerings that help professional accountants and tax
preparers provide accounting, payroll, tax planning and tax compliance services to their individual
and business clients, and that help them manage their own practices more effectively.
Tax Offerings. Our tax software product lines for accounting professionals are Lacerte and
ProSeries. Lacerte software is designed for full-service accounting firms that prepare the most
complex returns. We offer two versions of our ProSeries software: ProSeries Professional Edition,
designed for year-round tax practices that prepare moderately complex tax returns; and ProSeries
Basic Edition, designed for the needs of smaller and seasonal tax practices. Accounting
professionals license these tax products for a flat fee for unlimited use, or use them to print or
electronically file tax returns on a pay-per-return basis. Accountants and tax preparers using
Lacerte and ProSeries can file their clients tax returns using our electronic filing services.
Accounting Offerings. Our accounting offering for professionals, QuickBooks Premier Accountant
Edition, provides the tools and file-sharing capabilities needed to efficiently complete
bookkeeping, trial balance, write-up, and financial reporting tasks. Our QuickBooks ProAdvisor
Program is a subscription-based membership that provides
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QuickBooks and QuickBooks Payroll software for professional accountants, technical support,
training, product certification, access to marketing tools and discounts on products purchased on
behalf of clients.
Financial Institutions
Our Digital Insight business provides outsourced online banking software products that are hosted
in our data centers and delivered as an on-demand service offering to small and medium sized
financial institutions. No single financial institution accounted for more than 10% of this
business revenue in fiscal 2008 or 2007.
Consumer Banking. We offer Internet banking applications that financial institutions make
available to their retail customers. These applications include the ability to view transaction
history, account balances, check images and statements; funds transfer between accounts;
inter-institutional transfers; bill payment and bill presentment; and interfaces to personal
financial management software such as Quicken.
Business Banking. We also offer business banking software products and services that financial
institutions make available to their business customers. These offerings include features similar
to those of our consumer product as well as lockbox reporting, payroll direct deposit, wire and
inter-account fund transfers, account reconciliations, foreign exchange trade and interfaces to
business financial management software such as QuickBooks.
Other Businesses
Quicken. Our Quicken line of desktop software products helps users organize, understand and manage
their personal finances. Quicken allows customers to reconcile bank accounts, pay bills, record
credit card and other transactions, and track investments, mortgages and other assets and
liabilities. Quicken also allows customers to flag their tax-related financial transactions and
download that information into our TurboTax consumer tax return preparation software. We offer
Quicken Starter Edition and Quicken Deluxe as well as Quicken Premier, which offers more robust
investment and tax planning tools; Quicken Home and Business, which allows customers to manage both
personal and small business finances in one application; and Quicken for Mac. We also offer Quicken
Online, which brings customer bank account, credit card and bill payment information together on
the Internet under a single password.
Intuit Real Estate Solutions. Our Intuit Real Estate Solutions business offers software and
related technical support, consulting and training services for residential, commercial and
corporate property managers. In addition to its domestic operations, this business has operations
in several international locations.
Canada and the United Kingdom. In Canada, we offer versions of QuickBooks that we have
localized, that is, customized to meet the unique needs of customers in that specific
international location. These include QuickBooks software offerings, payroll offerings and service
plans. We also offer QuickTax consumer tax return preparation software, professional tax
preparation products and services, and localized versions of Quicken in Canada. In the United
Kingdom, we offer localized versions of QuickBooks and QuickBooks Payroll, including products and
services sold in partnership with banks.
PRODUCT DEVELOPMENT
Since the markets for software and related services are characterized by rapid technological
change, shifting customer needs and frequent new product introductions and enhancements, a
continuous high level of investment is required to innovate and develop new products and services
and to enhance existing offerings. We develop the majority of our products and services internally.
We also supplement our internal development efforts by acquiring or licensing products and
technology from third parties, and establishing other relationships that enable us to enhance or
expand our offerings more rapidly. We have a number of United States patents and pending
applications that relate to various aspects of our products and technology.
Our traditional core desktop software products QuickBooks, TurboTax, Lacerte, ProSeries and
Quicken tend to have predictable annual development and product release cycles. We also develop
new products for which development cycles are less predictable. Developing consumer and
professional tax software and services presents unique challenges because of the demanding
development cycle required to accurately incorporate tax law and tax
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form changes within a rigid timetable. The development timing for our other small business and
financial institutions offerings varies with business needs and regulatory requirements and the
length of the development cycle depends on the scope and complexity of each particular project.
In our Financial Institutions business, we have developed interfaces with the systems of many of
the major providers of core processing software and services to financial institutions. These
system interfaces allow us to access a financial institutions host system to provide end users
access to their account data. In addition to developing new interfaces, we continue to enhance our
many existing interfaces in order to deliver more robust connectivity and increase operating
efficiencies.
We continue to make substantial investments in research and development, and we expect to focus our
future research and development efforts on enhancing existing products and services and on
developing new products and services that will offer increased ease of use, be customized for
specific customer categories, be Web-integrated or Web-based, and feature improved integration with
other Intuit and third party products and services and with our internal information systems. We
also expect to continue to focus significant research and development efforts on multi-year
projects to update the technology platforms for several of our products. Our research and
development expenses were $605.8 million or 20% of total net revenue in fiscal 2008, $472.5 million
or 17% of total net revenue in fiscal 2007, and $385.8 million or 17% of total net revenue in
fiscal 2006.
SEASONALITY
Our QuickBooks, Consumer Tax and Accounting Professionals businesses are highly seasonal. Some of
our other offerings are also seasonal, but to a lesser extent. Revenue from our QuickBooks software
products tends to be highest during our second and third fiscal quarters, 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. In our Consumer Tax business, a greater proportion of our revenue has been
occurring later in this seasonal period due in part to the growth in sales of TurboTax Online, for
which revenue is recognized upon printing or electronic filing of a tax return. The seasonality of
our Consumer Tax and Accounting Professionals revenue is also affected by the timing of the
availability of tax forms from taxing agencies and the ability of those agencies to receive
electronic tax return submissions. Delays in the availability of tax forms or the ability of taxing
agencies to receive submissions can cause revenue to shift from our second fiscal quarter to our
third fiscal quarter. 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. We
believe the seasonality of our revenue is likely to continue in the future.
MARKETING, SALES AND DISTRIBUTION CHANNELS
Markets
Our primary target customers are small and medium sized businesses, consumers, accounting
professionals, and small and medium sized financial institutions. The markets in which we compete
have always been characterized by rapid technological change, shifting customer needs, and frequent
new product introductions and enhancements by competitors. Over the past few years the Internet has
accelerated the pace of change and revolutionized the way that customers learn about and purchase
products and services. Real-time, personalized online shopping experiences are rapidly becoming the
standard. Many customers now begin their shopping process online and make their purchase either
online or at a retail location. This drives the need to create integrated, multi-channel shop and
buy experiences. Market and industry changes are quickly rendering existing products and services
obsolete, so our success depends on our ability to respond rapidly to these changes with new
business models, updated competitive strategies, new or enhanced products and services, alternative
distribution methods and other changes in the way we do business.
Our target customers for online banking services are small and medium sized financial institutions
seeking an outsourced solution that allows them to compete with the larger national banks in their
market.
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Marketing Programs
To sell our products and services to small businesses, consumers and accounting professionals, we
use a variety of marketing programs to generate software orders, stimulate demand and generally
maintain and increase customer awareness of our products and services. These programs include Web
marketing, including purchasing key words from major search engine companies; direct-response mail
and email campaigns; telephone solicitations; newspaper, magazine, billboard, radio and television
advertising; and promotional offers that we coordinate with major retailers and computer original
equipment manufacturers, or OEMs. We also use workflow-integrated in-product discovery in some of
our software products to market other related products and services, including third-party products
and services. In our Financial Institutions business, our marketing efforts are primarily focused
on identifying potential financial institution clients and marketing our services to consumer end
users in cooperation with our financial institution clients.
Sales and Distribution Channels
Multi-Channel Shop and Buy Experiences. Our consumer and small business customers increasingly use
the Internet to research both online and desktop products and services. Some customers buy and use
our products and services entirely online. Others purchase desktop products and services using the
Internet. Still others prefer to make their final decision at a retail location. We coordinate our
Web sites, promotions and retail displays in support of this integrated multi-channel shop and buy
model.
Direct Sales Channel. We sell many of our products and services for small businesses, consumers
and accounting professionals directly to our customers through our Web sites and call centers.
Telesales continues to be an effective channel for serving customers that want live help selecting
the products and services that are right for their needs.
In our Financial Institutions business, we sell our products and services to financial institutions
using a direct sales model and, to a lesser extent, in cooperation with core processing partners.
Our typical sales cycle is approximately six to twelve months for new financial institutions and
four to six months for add-on sales to existing customers.
Retail Channel. We sell our QuickBooks, TurboTax and Quicken desktop software as well as our
QuickBooks Payroll and Intuit Online Payroll services and merchant credit card payment processing
services at retail in the United States. We sell these products and services directly and through
distributors to office supply superstores, warehouse clubs, consumer electronics retailers, general
mass merchandisers, online retailers, and catalogers. In Canada and other international markets we
also rely on distributors and other third parties who sell products into the retail channel. The
retail channel provides broad customer reach through retailer-sponsored advertising and exposure to
retail foot traffic. This channel also gives us the opportunity to communicate our product and
service lineup and messages through multiple touch points and allows us to serve our customers at
relatively modest cost.
OEM, Alliance Partner and Solution Provider Channels. We have strategies to address the original
equipment manufacturer (OEM), alliance partner, and solution provider channels. Revenue from these
channels is currently less significant than revenue from our direct and retail channels, but it is
growing. Relationships with selected personal computer OEMs help us attract new customers and
generate sales of our core desktop software products. We also sell our consumer and small business
products and services through selected alliance partners, primarily banks, credit unions, and
savings and investment firms. These alliance partners help us reach new customers at the point of
transaction and drive growth and market share by extending our online reach. Solution providers
combine our products and services with value-added marketing, sales and technical expertise to
deliver a complete solution at the local level.
In our Financial Institutions business, we have joint marketing arrangements with several core
processing vendors. They include Fiserv, Inc., Open Solutions, Inc., Fidelity Information Services,
Inc., Metavante Corporation and Computer Services Inc. To deliver bill payment and bill presentment
services to our financial institution customers, we also maintain value-added reseller
relationships with major providers such as Metavante Corporation and CheckFree Corporation (part of
Fiserv).
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COMPETITION
Overview
We face intense competition in all of our businesses, both domestically and internationally.
Competitive interest and expertise in many of the markets we serve, particularly small business,
consumer tax and online banking, has grown markedly over the past few years and we expect this
trend to continue. Some of our existing competitors have significantly greater financial, technical
and marketing resources than we do. In addition, the competitive landscape can shift rapidly as new
companies enter markets in which we compete. This is particularly true for online products and
services, where the barriers to entry are lower than they are for desktop software products and
services. To attract customers, many new online competitors are offering free or low-priced
entry-level products which we must take into account in our pricing strategies.
Our most obvious competition comes from other companies that offer technology solutions similar to
ours. However, for many of our products and services, other important competitive alternatives for
customers are third party service providers such as professional accountants and seasonal assisted
tax preparation businesses. Manual tools and processes, or general-purpose software, are also
important competitive alternatives. Many of our new customers previously used pencil and paper or
software such as word processors and spreadsheets, rather than competitors software and services,
to perform financial tasks. We believe that there is a long-term trend away from manual methods and
toward the use of both desktop and online software to accomplish these tasks that will provide
future growth opportunities.
Competition Specific to Business Segments
Small Business. QuickBooks is the leading product in the retail sales channel for its category. We
face competitive challenges in our QuickBooks business and our Payroll and Payments business from
Microsoft Corporation, which offers accounting software and associated services that directly
target small business customers. Increasingly, our small business products and services also face
competition from free or low cost online accounting offerings as well as free online banking and
bill payment services offered by financial institutions and others. In our merchant services
business, we also compete directly with a number of independent sales organizations, none of which
dominates the market.
Consumer Tax. In the private sector we face intense competition primarily from H&R Block, the
makers of TaxCut software, and from 2nd Story Softwares TaxACT, an online offering that subjects
us to significant price pressure. We also compete for customers with assisted tax preparation
businesses such as H&R Block.
We face potential competitive challenges in our Consumer Tax business from publicly funded
government entities that offer electronic tax preparation and filing services at no cost to
individual taxpayers. We are a member of the Free File Alliance, a consortium of private sector
companies that entered into an agreement with the federal government that is scheduled to expire in
October 2009. Under this agreement, a number of private sector companies, rather than the federal
government, have been providing online federal tax preparation and filing services at no cost to
eligible federal taxpayers through initiatives such as our Intuit Tax Freedom Project.
Approximately 20 states have also adopted Free File Alliance public-private agreements while
approximately 20 other states offer some form of direct government tax preparation and filing
services free to qualified taxpayers. We continue to actively work with others in the private and
public sectors to advance the goals of the Free File Alliance policy initiative and to support
successful public-private partnerships. However, future administrative, regulatory or legislative
activity in this area could harm our Consumer Tax business.
Accounting Professionals. Our ProSeries professional tax offerings face pricing pressure from
competitors who may offer deep product discounts or lower prices. Our Lacerte professional tax
offerings face competition from competitively-priced tax and accounting solutions that include
integration with non-tax functionality. We also face growing competition from online offerings,
which may be marketed more effectively or have lower pricing than our offerings for accounting
professionals.
Financial Institutions. The market for Internet banking services is highly competitive. In the
area of consumer Internet banking, we primarily compete with other companies that provide
outsourced online banking services to financial institutions, including Online Resources, S1
Corporation and FundsXpress (a subsidiary of First Data Corporation). Also, vendors such as
Corillian (part of Fiserv) that primarily target the largest financial institutions
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occasionally compete with us in our market segment. In addition, Fiserv, Open Solutions, Inc.,
Fidelity Information Services, Inc., Jack Henry, Metavante Corporation and several other vendors of
core processing services to financial institutions offer their own online banking products,
although many of these firms also offer our products through a referral or reseller arrangement
with us.
The following table shows the significant competitors for each of our major products and services.
Intuit | Significant Competitors | |||||
Segment | Product or Service | Name | Product or Service | |||
QuickBooks
|
QuickBooks | Microsoft Corporation | Microsoft Office Accounting | |||
Financial supplies | Deluxe Corporation | Business forms and checks | ||||
FedEx Kinkos, Office Depot, Staples
|
Business forms and business
identity services
|
|||||
Payroll and Payments
|
Small business payroll | ADP | Payroll solutions for businesses
of any size |
|||
Paychex | Payroll solutions for small
and medium sized businesses |
|||||
PayCycle | Online self-service payroll solutions for small businesses |
|||||
Merchant services |
Wells Fargo, JP Morgan Chase,
First Data Corporation, Elavon |
Merchant processing services |
||||
Consumer Tax
|
TurboTax | H&R Block | TaxCut | |||
2nd Story Software, Inc. | TaxACT | |||||
Accounting Professionals
|
ProSeries | CCH | ATX and TaxWise offerings | |||
Drake Software |
Drake professional tax offerings
|
|||||
Lacerte | CCH | ProSystem fx Office Suite |
||||
Thomson Reuters |
CS Professional Suite,
GoSystems Tax |
|||||
Financial Institutions
|
Online banking services |
Online Resources, S1 Corporation,
and FundsXpress
|
Online banking services | |||
Fiserv, Open Solutions, Fidelity
Information Services, Jack Henry
and Metavante Corporation
|
Online banking services
(core processors)
|
|||||
Competitive Factors
We believe the most important competitive factors for our core software products QuickBooks,
TurboTax, Lacerte, ProSeries and Quicken are ease of use, product features, size of the installed
customer base, brand name recognition, value proposition, cost, and product and support quality.
Access to distribution channels is also important for our QuickBooks, TurboTax and Quicken
products. In addition, support from accounting professionals and the ability for customers to
upgrade within product families as their businesses grow are significant competitive factors for
our QuickBooks products. Productivity is also an important competitive factor for the full-service
accounting firms to which we market our Lacerte products. We believe we compete effectively on
these factors as our QuickBooks, TurboTax, and Quicken products are the leading products in the
retail sales channel for their respective categories.
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For our service offerings such as small business payroll, merchant payment processing services and
outsourced online banking, features and ease of use, the integration of these products with related
software, brand name recognition, effective distribution, quality of support, cost and scalability
of operations are important competitive factors.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
We provide customer service and technical support by telephone, e-mail, online chat, online
communities, and our customer service and technical support Web sites. We have full-time and
outsourced customer service and technical support staffs. We supplement these staffs with seasonal
employees and additional outsourcing during periods of peak call volumes, such as during the tax
return filing season or following a major product launch. We outsource to several firms
domestically and internationally. Most of our internationally outsourced consumer and small
business customer service and technical support personnel are currently located in Canada and
India.
We offer free self-help information through our technical support Web sites for our QuickBooks,
TurboTax, Accounting Professionals and Quicken software products. Customers use our Web sites to
find answers to commonly asked questions and check on the status of orders. Under certain support
plans, customers can also use our Web sites to receive product updates electronically. Support
alternatives and fees vary by product. We also sponsor online user communities, such as TurboTax
Live Community, where customers can share knowledge and product advice with each other.
MANUFACTURING AND DISTRIBUTION
Desktop Software and Supplies
The main steps involved in manufacturing desktop software are manufacturing compact discs (CDs),
printing boxes and related materials, and assembling and shipping the final products.
For retail manufacturing, we have an agreement with Arvato Digital Services, Inc. (ADiS), a
division of Bertelsmann AG, under which ADiS provides a large majority of the manufacturing volume
for our launches of QuickBooks, TurboTax and Quicken, as well as for day-to-day replenishment after
product launches. ADiS has operations in multiple locations that can provide redundancy if
necessary. We also have an agreement with JVC America Inc. under which JVC provides secondary
outsourced manufacturing volume for these launches and for day-to-day replenishment.
For retail distribution, we have an agreement with ADiS under which ADiS handles all logistics
services. Our retail product launches are operationally complex. Our model for product delivery for
retail launches and replenishment is a hybrid of direct to store deliveries and shipments to
central warehouse locations. This allows improved inventory management by our retailers. We also
ship products for many of our smaller retail customers through distributors.
ADiS also provides most of the manufacturing volume and distribution services for our direct
desktop software orders. We have an exclusive agreement with Harland Clarke, a division of M&F
Worldwide Corporation, to fulfill orders for all of our printed checks and most other products for
our financial supplies business.
We have multiple sources for all of our raw materials and availability has historically not been a
significant problem for us.
Prior to major product releases for our core desktop software products we tend to have significant
levels of backlog, but at other times backlog is minimal and we typically ship products within a
few days of receiving an order. Because of this fluctuation in backlog, we believe that backlog is
not a reliable predictor of our future core desktop software sales.
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Internet-Based Products and Services
Intuits data centers house most of the systems, networks and databases required to operate and
deliver our Internet-based products and services. These include QuickBooks Online, online payroll
services, merchant payment processing services, Web site hosting services for small businesses,
TurboTax Online, consumer and professional electronic tax filing services, Digital Insight
outsourced online banking services, and Quicken Online. Through our data centers, we connect
customers to products and services and we store the vast amount of data that represents the content
on our Web sites. As our businesses continue to move toward delivering more online products and
services, this infrastructure will become even more critical in the future. Our data centers
consist of numerous servers and databases located in several sites across the United States. Due to
our evolving business needs, we are building a new data center in Washington state to support our
longer term hosting and system availability requirements. We expect to begin occupying this data
center in the second half of fiscal 2009.
PRIVACY AND SECURITY OF CUSTOMER INFORMATION AND TRANSACTIONS
We are subject to various federal, state and international laws and regulations and to financial
institution requirements relating to the privacy and security of customer and employee personal
information. We are also subject to laws and regulations that apply to telemarketing, email
activities and credit reporting. Additional laws in all of these areas are likely to be passed in
the future, which could result in significant limitations on or changes to the ways in which we can
use or transmit the personal information of our customers or employees, communicate with our
customers, and deliver products and services, or may significantly increase our compliance costs.
If our business expands to new industry segments that are regulated for privacy and security, or to
countries outside the United States that have strict data protections laws, our compliance
requirements and costs will increase.
Through a Master Privacy Policy Framework designed to be consistent with globally recognized
privacy principles, we comply with United States federal and other country guidelines and practices
to help ensure that customers and employees are aware of, and can control, how we use information
about them. Our primary Web sites, such as QuickBooks.com and TurboTax.com, have been certified by
TRUSTe, an independent, non-profit organization that operates a Web site privacy certification
program representing industry standard practices to address users and regulators concerns about
online privacy. We also use privacy statements to provide notice to customers of our privacy
practices, as well as provide them the opportunity to furnish instructions with respect to use of
their personal information. We participate in industry groups whose purpose is to influence public
policy and industry best practices for privacy and security.
To address security concerns, we use security safeguards to help protect the systems and the
information customers give to us from loss, misuse and unauthorized alteration. Whenever customers
transmit sensitive information, such as a credit card number or tax return data, to us through one
of our Web sites, that information is stored on servers that allow encryption of the information as
it is transmitted to us. We work to protect our systems from unauthorized internal or external
access using numerous commercially available computer security products as well as internally
developed security procedures and practices.
GOVERNMENT REGULATION
The financial services industry is subject to extensive and complex federal and state regulation.
Our financial institution customers, which include commercial banks and credit unions, operate in
markets that are subject to rigorous regulatory oversight and supervision. The compliance of our
products and services with these requirements depends on a variety of factors including the
particular functionality, the interactive design and the charter or license of the financial
institution. Our financial services customers must independently assess and determine what is
required of them under these regulations and are responsible for ensuring that our systems and the
design of their Web sites conform to their regulatory obligations.
Our Digital Insight subsidiary is not directly subject to federal or state regulations specifically
applicable to financial institutions such as banks and credit unions. However, as a provider of
services to financial institutions, our Digital Insight subsidiary is examined by the Federal
Financial Institution Examination Council under the Information
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Technology examination guidelines. Although we believe we are not subject to direct supervision by
federal and state banking agencies with regard to other regulations, we have from time to time
agreed to examinations of our business and operations by these agencies.
Our Consumer Tax and Accounting Professionals businesses are also subject to federal and state
government requirements, including regulations related to the electronic filing of tax returns, the
provision of tax preparer assistance and the use and disclosure of customer information. In
addition, we offer certain other products and services, such as small business payroll, which are
subject to special regulatory requirements. As we expand our financial institutions, tax and small
business products and services, we may become subject to additional government regulation. New laws
or regulations may be adopted in these areas that could impose significant limitations on our
business and increase our cost of compliance. We continually analyze new business opportunities,
and new businesses that we pursue may require additional costs for regulatory compliance.
We are subject to federal and state laws and government regulations concerning employee safety and
health and environmental matters. The Occupational Safety and Health Administration, the
Environmental Protection Agency, and other federal and state agencies have the authority to put
regulations in place that may have an impact on our operations.
INTELLECTUAL PROPERTY
We regard our products as proprietary. We protect our intellectual property by relying on a
combination of copyright, patent, trade secret and trademark laws, restrictions on disclosure and
other methods. In particular, we have a number of registered trademarks that include Intuit,
QuickBooks, TurboTax, Lacerte, ProSeries, Digital Insight and Quicken. We have registered these and
other trademarks and service marks in the United States and, depending on the relevance of each
brand to other markets, in many foreign countries. Most registrations can be renewed perpetually at
10-year intervals. We also currently hold a small but growing patent portfolio. We regularly file
applications for patents, copyrights and trademarks and service marks in order to protect
proprietary intellectual property that we believe is important to our business. We also license
intellectual property from third parties for use in our products.
We face a number of risks relating to our intellectual property, including unauthorized use and
unauthorized copying, or piracy, of our products. Litigation may be necessary to protect our
intellectual property rights or to determine the validity and scope of the proprietary rights of
others. Patents that have been issued to us could be determined to be invalid and may not be
enforceable against competitive products in every jurisdiction. Furthermore, other parties have
asserted and may, in the future, assert infringement claims against us. These claims and any
litigation may result in invalidation of our proprietary rights or a finding of infringement
against us along with an assessment of damages. Litigation, even if without merit, could result in
substantial costs and diversion of resources and management attention. In addition, third party
licenses may not continue to be available to us on commercially acceptable terms, or at all.
EMPLOYEES
As of July 31, 2008, we had approximately 8,200 employees in major offices in the United States,
Canada, India, the United Kingdom and other locations. We believe our future success and growth
will depend on our ability to attract and retain qualified employees in all areas of our business.
We do not currently have any collective bargaining agreements with our employees, and we believe
employee relations are generally good. Although we have employment-related agreements with a number
of key employees, these agreements do not guarantee continued service. We believe we offer
competitive compensation and a good working environment. We were named one of Fortune magazines
100 Best Companies to Work For in each of the last seven years. However, we face intense
competition for qualified employees, and we expect to face continuing challenges in recruiting and
retention.
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ITEM 1A
RISK FACTORS
Forward-Looking Statements and Risk Factors
This Annual Report on Form 10-K contains forward-looking statements. All statements in this report,
other than statements that are purely historical, are forward-looking statements. Words such as
expect, anticipate, intend, plan, believe, forecast, estimate, seek, and similar
expressions also identify forward-looking statements. In this report, forward-looking statements
include, without limitation, the following:
| our expectations and beliefs regarding future conduct and growth of the business; | ||
| our expectations regarding competition and our ability to compete effectively; | ||
| our expectations regarding the development of future products, services and technology platforms and our research and development efforts; | ||
| our intention to create easy-to-use connected services that solve customer problems while building durable competitive advantage; | ||
| the assumptions underlying our critical accounting policies and estimates, including our estimates regarding product rebate and return reserves; stock volatility and other assumptions used to estimate the fair value of share-based compensation; and expected future amortization of purchased intangible assets; | ||
| our belief that the investments that we hold are not other-than-temporarily impaired; | ||
| our belief that the reduction in liquidity of the municipal auction rate securities we hold will not have a material impact on our overall ability to meet our liquidity needs; | ||
| our belief that our exposure to currency exchange fluctuation risk will not be significant in the future; | ||
| our assessments and estimates that determine our effective tax rate; | ||
| our belief that our income tax valuation allowance is sufficient; | ||
| our belief that our cash and cash equivalents, investments and cash generated from operations will be sufficient to meet our working capital, capital expenditure and other liquidity requirements for at least the next 12 months; | ||
| our belief that long-term trends toward the use of both desktop and online software will provide future growth opportunities; | ||
| our belief that the continuing trend among individual taxpayers toward the use of software to prepare their own income tax returns will continue to be important to the growth of our Consumer Tax business; | ||
| our expectations regarding capital expenditures; | ||
| our expectations regarding the timing of our occupation of the new data center we are building in Washington state; | ||
| our belief that our facilities are adequate for our near-term needs and that we will be able to locate additional facilities as needed; and | ||
| our assessments and beliefs regarding the future outcome of pending legal proceedings and the liability, if any, that Intuit may incur as a result of those proceedings. |
We caution investors that forward-looking statements are only predictions based on our current
expectations about future events and are not guarantees of future performance. We encourage you to
read carefully all information provided in this report 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 Annual Report, and we undertake
no obligation to revise or update any forward-looking statement for any reason.
Because forward-looking statements involve risks and uncertainties, there are important factors
that may cause actual results to differ materially from those contained in the forward-looking
statements. These factors include the following:
We face intense competitive pressures in all of our businesses that may harm our operating results.
We face intense competition in all of our business units, and we expect competition to remain
intense in the future. The number, resources and sophistication of the companies with whom we
compete have increased as we continue to expand our product and service offerings. Our
competitors, whether new or well-established, may introduce new
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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. We also face intensified competition from providers of free online
and desktop accounting, tax, banking and other financial services. In order to compete, we have
also introduced free offerings in several categories, but we may not be able to attract customers
or effectively monetize all of these offerings. These actions of our competitors, if successful,
can diminish our revenue and profitability, capture market share, and harm our ability to acquire
and retain customers.
QuickBooks; Payroll and Payments. Losing existing or potential QuickBooks customers to competitors
causes us to lose potential revenue in the short-term and limits our opportunities to sell related
products and services, including payroll and payments offerings, in the future. Many competitors
provide accounting and business management products and services to small businesses. For example,
Microsoft currently offers a version of its small business accounting software for no additional
charge to users of its operating system, and offers, in partnership with third parties, several
other competitive products and services for small businesses. Although we have successfully
competed with Microsoft in the past, Microsofts small business offerings may have a significant
negative impact on our future revenue and profitability. As we continue to offer small business
services beyond financial management, we are likely to come into competition with several other
well-established companies that may have greater resources, market share and other advantages. In
addition, as online services and business models grow in popularity, new competitors may face lower
barriers to entry and can offer online services that compete directly with our desktop and online
offerings.
We may also experience pricing pressure for our small business payroll offerings due to the larger
size and economies of scale of certain competitors in that business.
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.
| Government Encroachment. Although the Free File Alliance has kept the federal government from being a direct competitor to Intuits tax offerings, it has fostered additional online competition and could cause us to lose significant revenue opportunities. Companies have used the Free File Alliance and its position on the Internal Revenue Service Web site as a marketing tool to grow brand awareness and attract customers to other paid services, which has intensified competition. In addition, taxpayers who formerly have paid for Intuits products may elect to use Intuits or our competitors free federal service instead. The current agreement with the Free File Alliance is scheduled to expire in October 2009. However, the IRS often seeks to negotiate changes to the agreement in the fall prior to each new tax filing season based on the prior tax seasons experience with the Free File program. If the IRS chose not to renew this agreement or terminated the agreement and elected to provide government software and electronic filing services to taxpayers at no charge, or if the federal government significantly altered the Free File Alliance or required the provision of government tax filing services directly to taxpayers, our revenue and profits could suffer. See the discussion on the Free File Alliance in Item 1, Business Competition. | ||
In 2008, approximately 20 state governments had agreements with the private sector based on the federal Free File Alliance agreement and had agreed not to provide direct government tax preparation services. However, approximately 20 other states, including California, directly offered their own online tax preparation and filing services to taxpayers. California has tested a program under which a state-operated system automatically prepared and filed state income tax returns for approximately 11,000 taxpayers for tax year 2007 with no individual transaction charge to those taxpayers. These or similar programs could be introduced or expanded in the future, which could cause us to lose customers and revenue. We anticipate that governmental encroachment will present a continued competitive threat to our business for the foreseeable future. | |||
| Private Sector Competition. In the private sector we face intense competition primarily from H&R Block, which offers tax preparation services and software, and from online offerings from 2nd Story Software, which subject us to significant price pressure. In addition, the availability of free online tax preparation services, whether through the Free File Alliance or otherwise, may reduce demand for our paid offerings which would harm our business and results of operations. Pricing pressure or other factors may cause us to bundle products and services for which we have previously charged separate fees, which could lead to a loss of market share or a decrease or deferral of revenue. |
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Accounting Professionals. Our ProSeries professional tax offerings face pricing pressure from
competitors who may offer deep product discounts or lower prices. Our Lacerte professional tax
offerings face competition from competitively-priced tax and accounting solutions that include
integration with non-tax functionality. We also face growing competition from online offerings,
which may be marketed more effectively or have lower pricing than our offerings for accounting
professionals.
Financial Institutions. We compete with several companies that provide online banking services to
financial institutions. We face intense competition from two main sources: other companies that
primarily offer outsourced online banking services, and vendors of core processing services to
financial institutions. Also, vendors that primarily target the largest financial institutions
occasionally compete in our target market. In some instances, we compete with companies, including
core processing vendors, with whom we also have significant business relationships. Some of our
current and potential competitors have longer operating histories and may be in a better position
to produce and market their services due to their greater technical, marketing and other resources,
as well as their greater name recognition and larger installed bases of customers. Many of our
competitors, including the core processors, may have well-established relationships with our
current and potential financial institution customers, which may harm our ability to acquire and
retain those customers.
As we negotiate service contract renewals with current customers, competitive pressures may require
us to make concessions on pricing and other material terms to induce the customer to remain with
us. If we are unable to compete effectively with other online banking service providers, our
business results may suffer.
Future revenue growth for our core products depends upon our successful introduction of new and
enhanced products and services.
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 to generate a significant portion
of their revenues. In addition, our consumer tax business depends significantly on revenue from
customers who return each year to use our updated tax preparation and filing software and services.
As our existing products mature, encouraging customers to purchase product upgrades becomes more
challenging unless new product releases provide features and functionality that have meaningful
incremental value. If we are not able to develop and clearly demonstrate the value of upgraded
products to our customers, our upgrade and service revenues will be harmed. 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.
As online services and business models grow in popularity and usage, and as we continue to grow our
online offerings, we must continue to innovate and develop features that are demanded by our
existing and potential online customers, which may require expertise with new technologies and
platforms. If we are unable to continue developing, marketing and commercializing valuable online
services, we may be unable to attract and retain customers, and our revenues could suffer.
In some cases, 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, we discontinued our Easy Estimator
for contractors offering at the end of fiscal 2007. If we misjudge customer needs, our new
products and services will not succeed and our revenues and earnings will be harmed. As we expand
our offerings to new customer categories we run the risk of customers shifting from our higher
priced and higher margin products to our lower priced or free offerings. For instance, our
QuickBooks Simple Start free edition may attract users that would otherwise have purchased our
higher priced, more full featured offerings.
Interruption or failure of our information technology and communications systems could compromise
the availability and security of our online products and services, which could damage our
reputation and harm our operating results.
As we continue to grow our online services, including TurboTax Online, consumer and professional
electronic tax filing services, QuickBooks Online, Web site design and hosting services for small
businesses, online payroll and banking services, Quicken Online and online commerce Web sites, we
become more dependent on the continuing
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operation and availability of our information technology and communication systems and those of our
external service providers. Any damage to or failure of our systems could result in interruptions
in our service, which could reduce our revenues and profits, cause us to lose customers and damage
our brand. Although we have implemented practices designed to maintain the availability of our
online products and services and mitigate the harm of any unplanned interruptions, we do not have
complete redundancy for all of our systems, and our disaster recovery planning cannot account for
all eventualities. Despite our efforts to maintain continuous and reliable server operations, we
occasionally experience unplanned outages or technical difficulties. Due to our evolving business
needs and real estate planning, we are building a new data center in Washington state to support
our longer term hosting requirements. We expect to begin occupying this data center in the second
half of fiscal 2009. If we do not execute this transition to the new data center in an effective
manner, we could experience unplanned service disruptions or unforeseen increases in cost which
could harm our operating results and our business. We do not maintain real-time back-up of all our
data, and in the event of significant system disruption, particularly during peak tax filing
season, we could experience loss of data or processing capabilities, which could cause us to lose
customers and could materially harm our reputation and our operating results.
Our data centers and our information technology and communications systems are vulnerable to damage
or interruption from natural disasters, malicious attacks, fire, power loss, telecommunications
failures, computer viruses, computer denial of service attacks or other attempts to harm our
systems. If hackers were able to circumvent our security measures, we could lose proprietary
information or personal information or experience significant disruptions in the delivery of our
products and services. If our systems become unavailable or suffer a security breach, we may
expend significant resources to address these problems, including notification under data privacy
regulations, and our reputation and operating results could suffer.
We rely on internal systems and external systems maintained by manufacturers, distributors and
service providers to take and fulfill customer orders, handle customer service requests and host
certain online activities. Any interruption or failure of our internal or external systems could
prevent us or our service providers from accepting and fulfilling customer orders or cause company
and customer data to be unintentionally disclosed. Our continuing efforts to upgrade and expand
our network security and other information systems could be costly, and problems with the design or
implementation of system enhancements could harm our business and our results of operations.
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 online tax preparation and filing 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 which could prevent 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
would harm our reputation and ability to attract and retain customers. For example, on April 17,
2007 our customers experienced significant delays in electronically filing their income tax returns
due to an intermittent database problem in our e-filing system. We refunded approximately $9
million in credit card charges for our consumer electronic filing and online tax preparation
services that were made during the time that the delays occurred. These refunds did not have a
significant impact on our fiscal 2007 financial condition or results of operations. However, we may
experience problems with our online systems and services in the future, and any prolonged
interruptions in our online tax preparation or electronic filing service at any time during the tax
season would result in lost customers, additional refunds of customer charges, negative publicity
and increased operating costs, any of which could significantly harm our business, financial
condition and results of operations.
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. 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
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because our customers expect high levels of accuracy and a timely launch of these products to
prepare and file their taxes by the tax filing deadline. Due to the complexity of our products and
the condensed development cycles under which we operate, our products sometimes contain bugs that
can unexpectedly interfere with the operation of the software. 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
loss of customers and revenue, negative publicity, customer and employee dissatisfaction, reduced
retailer shelf space and promotions, and increased operating expenses, such as inventory
replacement costs, legal fees or payments resulting from our commitment to reimburse penalties and
interest paid by customers due solely to calculation errors in our consumer tax preparation
products.
Our collection, use and retention of personal customer information present business operations and
security risks, require us to incur expenses, and could harm our business.
A number of our businesses collect, use and retain large amounts of personal customer information,
including credit card numbers, tax return information, bank account numbers and passwords, personal
and business financial data, social security numbers and other payroll information. We may also
develop new business models that use personal information, or data derived from personal
information, in innovative and novel ways. In addition, we collect and maintain personal
information of our employees in the ordinary course of our business. Some of this personal customer
and employee information is held and some transactions are executed by third parties. In addition,
as many of our products and services are Web based, the amount of data we store for our users on
our servers (including personal information) has been increasing. We and our vendors use
commercially available security technologies to protect transactions and personal information. We
use security and business controls to limit access and use of personal information. However, a
third party may be able to circumvent these security and business measures, and errors in the
storage, use or transmission of personal information could result in a breach of customer or
employee privacy or theft of assets, which may require notification under applicable data privacy
regulations. We employ contractors, temporary and seasonal employees who may have access to the
personal information of customers and employees or who may execute transactions in the normal
course of their duties. While we conduct necessary and appropriate background checks of these
individuals and limit access to systems and data, it is possible that one or more of these
individuals could circumvent these controls, resulting in a security breach. The ability to
execute transactions and the possession and use of personal information in conducting our business
subjects us to legislative and regulatory burdens that could require notification to customers or
employees of a security breach, restrict our use of personal information and hinder our ability to
acquire new customers or market to existing customers. 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 our security measures or those of third
parties that execute transactions or hold and manage personal information could have serious
negative consequences for our businesses, including possible fines, penalties and damages, reduced
customer demand for our services, harm to our reputation and brands, further regulation and
oversight by federal or state agencies, and loss of our ability to provide financial transaction
services or accept and process customer credit card orders or tax returns. From time to time, we
detect, or receive notices from customers or public or private agencies that they have detected,
vulnerabilities in our software or in third-party software components that are distributed with our
products. The existence of vulnerabilities, even if they do not result in a security breach, can
harm customer confidence and require substantial resources to address, and we may not be able to
discover or remediate such security vulnerabilities before they are exploited. Although we have
sophisticated network and application security, internal control measures, and physical security
procedures to safeguard our systems, there can be no assurance that a security breach, loss or
theft of personal information will not occur, which could harm our business, customer reputation
and results of operations. If our business expands to new industry segments that are regulated for
privacy and security, or to countries outside the U.S. that have more strict data protection laws,
our compliance requirements and costs will increase.
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. We must continually
invest in our software
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architecture and developer tools in order 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 updating the software platforms for a number of our product lines,
including our QuickBooks and TurboTax products and services. Completing these upgrades and
adapting to other technological developments and new platforms 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.
Our reliance on a limited number of manufacturing and distribution suppliers could harm our
business.
We have chosen to outsource the large majority of the manufacturing and distribution for many of
our desktop software products to a single third party provider and we use a single vendor to
produce and distribute our check and business forms supplies products. Although our reliance on
single suppliers provides us with efficiencies and enhanced bargaining power, poor performance by
or lack of effective communication with these suppliers 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. In particular, the loss of our manufacturing partner for retail would be
disruptive to our business and could cause delay in a product launch. We seek to mitigate this
risk by managing our second tier vendors and maintaining contingency plans. If we experience
delays during a peak demand period or significant quality issues our business could be
significantly harmed.
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 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. In addition, as we offer more
services on a subscription basis, including certain online services for small businesses, we
recognize revenue from those services over the periods in which they are delivered, rather than
recognizing one-time license fees. This could result in significant shifts of revenue from quarter
to quarter, or from one fiscal year to the next, and could make our revenues less predictable.
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 products
and 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 2007 and 2008 we had total net revenue of between $751 million and $1.3 billion while in the
first and fourth quarters of fiscal 2007 and 2008 we had total net revenue of between $351 million
and $478 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; our methods for distributing our products, including the shift to a consignment
model for some of our desktop products sold through retail distribution channels; changes to our
bundling strategy, including the inclusion of upgrades with certain offerings, changes to how we
communicate the availability of new functionality in the future, and the timing of our delivery of
federal and state tax forms (any of which can impact the pattern of revenue recognition); and the
timing of acquisitions, divestitures, and goodwill and purchased intangible asset impairment
charges.
We face a number of risks in our payment processing business that could result in a reduction in
our revenue and earnings.
Our payment processing service business is subject to several specific risks, including the
following:
| if merchants for whom we process payment 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 |
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and our payments may exceed the amount of the customer reserves we have established to make such payments; | |||
| if banks who receive our automated clearing house (ACH) check settlement requests refuse to honor those requests due to inadequate account balances or account closures, we may be required to pay those amounts and our payments may exceed the amount of the check return reserves we have established to make such payments; | ||
| we rely on sponsor banks, payment processors and other service providers to process payment transactions and to access the ACH to submit both credit card and check settlements. If these service providers place restrictions on our processing volume or terminate their relationships with us (including due to failures of financial institutions) and we are unable to secure or successfully migrate our business to other service providers, our ability to process payment transactions and receive the related revenue would be adversely affected; | ||
| if we or our sponsor banks fail to adhere to the data security and other standards of the payment card associations, we may lose our ability to provide payment processing services for Visa, MasterCard and other payment cards; | ||
| we depend on independent sales organizations, some of which do not serve us exclusively, as well as Superior Bankcard Services, a joint venture in which we participate, to acquire and retain merchant accounts; | ||
| our profit margins will be reduced if for competitive reasons we cannot increase our fees at times when the card associations increase the fees that we pay to process merchant transactions through their systems; | ||
| government regulation or policy could restrict the types of merchants for which we can process payments or could impose other requirements on the way we conduct our business, which could result in lower revenue and higher compliance costs; | ||
| unauthorized disclosure of merchant and cardholder data, whether through breach of our computer systems or otherwise, could expose us to protracted and costly litigation as well as notification requirements under applicable regulations; and | ||
| we may encounter difficulties scaling our business systems to support our expected growth. |
Should any of these risks be realized our business and financial results would suffer.
We face a number of risks associated with our financial institutions business which could harm our
revenue and results of operations.
In February 2007 we acquired Digital Insight, a provider of outsourced online banking services to
financial institutions. This financial institutions business is subject to several risks,
including the following:
| consolidation among core processors or between core processors and online banking and bill-pay providers may create larger or vertically-integrated competitors that may have stronger relationships with our current or potential financial institutions clients, which could harm our reseller and revenue-sharing agreements with core processors or reduce the likelihood of extending our agreements at expiration; | ||
| if any of our products fail to be supported by financial institutions core processing vendors, we would have to redesign our products to suit these financial institutions, and we cannot assure that any redesign could be accomplished in a cost-effective or timely manner, and we could experience higher implementation costs or the loss of current and potential customers; | ||
| the financial institutions business experiences lengthy sales cycles, which could cause us to expend substantial employee and management resources without making a sale or could cause our operating results to fall short of anticipated levels for a particular quarter; | ||
| continued consolidation of the banking and financial services industry, including due to failures of financial institutions, could result in a smaller market for our products and services and may cause us to lose relationships with key customers; | ||
| our financial institution clients may not promote our services to their end user customers, and we may not be able to persuade potential customers to adopt our solutions in place of financial institutions own proprietary solutions or competitive offerings; and | ||
| macro-economic factors affecting banks, credit unions, mortgage lenders and other financial institutions may lead to cost-cutting efforts by our clients, which could cause us to lose current or potential customers or achieve less revenue per customer. |
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Because we depend on a small number of larger retailers and distributors, changes in these
relationships could harm our results of operations.
We sell most of our desktop software products through our retail distribution channel and a
relatively small number of larger retailers and distributors generate a significant portion of our
sales volume. Our principal retailers have significant bargaining leverage due to their size and
available resources. Historically, some retailers have elected to offer our tax products
exclusively, but we cannot guarantee that these exclusive relationships will continue in the
future. Any change in principal business terms, loss of exclusivity, major disruption or
termination of a relationship with these resellers could result in a potentially significant
decline in our revenues and earnings. The sourcing decisions, product display locations and
promotional activities that retailers undertake can greatly impact the sales of our products.
Changes in our pricing, product offerings or features, or concerns by retailers about our direct
sales efforts, could cause retailers or distributors to reduce their efforts to promote our
products, eliminate any exclusive placements, or stop selling our products altogether. If any of
our retailers or distributors experience financial difficulties we may be unable to collect amounts
that we are owed. At January 31, 2008, in the midst of the 2007 consumer tax season, amounts due
from our 10 largest retailers and distributors represented approximately 49% of total gross
accounts receivable.
Increased government regulation of our businesses could harm our operating results.
The tax preparation industry has received increased attention from legislative and regulatory
bodies in recent years, both because of the continuing focus on free tax preparation and because of
the nature of certain services used to process and transfer refunds to taxpayers. New legislation,
regulation or public policy considerations could result in greater oversight of the tax preparation
industry, restrict the types of products and services that we can offer, or otherwise cause us to
change the way we operate our tax businesses or offer our tax products and services. This in turn
could increase our cost of doing business and limit our revenue opportunities.
We are also 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.
Our financial institutions business provides services to banks, credit unions and other
institutions that are subject to extensive and complex federal and state regulation. As a result,
our financial institution customers require that our products and services comply with the
regulations applicable to these customers. If we are unable to comply with these regulations, we
could incur significant costs and penalties, face litigation or governmental proceedings, and lose
our ability to sell to these customers. Any of these adverse events could harm our results of
operations and our reputation.
In addition, as we seek to grow our business, we may expand into more highly-regulated businesses
or countries, which will require increased investment in compliance and auditing functions or new
technologies in order to meet regulatory standards. Government authorities could adopt other laws,
rules or regulations that place new burdens or restrictions on our business or determine that our
operations are directly subject to existing rules or regulations, such as requirements related to
data collection, use, transmission, retention and processing, which could make our business more
costly, less efficient or impossible to conduct, and could require us to modify our current or
future products or services, which could harm our operating results.
Expansion of our operations in international markets exposes us to operational and compliance
risks.
As we continue to grow our business internationally we face increased risk which could harm our
business operating results and financial condition. We have limited experience with operations
outside the U.S. and our ability to manage our business and conduct our operations internationally
requires management attention and resources and is subject to a number of risks, including
difficulties in managing varying foreign operations, political or social unrest or economic
instability, foreign currency restrictions and exchange rate fluctuations, higher costs associated
with doing business internationally and potentially adverse tax consequences. Also, compliance
with complex foreign and U.S. laws and regulations that apply to our international operations
increases our cost of doing business in international jurisdictions and could expose us or our
employees to fines and penalties.
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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. 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 requests. 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, although many of our consumer tax service representatives return each tax season, it is
challenging to expand the number of representatives from about 110 during off-season months to
about 1,100 at the peak of the season. If we do not adequately train our support representatives
our customers will not receive an appropriate level of support, 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 and operating results will be harmed.
We outsource a substantial portion of our customer service and technical support activities to
domestic and international third-party service providers, including service providers in India, 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:
| 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. | ||
| Customers may react negatively to providing information to and receiving support from overseas organizations. | ||
| We may not be able to affect the quality of support as directly as we are able to in our company-run call centers. | ||
| International outsourcing has received considerable negative attention in the media, which could harm our reputation, and the U.S. government may adopt legislation that would affect how we operate. For example, the Treasury Department and Internal Revenue Service recently released new regulations restricting the flow of personal information to overseas providers. | ||
| We rely on a global communications infrastructure that may be interrupted in a number of ways. For example, in fiscal 2007 an earthquake in Taiwan caused temporary disruption to overseas infrastructure. |
We are exposed to risks associated with credit card and payment fraud and with credit card
processing.
Many of our customers use credit cards or automated payment systems to pay for our products and
services. We have suffered losses, and may continue to suffer losses, as a result of orders placed
with fraudulent credit card or other payment data. For example, 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 transactions. However, the failure to detect or control payment fraud
could have an adverse effect on our results of operations.
We are subject to payment card association operating rules and certification requirements, as in
effect from time to time. Failure to comply with these rules or requirements may subject us to
fines and higher transaction fees or cause us to lose our ability to accept credit card payments
from our customers, resulting in harm to our business and 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
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employees, contractors, distributors and corporate partners and into license agreements with
respect to our software, documentation and other proprietary information. The creation and
protection of our proprietary rights are 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 adequate protection.
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.
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
may become increasingly subject to infringement claims, including patent, copyright, and trademark
infringement claims. We have 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. Some of these claims are the subject of pending litigation against us and
against some of our OEM customers. These claims may involve patent holding companies or other
adverse patent owners who have no relevant product revenues of their own, and against whom our own
patents may provide little or no deterrence. 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.
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 protect our intellectual property may be misunderstood and perceived negatively by our
customers. Although we continue to evaluate and put in place technology solutions to attempt to
lessen the impact of 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 fully combat
the effect of 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 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
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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. 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. 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 harm our revenue and operating results.
Certain of our offerings include third-party software that is licensed under so-called open
source licenses, some of which may include a requirement that, under certain circumstances, we
make available, or grant licenses to, any modifications or derivative works we create based upon
the open source software. Although we have established internal review and approval processes to
mitigate these risks, we cannot be sure that all open source software is submitted for approval
prior to use in our products. Many of the risks associated with usage of open source cannot be
eliminated, and could, if not properly addressed, harm our business.
Our acquisition and divestiture activities could disrupt our ongoing business, may involve
increased expenses 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. For example, in February 2007 we acquired Digital Insight for total
consideration of approximately $1.34 billion including the value of assumed vested options.
Acquisitions 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; | ||
| inability to realize synergies expected to result from an acquisition; | ||
| distraction of managements attention away from normal business operations; | ||
| challenges retaining the key employees, customers, resellers and other business partners of the acquired operation; | ||
| lack of experience in new markets, products or technologies or the initial dependence on unfamiliar supply or distribution partners; | ||
| insufficient revenue generation to offset liabilities assumed; | ||
| expenses associated with the acquisition; and | ||
| unidentified issues not discovered in our due diligence process, including product or service quality issues, intellectual property issues and legal contingencies. |
Acquisitions and divestitures are inherently risky. We can not be certain that our previous,
pending or future transactions will be successful and will not materially adversely affect the
conduct, operating results or financial condition of our business. Many transactions are subject
to closing conditions, which may not be satisfied, and transactions may not be successfully
completed even after their public announcement. In addition, integrating acquired businesses has
been and will continue to be complex, time consuming, and expensive, and can impact the
effectiveness of our internal control over financial reporting. We have generally paid cash for
our recent acquisitions. These transactions may involve further use of our cash resources, the
issuance of equity or debt securities, the incurrence of other forms of debt, the amortization of
expenses related to intangible assets, or potential future impairment charges related to goodwill
that we record on our balance sheet, which will be subject to annual testing in the future, any of
which could harm our financial condition and results of operations. In particular, we allocated a
portion of the purchase price for Digital Insight to goodwill, which could be subject to potential
future impairment charges, and we also allocated a portion of the purchase price to identified
intangible assets, which we expect to amortize over a period of three to five years. Further, we
issued $1 billion in senior unsecured notes to fund a portion of the purchase price of Digital
Insight and to fund our operations. The use of debt to fund acquisitions or for other purposes
significantly increases our interest expense and leverage. If we issue equity securities as
consideration in an acquisition, current shareholders percentage ownership and earnings per share
may be diluted.
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We have issued $1 billion in a debt offering and may incur other debt in the future, which could
adversely affect our financial condition and results of operations.
In fiscal 2007 we issued $1 billion in senior unsecured notes. We have also entered into a $500
million five-year revolving credit facility. Although we have no current plans to request any
advances under this credit facility, we may use the proceeds of any future borrowing for general
corporate purposes or for future acquisitions or expansion of our business.
This debt may adversely affect our operating results and financial condition by, among other
things:
| increasing our vulnerability to downturns in our business, to competitive pressures and to adverse economic and industry conditions; | ||
| requiring the dedication of a portion of our expected cash from operations to service our indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures and acquisitions; and | ||
| limiting our flexibility in planning for, or reacting to, changes in our business and our industry. |
Our current revolving credit facility imposes restrictions on us, including restrictions on our
ability to create liens on our assets and the ability of our subsidiaries to incur indebtedness,
and require us to maintain compliance with specified financial ratios. Our ability to comply with
these ratios may be affected by events beyond our control. In addition, our long-term
non-convertible debt includes covenants that may adversely affect our ability to incur certain
liens or engage in certain types of sale and leaseback transactions. If we breach any of the
covenants under our long-term debt or our revolving credit facility and do not obtain a waiver from
the lenders, then, subject to applicable cure periods, any outstanding indebtedness could be
declared immediately due and payable.
In addition, changes by any rating agency to our credit rating can negatively impact the value and
liquidity of both our debt and equity securities. If our credit ratings are downgraded or other
negative action is taken, the interest rate payable by us under our revolving credit facility would
increase. In addition, any downgrades in our credit ratings could affect our ability to obtain
additional financing in the future and may affect the terms of any such financing.
We are subject to risks associated with information disseminated through our services.
The law relating to the liability of online services companies for information carried on or
disseminated through their services is often unsettled. Claims could be made against online
services companies under both U.S. and foreign law for defamation, libel, invasion of privacy,
negligence, copyright or trademark infringement, or other theories based on the nature and content
of the materials disseminated through their services. Certain of our services feature a Live
Community, which includes input from users in response to questions from other users. Although all
such feedback is generated by users and not by us, claims of defamation or other injury could be
made against us for content posted in the Live Community. Any costs incurred as a result of this
potential liability could harm our business.
If actual product returns exceed returns 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 returns and we closely monitor product sales and inventory in the
retail channel in an effort to maintain adequate reserves. In the past, returns have not differed
significantly from these reserves. However, if we experience actual returns that significantly
exceed reserves, it would result in lower net revenue. For example, if we had increased our fiscal
2008 returns reserves by 1% of non-consignment sales to retailers for QuickBooks, TurboTax and
Quicken, our total net revenue for fiscal 2008 would have been approximately $3.0 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.
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Acquisition-related costs and impairment charges can cause
significant fluctuation in our net
income.
Our acquisitions have resulted in significant expenses, including
amortization and impairment of
purchased intangible assets, charges for in-process research and development, and impairment of
goodwill. Total acquisition-related costs in the categories identified above were approximately
$92 million in fiscal 2008, $51 million in fiscal 2007 and $18 million in fiscal 2006. 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. At July 31, 2008, we had $1.7 billion in goodwill and $273 million in net
purchased intangible assets 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.
Our investments in auction rate securities are subject to
risks that may cause losses and affect
the liquidity of these investments.
At July 31, 2008, we held approximately $285 million in
municipal auction rate securities that were
valued at par and classified as long-term assets. Due to a decrease in liquidity in the global
credit markets, in February 2008 auctions began failing for the municipal auction rate securities
we held. Regularly scheduled auctions for these securities have generally continued to fail since
that time. We will not be able to liquidate these investments and realize their full carrying value
unless successful auctions occur, a buyer is found outside of the auction process, the issuer calls
the security, the issuer repays principal over time from cash flows prior to final maturity, or the
security matures according to contractual terms ranging from one to 39 years. We believe
the fair values of the municipal auction rate securities we hold
are substantially equivalent to their par values.
However, if the issuers of these securities are unable to call the securities or successfully close
future auctions and their credit ratings are lowered, we may be required to record future
impairment charges related to these investments, which would harm our results of operations. If we
are unable to find alternate means to liquidate these investments, we may not realize the value of
the investments until the final maturity of the underlying securities.
If we fail to operate our 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. The systems
supporting our payroll business 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. 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 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
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software and services industries are in high demand and
competition for their talents is intense,
especially in the San Francisco Bay Area 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.
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. Defending litigation 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.
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.
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. 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 controls environment is expensive and
requires considerable management attention. 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 the 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.
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.
We and our independent registered public accounting firm must
certify the effectiveness of our
internal controls over financial reporting annually. Identification of material weaknesses in
internal controls over financial reporting could harm our business.
General economic conditions may affect our revenue and harm
our business.
Economic growth in the U.S. continued to slow in the last quarter
of fiscal year 2008. If economic
growth in the U.S. continues to slow, many customers may delay or reduce technology purchases.
This could result in reductions in sales of our products, slower adoption of new technologies and
upgrades to existing technologies and increased price competition. Weakness in the end-user market
could negatively affect the cash flow of our distributors and resellers who could, in turn, delay
paying their obligations to us, which could increase our credit risk exposure and cause delays in
our recognition of revenue or future sales to these customers. If economic or other factors cause
financial institutions to fail, we could lose current or potential customers and our revenues could
suffer. Any of these events would likely harm our business, results of operations and financial
condition.
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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. Our
global operations are also dependent on political stability in regions with emerging economies and
less predictable regulation of commerce. 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 do not have disaster recovery facilities for all of our data centers. Our operating
results and financial condition could be materially harmed in the event of a major earthquake or
other natural or man-made disaster or disruption.
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ITEM 1B
UNRESOLVED STAFF COMMENTS
UNRESOLVED STAFF COMMENTS
None.
ITEM 2
PROPERTIES
PROPERTIES
Our principal locations, their purposes and the expiration dates
for the leases on facilities at
those locations as of July 31, 2008 are shown in the table below. We have renewal options on many
of our leases.
Principal | ||||||||||
Approximate | Lease | |||||||||
Square | Expiration | |||||||||
Location | Purpose | Feet | Dates | |||||||
Mountain View and
Menlo Park, California
|
Principal offices, corporate headquarters and
headquarters for Small Business division
|
774,000 | 2009 - 2018 | |||||||
San Diego, California | Headquarters for Consumer Tax business, general
office space and data center
|
537,000 | 2009 - 2017 | |||||||
Calabasas and Westlake
Village, California
|
Headquarters for Digital Insight financial institutions
business and data center
|
212,000 | 2008 - 2011 | |||||||
Headquarters for Innovative Merchant Solutions
payments business and data center |
||||||||||
Tucson, Arizona | Major customer call center
|
186,000 | 2008 - 2017 | |||||||
Plano, Texas | Headquarters for Accounting Professionals business
and data center
|
166,000 | 2011 | |||||||
In November 2006 we entered into an agreement under which we
will lease approximately 167,000
square feet of office space in a new building to be constructed by the landlord in Woodland Hills,
California for our Innovative Merchant Solutions business. The lease term is 10 years beginning on
October 1, 2008.
Due to our evolving business needs, we are building a new data
center in Washington state to
support our longer term hosting requirements. We expect to begin occupying this data center in the
second half of fiscal 2009.
We also lease or own facilities in a number of other domestic
locations and internationally in
Canada, India, the United Kingdom and several other locations. We believe our facilities are
adequate for our current and near-term needs, and that we will be able to locate additional
facilities as needed. See Note 10 to the financial statements in Item 8 for more information about
our lease commitments.
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ITEM 3
LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
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. 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.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Common Stock
Intuits common stock is quoted on the NASDAQ Global Select
Market under the symbol INTU. The
following table shows the range of high and low sale prices reported on the NASDAQ Global Select
Market for the periods indicated. The closing price of Intuits common stock on August 29, 2008 was
$30.07.
High | Low | |||||||
Fiscal year ended July 31, 2007 |
||||||||
First quarter |
$ | 35.98 | $ | 29.15 | ||||
Second quarter |
35.44 | 28.54 | ||||||
Third quarter |
32.10 | 26.74 | ||||||
Fourth quarter |
31.83 | 27.39 | ||||||
Fiscal year ended July 31, 2008 |
||||||||
First quarter |
$ | 33.10 | $ | 26.14 | ||||
Second quarter |
33.02 | 27.75 | ||||||
Third quarter |
31.50 | 25.08 | ||||||
Fourth quarter |
30.06 | 26.18 | ||||||
Stockholders
As of September 2, 2008 we had approximately 800 record
holders and approximately 79,000 beneficial
holders of our common stock.
Dividends
Intuit has never paid any cash dividends on its common stock. We
currently anticipate that we will
retain all future earnings for use in our business and for repurchases under our stock repurchase
programs. We do not anticipate paying any cash dividends in the foreseeable future.
On July 6, 2006 we implemented a two-for-one stock split in
the form of a 100% stock dividend.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
During the three months ended July 31, 2008 we repurchased no
shares of our common stock under our
stock repurchase programs. At July 31, 2008, we had authorization from our Board to expend up to
$600 million for stock repurchases through May 15, 2011.
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Company Stock Price Performance
The graph below compares the cumulative total stockholder return
on Intuit common stock for the
last five full fiscal years with the cumulative total returns on the S&P 500 Index and the Morgan
Stanley High Technology Index for the same period. The graph assumes that $100 was invested in
Intuit common stock and in each of the other indices on July 31, 2003 and that all dividends were
reinvested. Intuit has never paid cash dividends on its stock. The comparisons in the graph below
are based on historical data with Intuit common stock prices based on the closing price on the
dates indicated and are not intended to forecast the possible future performance of Intuits
common stock.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Intuit Inc., The S&P 500 Index
And The Morgan Stanley Technology Index
Among Intuit Inc., The S&P 500 Index
And The Morgan Stanley Technology Index
* $100 invested on 7/31/03 in stock &
index-including reinvestment of dividends.
Fiscal year ending July 31.
Fiscal year ending July 31.
Copyright
©
2008 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
July 31, | July 31, | July 31, | July 31, | July 31, | July 31, | |||||||||||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||||||||||||||||
Intuit
Inc. |
100.00 | 86.81 | 111.29 | 143.15 | 132.81 | 126.73 | ||||||||||||||||||||||||||
S&P 500 |
100.00 | 113.17 | 129.07 | 136.02 | 157.97 | 140.44 | ||||||||||||||||||||||||||
Morgan Stanley
Technology |
100.00 | 113.76 | 126.83 | 117.64 | 158.30 | 150.54 | ||||||||||||||||||||||||||
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ITEM 6
SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
The following tables show Intuits selected financial
information for the past five fiscal years.
The comparability of the information is affected by a variety of factors, including acquisitions
and divestitures of businesses, issuance of debt, share-based compensation expense, amortization of
purchased intangible assets, gains and losses related to marketable equity securities and other
investments, and repurchases of common stock under our stock repurchase programs.
On July 6, 2006 we implemented a two-for-one stock split in
the form of a 100% stock dividend. All
share and per share figures in the selected financial data below, in Item 7, and in the statement
of operations and notes to the financial statements in Item 8 retroactively reflect this stock
split.
We adopted Statement of Financial Accounting Standards
(SFAS) 123(R), Share-Based Payment, on
August 1, 2005 using the modified prospective transition method. Because we elected to use the
modified prospective transition method, results for prior periods have not been restated to include
share-based compensation expense for stock options or our Employee Stock Purchase Plan. See Note 1
and Note 12 to the financial statements in Item 8 for more information.
In February 2007 we acquired Digital Insight Corporation for
a purchase price of approximately
$1.34 billion. In December 2007 we acquired Homestead Technologies Inc. for total consideration of
approximately $170 million and in February 2008 we acquired Electronic Clearing House, Inc. for a
total purchase price of approximately $131 million. Accordingly, we have included the results of
operations for these companies in our consolidated results of operations from their respective
dates of acquisition. During fiscal 2007 and fiscal 2008 we transitioned certain outsourced payroll
customers in connection with a sale of assets to Automatic Data Processing, Inc. (ADP). In
addition, we sold our Intuit Distribution Management Solutions business in fiscal 2008, our Intuit
Information Technology Solutions business in fiscal 2006, and our Intuit Public Sector Solutions
business in fiscal 2005. We accounted for these three businesses as discontinued operations and,
accordingly, we have reclassified the selected financial data for all periods presented to reflect
them as such. To better understand the information in the tables, investors should read
Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 7,
and the financial statements and related notes in Item 8.
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FIVE-YEAR SUMMARY
Consolidated Statement of Operations Data | Fiscal | |||||||||||||||||||
(In thousands, except per share amounts) | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||
Total net revenue |
$ | 3,070,974 | $ | 2,672,947 | $ | 2,293,010 | $ | 1,993,102 | $ | 1,760,147 | ||||||||||
Total costs and expenses |
2,420,207 | 2,035,377 | 1,727,416 | 1,464,401 | 1,338,983 | |||||||||||||||
Operating income from continuing operations |
650,767 | 637,570 | 565,594 | 528,701 | 421,164 | |||||||||||||||
Total share-based compensation expense
included in total costs and expenses |
113,238 | 76,313 | 70,340 | 5,489 | 6,232 | |||||||||||||||
Net income from continuing operations |
450,750 | 443,468 | 380,963 | 377,743 | 324,267 | |||||||||||||||
Net income (loss) from discontinued operations |
26,012 | (3,465 | ) | 36,000 | 3,884 | (7,237 | ) | |||||||||||||
Net income |
476,762 | 440,003 | 416,963 | 381,627 | 317,030 | |||||||||||||||
Net income (loss) per common share: |
||||||||||||||||||||
Basic net income per share from
continuing operations |
$ | 1.37 | $ | 1.29 | $ | 1.10 | $ | 1.02 | $ | 0.83 | ||||||||||
Basic net income (loss) per share from
discontinued operations |
0.08 | (0.01 | ) | 0.10 | 0.01 | (0.02 | ) | |||||||||||||
Basic net income per share |
$ | 1.45 | $ | 1.28 | $ | 1.20 | $ | 1.03 | $ | 0.81 | ||||||||||
Diluted net income per share from
continuing operations |
$ | 1.33 | $ | 1.25 | $ | 1.06 | $ | 1.00 | $ | 0.81 | ||||||||||
Diluted net income (loss) per share from
discontinued operations |
0.08 | (0.01 | ) | 0.10 | 0.01 | (0.02 | ) | |||||||||||||
Diluted net income per share |
$ | 1.41 | $ | 1.24 | $ | 1.16 | $ | 1.01 | $ | 0.79 | ||||||||||
Consolidated Balance Sheet Data | At July 31, | |||||||||||||||||||
(In thousands) | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||
Cash, cash equivalents and investments |
$ | 827,833 | $ | 1,303,671 | $ | 1,197,200 | $ | 994,258 | $ | 1,017,963 | ||||||||||
Long-term investments |
288,310 | | | | | |||||||||||||||
Working capital |
306,324 | 791,823 | 801,056 | 610,935 | 636,856 | |||||||||||||||
Total assets |
4,666,584 | 4,252,026 | 2,770,027 | 2,716,451 | 2,730,741 | |||||||||||||||
Long-term debt |
997,996 | 997,819 | | | | |||||||||||||||
Other long-term obligations |
121,489 | 57,756 | 15,399 | 17,548 | 16,394 | |||||||||||||||
Total stockholders equity |
2,072,954 | 2,035,013 | 1,738,086 | 1,695,499 | 1,822,419 | |||||||||||||||
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ITEM 7
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 and Estimates that we believe are important to understanding the assumptions and judgments underlying our financial statements. | ||
| Results of Operations that includes a more detailed discussion of our revenue and expenses. | ||
| Liquidity and Capital Resources which discusses key aspects of our statements of cash flows, changes in our balance sheets and our financial commitments. |
You should note that this MD&A discussion contains
forward-looking statements that involve risks
and uncertainties. Please see the section entitled Forward-Looking Statements and Risk Factors at
the beginning of Item 1A 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 8.
In February 2007 we completed the acquisition of Digital Insight Corporation (Digital Insight) for
a total purchase price of approximately $1.34 billion. In December 2007 we acquired Homestead
Technologies Inc. (Homestead) for total consideration of approximately $170 million and in February
2008 we acquired Electronic Clearing House, Inc. (ECHO) for a total purchase price of approximately
$131 million. Accordingly, we have included the results of operations for these companies in our
consolidated results of operations from their respective dates of acquisition. During fiscal 2007
and fiscal 2008 we transitioned certain outsourced payroll customers in connection with a sale of
assets to Automatic Data Processing, Inc. (ADP). We have also reclassified our financial statements
for all periods presented to reflect our Intuit Information Technology Solutions and Intuit
Distribution Management Solutions businesses as discontinued operations. See Results of Operations
- - Dispositions and Discontinued Operations later in this Item 7 for more information. Unless
otherwise noted, the following discussion pertains only to our continuing operations.
Executive Overview
This overview provides a high level discussion of our 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 fiscal 2008 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 Annual Report on Form 10-K.
Overview of Financial Results
Total net revenue for fiscal 2008 was $3.1 billion, up 15%
compared with fiscal 2007. The fiscal
2008 revenue increase was driven by our acquisition of Digital Insight and revenue growth in our
Consumer Tax segment. Excluding the impact of our acquisitions of Digital Insight, Homestead, and
ECHO and the transition of certain outsourced payroll customers in connection with a sale of assets
to ADP, we estimate that total net revenue for fiscal 2008 would have increased 11% compared with
fiscal 2007.
Operating income from continuing operations of $650.8 million
for fiscal 2008 increased 2% compared
with $637.6 million for fiscal 2007. Fiscal 2008 revenue growth was almost completely offset by
higher costs of revenue and higher operating expenses. Higher costs and expenses in fiscal 2008
reflect our acquisition of Digital Insight, which has a higher cost structure than our other
businesses; higher costs of revenue associated with revenue growth in our other segments; increased
investment in research and development for new and existing offerings; and increases in advertising
and other marketing spending to support our Consumer Tax offerings. In addition, share-based
compensation expense increased approximately $37 million in fiscal 2008 compared with fiscal 2007,
and we recorded a $23 million restructuring charge in the fourth quarter of fiscal 2008 in
connection with a reallocation of resources to key growth businesses. The effects of these factors
are described in more detail under Cost of Revenue and Operating Expenses below.
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Net income from continuing operations of $450.8 million for
fiscal 2008 increased 2% compared with
$443.5 million for fiscal 2007 and diluted net income per share from continuing operations of $1.33
for fiscal 2008 increased 6% compared with $1.25 for fiscal 2007. In fiscal 2008 we incurred
interest expense of $52.3 million, compared with $27.1 million in fiscal 2007. Interest expense for
both periods related primarily to the senior notes we issued in March 2007. We also recorded a
pre-tax gain of $51.6 million on the sale of certain outsourced payroll assets to ADP in fiscal
2008, compared with $31.7 million in fiscal 2007. Our effective tax rates for fiscal 2008 and
fiscal 2007 were approximately 35% and 36%. Average shares outstanding declined during fiscal 2008
as a result of repurchases of 27.2 million shares of common stock under our stock repurchase
programs, partially offset by the issuance of 10.6 million shares in connection with our employee
stock plans.
In August 2007 we sold our Intuit Distribution Management
Solutions (IDMS) business for
approximately $100 million in cash and recorded a net gain on disposal of $27.5 million. IDMS was
part of our Other Businesses segment. We have accounted for IDMS as a discontinued operation and
segregated the operating results of IDMS from continuing operations for all periods presented.
In December 2007 we acquired Homestead Technologies Inc. for
total consideration of approximately
$170 million on a fully diluted basis. Homestead is a provider of Web site design and hosting
services to small businesses and became part of our QuickBooks segment.
In February 2008 we acquired Electronic Clearing House, Inc.
for a total purchase price of
approximately $131 million in cash. ECHO is a provider of electronic payment processing services to
small businesses and became part of our Payroll and Payments segment.
During the third quarter of fiscal 2008 we completed the
transition of certain outsourced payroll
customers in connection with a sale of assets to ADP. See Non-Operating Income and Expenses -
Dispositions and Discontinued Operations later in this Item 7 for more information.
We ended fiscal 2008 with cash, cash equivalents and investments
totaling $827.8 million, a
decrease of $475.9 million from July 31, 2007. This decrease was due in part to the
reclassification of $285.3 million in municipal auction rate securities to long-term investments
during fiscal 2008. See Liquidity and Capital Resources Auction Rate Securities, later in this
Item 7 for more information. In fiscal 2008 we generated $830.2 million in cash from continuing
operations, $347.9 million from sales of investments, $194.7 million from the issuance of common
stock under employee stock plans, and $97.1 million from the sale of our IDMS business. During the
same period we used $800 million in cash for the repurchase of shares of our common stock under our
stock repurchase programs, $306.1 million for capital expenditures, and $264.5 million for
acquisitions of businesses, including Homestead and ECHO. At July 31, 2008, we had authorization
from our Board to expend up to $600 million for stock repurchases through May 15, 2011.
Seasonality
Our QuickBooks, Consumer Tax and Accounting Professionals
businesses are highly seasonal. Some of
our other offerings are also seasonal, but to a lesser extent. Revenue from our QuickBooks software
products tends to be highest during our second and third fiscal quarters, 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. In our Consumer Tax business, a greater proportion of our revenue has been
occurring later in this seasonal period due in part to the growth in sales of TurboTax Online, for
which revenue is recognized upon printing or electronic filing of a tax return. The seasonality of
our Consumer Tax and Accounting Professionals revenue is also affected by the timing of the
availability of tax forms from taxing agencies and the ability of those agencies to receive
electronic tax return submissions. Delays in the availability of tax forms or the ability of taxing
agencies to receive submissions can cause revenue to shift from our second fiscal quarter to our
third fiscal quarter. 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. We
believe the seasonality of our revenue is likely to continue in the future.
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Critical Accounting Policies and Estimates
In preparing our financial statements, we make estimates,
assumptions and judgments that can have a
significant impact on our net revenue, operating income or loss and net income or loss, as well as
on the value of certain assets and liabilities on our balance sheet. We believe that the estimates,
assumptions and judgments involved in the accounting policies described 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 Annual Report on Form 10-K with the Audit Committee of our
Board of Directors.
Revenue Recognition
We derive revenue from the sale of packaged software products,
license fees, software
subscriptions, product support, hosting services, payroll services, merchant services, professional
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 Revenue Recognition in Note 1 to the financial statements in Item 8.
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.
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 generally 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.
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 relate primarily to the return of excess
and 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 excess and 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 and
historical redemption trends by product and by type of promotional program.
In the past, actual returns and rebates have not differed
significantly from 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
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reserves, this would increase our future reported revenue. For
example, if we had increased our
fiscal 2008 returns reserves by 1% of non-consignment sales to retailers for QuickBooks, TurboTax
and Quicken, our total net revenue for fiscal 2008 would have been $3.0 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.
Business Combinations Purchase Accounting
Under the purchase method of accounting, we allocate the purchase
price of acquired companies to
the tangible and identifiable intangible assets acquired and liabilities assumed based on their
estimated fair values. We record the excess of purchase price over the aggregate fair values as
goodwill. We engage third-party appraisal firms to assist us in determining the fair values of
assets acquired and liabilities assumed. These valuations require us to make significant estimates
and assumptions, especially with respect to intangible assets. Critical estimates in valuing
purchased technology, customer lists and other identifiable intangible assets include future cash
flows that we expect to generate from the acquired assets. If the subsequent actual results and
updated projections of the underlying business activity change compared with the assumptions and
projections used to develop these values, we could experience impairment charges. In addition, we
have estimated the economic lives of certain acquired assets and these lives are used to calculate
depreciation and amortization expense. If our estimates of the economic lives change, depreciation
or amortization expenses could be accelerated or slowed.
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 stated
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 impact our reported financial results. More
conservative estimates 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 estimates could result in smaller or no impairment charges,
higher net income and higher asset values. At July 31, 2008, we had $1.7 billion in goodwill and
$273.1 million in net purchased intangible assets on our balance sheet.
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Accounting for Share-Based Compensation Plans
We account for share-based compensation using the fair value
recognition provisions of SFAS 123(R),
Share-Based Payment. At July 31, 2008, there was $221.5 million of total unrecognized
compensation cost related to non-vested share-based compensation arrangements granted under all
equity compensation plans which we will amortize to expense in the future. Total unrecognized
compensation cost will be adjusted for future changes in estimated forfeitures. We expect to
recognize that cost over a weighted average vesting period of 2.2 years.
We use a lattice binomial model and the assumptions shown in Note
12 to the financial statements in
Item 8 to estimate the fair value of stock options granted. We estimate the expected term of
options granted based on implied exercise patterns using a binomial model. 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 our option valuation
model on the implied yield in effect at the time of option grant on constant maturity U.S. Treasury
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 our option valuation model. In accordance with SFAS 123(R),
we 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. We amortize the fair value of options on a straight-line basis over the requisite
service periods of the awards, which are generally the vesting periods. We may elect to use
different assumptions under our option valuation model in the future, which could materially affect
our net income or loss and net income or loss per share. We value restricted stock units using the
intrinsic value method. We amortize the value of restricted stock units on a straight-line basis
over the restriction period.
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 financial position and results of
operations.
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. The calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax rules and the potential for future adjustment of
our uncertain tax positions by the Internal Revenue Service or other taxing jurisdiction. We
estimate our current tax liability and 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 in our statement of
operations.
Our net deferred tax asset at July 31, 2008 was
$154.2 million and we had no valuation allowance on
our deferred tax assets at that date. While we have considered future taxable income in assessing
the need for a valuation allowance, we could in the future be required to record a valuation
allowance to take into account deferred tax assets
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that we may be unable to realize. An increase in a 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 record the increase.
We adopted Financial Accounting Standards Board
(FASB) Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109 on August 1, 2007. See
Note 11 to the financial statements in Item 8. As a result of our adoption of FIN 48 we recognize
and measure benefits for uncertain tax positions accounted for in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, using a two-step
approach. The first step is to evaluate the tax position taken or expected to be taken in a tax
return by determining if the weight of available evidence indicates that it is more likely than not
that the tax position will be sustained upon audit, including resolution of any related appeals or
litigation processes. For tax positions that are more likely than not of being sustained upon
audit, the second step is to measure the tax benefit as the largest amount that is more than 50%
likely of being realized upon settlement. Significant judgment is required to evaluate uncertain
tax positions. We evaluate our uncertain tax positions on a quarterly basis. Our evaluations are
based upon a number of factors, including changes in facts or circumstances, changes in tax law,
correspondence with tax authorities during the course of audits and effective settlement of audit
issues. Changes in the recognition or measurement of uncertain tax positions could result in
material increases or decreases in our income tax expense in the period in which we make the
change, which could have a material impact on our effective tax rate and operating results.
Results of Operations
Financial Overview
Fiscal | Fiscal | Fiscal | 2008-2007 | 2007-2006 | ||||||||||||||||
(Dollars in millions, except per share amounts) | 2008 | 2007 | 2006 | % Change | % Change | |||||||||||||||
Total net revenue |
$ | 3,071.0 | $ | 2,672.9 | $ | 2,293.0 | 15 | % | 17 | % | ||||||||||
Operating income from
continuing operations |
650.8 | 637.6 | 565.6 | 2 | % | 13 | % | |||||||||||||
Net income from continuing
operations |
450.8 | 443.5 | 381.0 | 2 | % | 16 | % | |||||||||||||
Diluted net income per share
from continuing operations |
$ | 1.33 | $ | 1.25 | $ | 1.06 | 6 | % | 18 | % | ||||||||||
Total net revenue increased $398.1 million or 15% in fiscal
2008 compared with fiscal 2007. Total
net revenue was higher in fiscal 2008 due to our February 2007 acquisition of Digital Insight, to
revenue growth in our Consumer Tax segment and, to a lesser extent, to revenue growth in our
QuickBooks segment and our Payroll and Payments segment. Revenue from our Financial Institutions
segment, which includes Digital Insight, was $298.6 million in fiscal 2008 compared with $150.4
million in fiscal 2007. Consumer Tax revenue increased $116.5 million or 14% in fiscal 2008 due to
growth in TurboTax online units. Revenue in our QuickBooks segment was up $35.6 million or 6% in
fiscal 2008 and Payroll and Payments revenue increased $44.1 million or 9% compared with fiscal
2007. Payroll and Payments segment revenue for fiscal 2008 increased 14% when adjusted for our
acquisition of ECHO and the transition of certain outsourced payroll customers in connection with a
sale of assets to ADP. See Total Net Revenue by Business Segment below for more information.
Higher revenue in fiscal 2008 was almost completely offset by
higher costs and expenses, including
those of Digital Insight, which are relatively higher as a percentage of revenue than the costs and
expenses for our other businesses. In addition, share-based compensation expense increased
approximately $37 million in fiscal 2008 compared with fiscal 2007, and we recorded a $23 million
restructuring charge in the fourth quarter of fiscal 2008 in connection with a reallocation of
resources to key growth businesses. Including Digital Insight, share-based compensation expense and
these restructuring charges, increases in costs and expenses for fiscal 2008 were approximately $90
million for cost of revenue, approximately $133 million for product development expenses,
approximately $117 million for selling and marketing expenses, and approximately $41 million for
the amortization of purchased intangible assets and acquisition-related charges. See Cost of
Revenue and Operating Expenses below for more information.
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Net income from continuing operations increased 2% to $450.8 million in fiscal 2008 compared with
$443.5 million in fiscal 2007 and diluted net income per share from continuing operations increased
6% to $1.33 in fiscal 2008 compared with $1.25 in fiscal 2007. In fiscal 2008 we incurred interest
expense of $52.3 million, compared with $27.1 million in fiscal 2007. Interest expense for both
periods related primarily to the senior notes we issued in March 2007. We also recorded a pre-tax
gain of $51.6 million on the sale of certain outsourced payroll assets to ADP in fiscal 2008,
compared with $31.7 million in fiscal 2007. Our effective tax rates for fiscal 2008 and 2007 were
approximately 35% and 36%. See Income Taxes later in this Item 7 for more information. Average
shares outstanding declined during fiscal 2008 as a result of repurchases of 27.2 million shares of
common stock under our stock repurchase programs, partially offset by the issuance of 10.6 million
shares in connection with our employee stock plans.
Total Net Revenue by Business Segment
The table below and the discussion of total net revenue that follows it are organized in accordance
with our six reportable business segments. See Note 8 to the financial statements in Item 8 for
descriptions of product revenue and service and other revenue for each segment.
We have reclassified segment results for all periods presented to reflect changes that align our
product groups more closely with the customers they serve. We transferred QuickBooks Premier
Accountant Edition and ProAdvisor Program product revenue from our QuickBooks segment to our
Professional Tax segment and renamed that segment Accounting Professionals. Revenue from these
products was $31.5 million in fiscal 2008, $22.5 million in fiscal 2007 and $20.0 million in fiscal
2006. We also transferred QuickBase service revenue from our Other Businesses segment to our
QuickBooks segment. QuickBase revenue was $15.6 million in fiscal 2008, $10.5 million in fiscal
2007 and $7.1 million in fiscal 2006.
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% Total | % Total | % Total | ||||||||||||||||||||||||||||||
Fiscal | Net | Fiscal | Net | Fiscal | Net | 2008-2007 | 2007-2006 | |||||||||||||||||||||||||
(Dollars in millions) | 2008 | Revenue | 2007 | Revenue | 2006 | Revenue | % Change | % Change | ||||||||||||||||||||||||
QuickBooks |
||||||||||||||||||||||||||||||||
Product revenue |
$ | 471.8 | $ | 484.9 | $ | 446.2 | ||||||||||||||||||||||||||
Service and other
revenue |
150.0 | 101.3 | 79.8 | |||||||||||||||||||||||||||||
Subtotal |
621.8 | 20 | % | 586.2 | 22 | % | 526.0 | 23 | % | 6 | % | 11 | % | |||||||||||||||||||
Payroll and
Payments |
||||||||||||||||||||||||||||||||
Product revenue |
219.3 | 208.9 | 194.1 | |||||||||||||||||||||||||||||
Service and other
revenue |
341.5 | 307.8 | 268.0 | |||||||||||||||||||||||||||||
Subtotal |
560.8 | 18 | % | 516.7 | 19 | % | 462.1 | 20 | % | 9 | % | 12 | % | |||||||||||||||||||
Consumer Tax |
||||||||||||||||||||||||||||||||
Product revenue |
311.6 | 300.7 | 265.8 | |||||||||||||||||||||||||||||
Service and other
revenue |
617.8 | 512.2 | 440.3 | |||||||||||||||||||||||||||||
Subtotal |
929.4 | 30 | % | 812.9 | 30 | % | 706.1 | 31 | % | 14 | % | 15 | % | |||||||||||||||||||
Accounting Professionals |
||||||||||||||||||||||||||||||||
Product revenue |
301.5 | 283.8 | 265.0 | |||||||||||||||||||||||||||||
Service and other
revenue |
25.2 | 30.4 | 27.9 | |||||||||||||||||||||||||||||
Subtotal |
326.7 | 11 | % | 314.2 | 12 | % | 292.9 | 13 | % | 4 | % | 7 | % | |||||||||||||||||||
Financial Institutions |
||||||||||||||||||||||||||||||||
Product revenue |
0.8 | 0.2 | 0.2 | |||||||||||||||||||||||||||||
Service and other
revenue |
297.8 | 150.2 | 24.2 | |||||||||||||||||||||||||||||
Subtotal |
298.6 | 10 | % | 150.4 | 6 | % | 24.4 | 1 | % | 99 | % | 516 | % | |||||||||||||||||||
Other Businesses |
||||||||||||||||||||||||||||||||
Product revenue |
191.7 | 168.9 | 164.1 | |||||||||||||||||||||||||||||
Service and other
revenue |
142.0 | 123.6 | 117.4 | |||||||||||||||||||||||||||||
Subtotal |
333.7 | 11 | % | 292.5 | 11 | % | 281.5 | 12 | % | 14 | % | 4 | % | |||||||||||||||||||
Total Company |
||||||||||||||||||||||||||||||||
Product revenue |
1,496.7 | 1,447.4 | 1,335.4 | |||||||||||||||||||||||||||||
Service and other
revenue |
1,574.3 | 1,225.5 | 957.6 | |||||||||||||||||||||||||||||
Total net revenue |
$ | 3,071.0 | 100 | % | $ | 2,672.9 | 100 | % | $ | 2,293.0 | 100 | % | 15 | % | 17 | % | ||||||||||||||||
QuickBooks
Fiscal 2008 Compared with Fiscal 2007. QuickBooks segment total net revenue increased $35.6
million or 6% in fiscal 2008 compared with fiscal 2007. Excluding about $15 million in revenue from
Homestead, which we acquired in December 2007, QuickBooks segment total net revenue increased 4% in
fiscal 2008 compared with fiscal 2007. Total QuickBooks software unit sales, including activations
of our free Simple Start offering, were up slightly in fiscal 2008 compared with fiscal 2007.
Revenue growth in fiscal 2008 was driven by a 14% increase in QuickBooks
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Online subscribers, a 22% increase in the number of active QuickBooks Enterprise Solutions
customers, and 8% growth in revenue from secondary products and services sold in conjunction with
QuickBooks software units.
Fiscal 2007 Compared with Fiscal 2006. QuickBooks segment total net revenue increased $60.2
million or 11% in fiscal 2007 compared with fiscal 2006. Total QuickBooks software unit sales were
10% higher in fiscal 2007 compared with fiscal 2006 due in part to new promotions, including our
first-ever QuickBooks television advertisements. Revenue growth in fiscal 2007 was also driven by
favorable product mix, with QuickBooks Premier units increasing 25% compared with fiscal 2006.
Payroll and Payments
Fiscal 2008 Compared with Fiscal 2007. Payroll and Payments total net revenue increased $44.1
million or 9% in fiscal 2008 compared with fiscal 2007. In our Payments business, revenue increased
33% in fiscal 2008 due to 18% growth in our core merchant services customer base and about $16
million in revenue from ECHO, which we acquired in February 2008. Payroll revenue decreased 3% in
fiscal 2008 as we completed the transition of portions of our Complete Payroll and Premier Payroll
Services customer base in connection with a sale of assets to ADP. We estimate that revenue growth
in our Payroll and Payments segment in fiscal 2008 compared with fiscal 2007 would have been
approximately 14% when adjusted for the impact of our acquisition of ECHO and the sale of those
payroll customers.
Fiscal 2007 Compared with Fiscal 2006. Payroll and Payments total net revenue increased $54.6
million or 12% in fiscal 2007 compared with fiscal 2006. In our Payments business, revenue
increased 36% in fiscal 2007 due to 22% growth in the customer base and 9% higher transaction
volume per customer. Merchant services revenue slowed in fiscal 2007 compared with fiscal 2006 due
to new customer acquisition remaining relatively constant on a larger customer base. Payroll
revenue grew 3% in fiscal 2007 due to 4% growth in the customer base and, to a lesser extent, to
favorable product mix that resulted in higher revenue per customer. We estimate that revenue growth
in our Payroll and Payments segment in fiscal 2007 compared with fiscal 2006 would have been
approximately 16% when adjusted for the impact of the sale of certain payroll customers to ADP.
Consumer Tax
Fiscal 2008 Compared with Fiscal 2007. Consumer Tax total net revenue increased $116.5 million or
14% in fiscal 2008 compared with fiscal 2007. The fiscal 2008 revenue increase was due to 17%
growth in total federal TurboTax units, which was driven by 37% growth in TurboTax Online units. We
believe that the continuing trend among individual taxpayers toward the use of software, rather
than manual methods, to prepare their own income tax returns will continue to be important to the
growth of our Consumer Tax business.
Fiscal 2007 Compared with Fiscal 2006. Consumer Tax total net revenue increased $106.8 million or
15% in fiscal 2007 compared with fiscal 2006 due to 16% growth in federal TurboTax Online units and
to price increases. Consumer Tax net revenue for fiscal 2007 included the impact of approximately
$9 million in refunds to customers who experienced delays in electronically preparing or filing
their income tax returns on April 17, 2007.
Accounting Professionals
Fiscal 2008 Compared with Fiscal 2007. Accounting Professionals total net revenue increased $12.5
million or 4% in fiscal 2008 compared with fiscal 2007. We discontinued our ProSeries Express
product line in fiscal 2008, which we estimate resulted in a loss of five percentage points of
growth for the Accounting Professionals segment in fiscal 2008 compared with fiscal 2007.
Fiscal 2007 Compared with Fiscal 2006. Accounting Professionals total net revenue increased $21.3
million or 7% in fiscal 2007 compared with fiscal 2006 due to add-on product penetration and price
increases.
Financial Institutions
Fiscal 2008 Compared with Fiscal 2007. Financial Institutions total net revenue increased $148.2
million to $298.6 million in fiscal 2008 compared with fiscal 2007 due mainly to revenue from
Digital Insight, which we acquired in February 2007. In fiscal 2008 Internet banking end users grew
10% and bill-pay end users grew 16%.
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Fiscal 2007 Compared with Fiscal 2006. Financial Institutions total net revenue increased $126.0
million to $150.4 million in fiscal 2007 compared with fiscal 2006 due almost entirely to our
February 2007 acquisition of Digital Insight.
Other Businesses
Fiscal 2008 Compared with Fiscal 2007. Other Businesses total net revenue increased $41.2 million
or 14% in fiscal 2008 compared with fiscal 2007. In fiscal 2008 revenue from our businesses in
Canada and the United Kingdom increased 28%, revenue from our Intuit Real Estate Solutions business
grew 17%, and Quicken revenue was flat compared with fiscal 2007. The weaker U.S. dollar
contributed to Canadian revenue growth, accounting for approximately five percentage points of
Other Businesses segment revenue growth in fiscal 2008 compared with fiscal 2007.
Fiscal 2007 Compared with Fiscal 2006. Other Businesses total net revenue increased $11.0 million
or 4% in fiscal 2007 compared with fiscal 2006. Quicken revenue was flat while revenue from our
business in Canada increased 11% and revenue from our Intuit Real Estate Solutions business grew
28%.
Cost of Revenue
% of | % of | % of | ||||||||||||||||||||||
Fiscal | Related | Fiscal | Related | Fiscal | Related | |||||||||||||||||||
(Dollars in millions) | 2008 | Revenue | 2007 | Revenue | 2006 | Revenue | ||||||||||||||||||
Cost of product revenue |
$ | 154.1 | 10 | % | $ | 169.1 | 12 | % | $ | 165.9 | 12 | % | ||||||||||||
Cost of service and
other revenue |
414.1 | 26 | % | 309.4 | 25 | % | 232.6 | 24 | % | |||||||||||||||
Amortization of
purchased intangible
assets |
56.0 | n/a | 30.9 | n/a | 8.8 | n/a | ||||||||||||||||||
Total cost of revenue |
$ | 624.2 | 20 | % | $ | 509.4 | 19 | % | $ | 407.3 | 18 | % | ||||||||||||
Our cost of revenue has three components: (1) cost of product revenue, which includes the direct
costs of manufacturing and shipping our software products; (2) cost of service and other revenue,
which reflects direct costs associated with providing services, including data center costs related
to delivering Internet-based services, and costs associated with revenue sharing and online
transactions revenue; and (3) amortization of purchased intangible assets, which represents the
cost of amortizing over their useful lives developed technologies that we have obtained through
acquisitions.
Fiscal 2008 Compared with Fiscal 2007. Cost of product revenue as a percentage of product revenue
decreased to 10% in fiscal 2008 from 12% in fiscal 2007 due to cost efficiencies achieved for our
QuickBooks 2008 and Consumer Tax product lines. Cost of service and other revenue as a percentage
of service and other revenue increased slightly to 26% in fiscal 2008 from 25% in fiscal 2007. The
impact of our acquisition of Digital Insight, which has relatively higher costs of service revenue,
was partially offset by the impact of $105.6 million growth in revenue from TurboTax Online and
electronic tax filing services, which have relatively lower costs of service revenue compared with
our other service offerings. Amortization of purchased intangible assets increased in fiscal 2008
compared with fiscal 2007 due primarily to the amortization of Digital Insight purchased intangible
assets, which we acquired in February 2007.
Fiscal 2007 Compared with Fiscal 2006. Cost of service and other revenue as a percentage of
service and other revenue increased slightly to 25% in fiscal 2007 from 24% in fiscal 2006. The
impact of our acquisition of Digital Insight, which has relatively higher costs of service
revenue, was partially offset by the impact of $71.9 million growth in revenue from TurboTax Online
and electronic tax filing services, which have relatively lower costs of service revenue compared
with our other service offerings. Amortization of purchased intangible assets increased in
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fiscal 2007 compared with fiscal 2006 due to the amortization of Digital Insight purchased
intangible assets, which we acquired in February 2007.
Operating Expenses
% of | % of | % of | ||||||||||||||||||||||
Total | Total | Total | ||||||||||||||||||||||
Fiscal | Net | Fiscal | Net | Fiscal | Net | |||||||||||||||||||
(Dollars in millions) | 2008 | Revenue | 2007 | Revenue | 2006 | Revenue | ||||||||||||||||||
Selling and marketing |
$ | 859.6 | 28 | % | $ | 742.4 | 28 | % | $ | 657.6 | 29 | % | ||||||||||||
Research and
development |
605.8 | 20 | % | 472.5 | 17 | % | 385.8 | 17 | % | |||||||||||||||
General and
administrative |
295.0 | 10 | % | 291.1 | 11 | % | 267.2 | 12 | % | |||||||||||||||
Acquisition-related
charges |
35.5 | 1 | % | 20.0 | 1 | % | 9.5 | 0 | % | |||||||||||||||
Total operating
expenses |
$ | 1,795.9 | 59 | % | $ | 1,526.0 | 57 | % | $ | 1,320.1 | 58 | % | ||||||||||||
Fiscal 2008 Compared with Fiscal 2007. Total operating expenses as a percentage of total net
revenue increased to 59% in fiscal 2008 compared with 57% in fiscal 2007. Total operating expenses
in dollars increased about $270 million in fiscal 2008, approximately $109 million of which was due
to our acquisitions of Digital Insight, Homestead and ECHO and approximately $37 million of which
was due to higher share-based compensation expense. Share-based compensation expense was higher in
fiscal 2008 compared with fiscal 2007 due to our broad use of restricted stock units in addition to
stock options. We also recorded a $23 million restructuring charge in the fourth quarter of fiscal
2008 in connection with a reallocation of resources to key growth businesses.
Including Digital Insight, Homestead, ECHO, share-based compensation expense and the restructuring
charge, about half of the increase in total operating expenses in dollars for fiscal 2008 was due
to higher research and development expenses. During this period, we continued to invest in research
and development for existing offerings as well as for new offerings. Almost 45% of the fiscal 2008
increase in total operating expenses in dollars was due to higher selling and marketing expenses.
Of the total increase in selling and marketing expenses in dollars for this period about a third
was due to our acquisition of Digital Insight, whose selling costs are relatively higher compared
with our other businesses because they sell their services to financial institutions through a
direct sales force. About 20% of the fiscal 2008 increase in selling and marketing expenses in
dollars was due to higher advertising and other marketing expenses to support our Consumer Tax
offerings. Excluding the impact of the increase in share-based compensation expense, general and
administrative expenses declined about $5 million in fiscal 2008 compared with fiscal 2007.
Acquisition-related charges increased in fiscal 2008 compared with fiscal 2007 primarily due to the
amortization of Digital Insight purchased intangible assets, which we acquired in February 2007.
Fiscal 2007 Compared with Fiscal 2006. Individually and in the aggregate, operating expenses as a
percentage of total net revenue were generally consistent in fiscal 2007 compared with fiscal 2006.
Total operating expenses in dollars increased about $206 million in fiscal 2007, approximately $60
million of which was due to our February 2007 acquisition of Digital Insight.
Including Digital Insight, approximately 42% of the fiscal 2007 increase in total operating
expenses in dollars was due to higher research and development expenses. During fiscal 2007 we
continued to invest in research and development for existing offerings as well as for new
offerings. Approximately 41% of the fiscal 2007 increase in total operating expenses in dollars was
due to higher selling and marketing expenses that included increases in radio, television and
online advertising expenses for our Consumer Tax and QuickBooks offerings as well as additional
investments in direct marketing and product management.
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Acquisition-related charges increased in fiscal 2007 compared with fiscal 2006 due to the
amortization of Digital Insight purchased intangible assets, which we acquired in February 2007.
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 selling and marketing,
product development, and general and administrative expenses and share-based compensation expenses,
which are not allocated to specific segments. These unallocated costs totaled $561.4 million in
fiscal 2008, $506.2 million in fiscal 2007 and $465.2 million in fiscal 2006. Unallocated costs
increased approximately $55 million in fiscal 2008 compared with fiscal 2007. This increase was due
to $37 million in higher share-based compensation expenses and approximately $27 million in higher
expenses for shared product development and marketing functions, partially offset by a decline in
corporate general and administrative expenses. Segment expenses also do not include amortization of
purchased intangible assets, acquisition-related charges, and impairment of goodwill and purchased
intangible assets. In addition, segment expenses do not include interest expense, interest and
other income, and realized net gains or losses on marketable equity securities and other
investments. See Note 8 to the financial statements in Item 8 for reconciliations of total segment
operating income to income from continuing operations for each fiscal year presented.
% of | % of | % of | ||||||||||||||||||||||
Fiscal | Related | Fiscal | Related | Fiscal | Related | |||||||||||||||||||
(Dollars in millions) | 2008 | Revenue | 2007 | Revenue | 2006 | Revenue | ||||||||||||||||||
QuickBooks |
$ | 172.3 | 28 | % | $ | 178.8 | 31 | % | $ | 167.4 | 32 | % | ||||||||||||
Payroll and Payments |
216.3 | 39 | % | 215.4 | 42 | % | 181.9 | 39 | % | |||||||||||||||
Consumer Tax |
594.5 | 64 | % | 508.6 | 63 | % | 467.1 | 66 | % | |||||||||||||||
Accounting Professionals |
162.6 | 50 | % | 154.4 | 49 | % | 136.7 | 47 | % | |||||||||||||||
Financial Institutions |
57.0 | 19 | % | 38.8 | 26 | % | 12.2 | 50 | % | |||||||||||||||
Other Businesses |
101.0 | 30 | % | 98.7 | 34 | % | 83.8 | 30 | % | |||||||||||||||
Total segment
operating income |
$ | 1,303.7 | 42 | % | $ | 1,194.7 | 45 | % | $ | 1,049.1 | 46 | % | ||||||||||||
QuickBooks
Fiscal 2008 Compared with Fiscal 2007. QuickBooks segment operating income as a percentage of
related revenue decreased to 28% in fiscal 2008 from 31% in fiscal 2007. QuickBooks segment revenue
grew $35.6 million in fiscal 2008 compared with fiscal 2007, including about $15 million in revenue
from Homestead. Cost of revenue increased approximately $4 million as cost efficiencies achieved
for our QuickBooks 2008 product line partially offset higher costs associated with QuickBooks
services. Including Homestead, selling and marketing expenses increased approximately $18 million,
product development expenses increased approximately $15 million and general and administrative
expenses increased approximately $5 million in fiscal 2008 compared with fiscal 2007.
Fiscal 2007 Compared with Fiscal 2006. QuickBooks segment operating income as a percentage of
related revenue decreased slightly to 31% in fiscal 2007 from 32% in fiscal 2006. The $60.2 million
growth in QuickBooks segment revenue in fiscal 2007 was partially offset by higher expenses,
including increases of approximately $11 million for cost of revenue, approximately $16 million for
selling and marketing expenses (which consisted primarily of higher radio and television
advertising expenses and additional investments in direct marketing and product management) and
approximately $18 million for product development expenses in fiscal 2007.
Payroll and Payments
Fiscal 2008 Compared with Fiscal 2007. Payroll and Payments segment operating income as a
percentage of related revenue decreased to 39% in fiscal 2008 from 42% in fiscal 2007. Total
Payroll and Payments revenue increased $44.1 million in fiscal 2008 compared with fiscal 2007, with
higher merchant services revenue and about $16 million in revenue from ECHO more than offsetting
lower total payroll revenue. Although merchant services
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revenue has relatively higher costs of revenue than our combined payroll business, low growth in
cost of revenue in the segment was achieved through our transition of certain full service payroll
customers, which also have relatively higher costs of revenue, to ADP. Higher gross margins in
fiscal 2008 were partially offset by higher expenses, including increases of approximately $11
million for selling and marketing expenses, approximately $17 million for product development
expenses, approximately $6 million for infrastructure costs and approximately $4 million in lease
termination costs. About a third of the fiscal 2008 increase in Payroll and Payments costs and
expenses was associated with our acquisition of ECHO.
Fiscal 2007 Compared with Fiscal 2006. Payroll and Payments segment operating income as a
percentage of related revenue increased to 42% in fiscal 2007 from 39% in fiscal 2006. Most of the
fiscal 2007 revenue growth in this segment came from products and services with relatively lower
costs of revenue, such as QuickBooks Payroll, Assisted Payroll and merchant services. The $54.6
million higher Payroll and Payments revenue in fiscal 2007 was partially offset by higher expenses,
including increases of approximately $7 million for product development expenses, approximately $5
million for selling and marketing expenses and approximately $6 million for general and
administrative expenses in fiscal 2007.
Consumer Tax
Fiscal 2008 Compared with Fiscal 2007. Consumer Tax segment operating income as a percentage of
related revenue increased slightly to 64% in fiscal 2008 from 63% in fiscal 2007. The $116.5
million growth in Consumer Tax revenue in fiscal 2008 was partially offset by higher expenses,
including increases of approximately $25 million for selling and marketing expenses (including
higher radio, television and online advertising expenses as well as higher direct marketing
expenses) and approximately $12 million for product development expenses. Lower cost of revenue
partially offset the increases in selling and marketing expenses and product development expenses.
Fiscal 2007 Compared with Fiscal 2006. Consumer Tax segment operating income as a percentage of
related revenue decreased to 63% in fiscal 2007 from 66% in fiscal 2006. The $106.8 million growth
in Consumer Tax revenue in fiscal 2007 was partially offset by higher expenses, including increases
of approximately $45 million for selling and marketing expenses (including higher radio, television
and online advertising expenses as well as higher direct marketing expenses) and approximately $18
million for product development expenses.
Accounting Professionals
Fiscal 2008 Compared with Fiscal 2007. Accounting Professionals segment operating income as a
percentage of related revenue increased slightly to 50% in fiscal 2008 from 49% in fiscal 2007.
Accounting Professionals revenue increased $12.5 million while expenses were relatively stable in
fiscal 2008 compared with fiscal 2007.
Fiscal 2007 Compared with Fiscal 2006. Accounting Professionals segment operating income as a
percentage of related revenue increased to 49% in fiscal 2007 from 47% in fiscal 2006. Accounting
Professionals revenue increased $21.3 million while expenses were relatively stable in fiscal 2007
compared with fiscal 2006.
Financial Institutions
Fiscal 2008 Compared with Fiscal 2007. Financial Institutions segment operating income as a
percentage of related revenue decreased to 19% in fiscal 2008 from 26% in fiscal 2007. The fiscal
2008 decrease in segment operating income was due to our February 2007 acquisition of Digital
Insight, which has higher costs and expenses, including relatively higher costs of service revenue
and higher selling expenses, than the Intuit financial institutions business that existed prior to
the acquisition.
Fiscal 2007 Compared with Fiscal 2006. Financial Institutions segment operating income as a
percentage of related revenue decreased to 26% in fiscal 2007 from 50% in fiscal 2006. The fiscal
2007 decrease in segment operating income was due to our February 2007 acquisition of Digital
Insight, which we combined with our existing financial institutions business to create a new
Financial Institutions segment. This new segment is significantly larger and has higher costs,
including relatively higher cost of service revenue and higher selling expenses, than the Intuit
financial institutions business that preceded it.
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Other Businesses
Fiscal 2008 Compared with Fiscal 2007. Other Businesses segment operating income as a percentage
of related revenue decreased to 30% in fiscal 2008 from 34% in fiscal 2007. About a quarter of the
$41.2 million in fiscal 2008 revenue growth in this segment came from our Intuit Real Estate
Solutions business, which sells its products and services through a direct sales force and
therefore has a higher cost structure than the other businesses in this segment. While revenue from
our business in Canada was higher in fiscal 2008 due in part to the weaker U.S. dollar, total costs
and expenses for this business also increased due to the impact of foreign exchange rates. In
addition, fiscal 2008 selling and marketing expenses in our business in Canada increased in support
of our latest QuickBooks and consumer tax offerings.
Fiscal 2007 Compared with Fiscal 2006. Other Businesses segment operating income as a percentage
of related revenue increased to 34% in fiscal 2007 from 30% in fiscal 2006. The fiscal 2007
improvement in segment operating income as a percentage of related revenue was due to the May 2006
sale of our MasterBuilder business, which had relatively low operating margins.
Non-Operating Income and Expenses
Interest Expense
In March 2007 we issued $1 billion in senior notes to finance a portion of our February 2007
acquisition of Digital Insight and to fund our operations. Interest expense of $52.3 million for
fiscal 2008 and $27.1 million for fiscal 2007 consisted primarily of interest on $500 million in
principal amount of the senior notes at 5.40% and interest on $500 million in principal amount of
the senior notes at 5.75%. The senior notes are due in March 2012 and March 2017 and are redeemable
by Intuit at any time, subject to a make-whole premium.
Interest and Other Income
Fiscal | Fiscal | Fiscal | ||||||||||
(In millions) | 2008 | 2007 | 2006 | |||||||||
Interest income |
$ | 35.6 | $ | 44.0 | $ | 31.0 | ||||||
Quicken Loans royalties and fees |
7.5 | 9.3 | 9.3 | |||||||||
Gain on sale of assets |
2.7 | | 2.4 | |||||||||
Net foreign exchange gain (loss) |
0.5 | (0.1 | ) | 0.1 | ||||||||
Other |
0.2 | (0.5 | ) | 0.2 | ||||||||
Total interest and other income |
$ | 46.5 | $ | 52.7 | $ | 43.0 | ||||||
Interest and other income consists primarily of interest income. Lower interest rates and lower
average invested balances resulted in lower interest income in fiscal 2008 compared with fiscal
2007. Higher interest rates and higher average invested balances resulted in higher interest income
in fiscal 2007 compared with fiscal 2006. Total interest and other income for all periods presented
included royalties and fees from trademark license and distribution agreements that we entered into
when we sold our Quicken Loans mortgage business in July 2002.
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Income Taxes
Effective Tax Rate
Our effective tax rate was approximately 35% for fiscal 2008, approximately 36% for fiscal 2007 and
approximately 38% for fiscal 2006. Our effective tax rate for fiscal 2008 did not differ
significantly from the federal statutory rate. State income taxes were offset primarily by the
benefit we received from tax exempt interest income, the domestic production activities deduction,
and federal and state research and experimental credits. Our effective tax rate for fiscal 2007
differed from the federal statutory rate of 35% due primarily to state income taxes, which were
partially offset by the benefit we received from tax exempt interest income, federal and state
research and experimental credits and the domestic production activities deduction. In addition, in
fiscal 2007 we benefited from the retroactive extension of the federal research and experimental
credit as it related to fiscal 2006. Our effective tax rate for fiscal 2006 differed from the
federal statutory rate of 35% primarily due to state income taxes and the taxable gain on the sale
of our Master Builder business, which were partially offset by the benefit we received from tax
exempt interest income, federal and state research and experimental credits and the domestic
production activities deduction. See Note 11 to the financial statements in Item 8 for more
information.
In December 2006 the Tax Relief and Health Care Act of 2006 was signed into law. The Act included a
reinstatement of the federal research and experimental credit through December 31, 2007 that was
retroactive to January 1, 2006. We recorded a discrete tax benefit of $3.7 million for the
retroactive amount related to fiscal 2006 during fiscal 2007.
Tax Carryforwards
We acquired Electronic Clearing House and Homestead in fiscal 2008 and Digital Insight in fiscal
2007. See Note 6 to the financial statements in Item 8. These companies had federal net operating
loss carryforwards at their respective dates of acquisition that totaled approximately $164
million. We have recorded the tax effects of these carryforwards and other federal tax credit
carryforwards, which together totaled approximately $66 million, as deferred tax assets at the
respective dates of acquisition. The carryforwards do not result in an income tax provision
benefit, but they reduce income taxes payable and cash paid for income taxes as we utilize them. At
July 31, 2008, we had total federal net operating loss carryforwards of $95.0 million that will
expire starting in fiscal 2019.
Net Deferred Tax Assets
At July 31, 2008, we had net deferred tax assets of $154.2 million and no valuation allowance.
While we believe no valuation allowance was appropriate at that date, it may be necessary to record
a valuation allowance if it becomes more likely that we will not realize some portion of the net
deferred tax assets. We assess the need for an adjustment to the valuation allowance on a quarterly
basis. The assessment is based on our estimates of future sources of taxable income for the
jurisdictions in which we operate and the periods over which our deferred tax assets will be
realizable. See Note 11 to the financial statements in Item 8 for more information.
Dispositions and Discontinued Operations
During fiscal 2008, 2007 and 2006 we sold the assets and businesses described below. See Note 7 to
the financial statements in Item 8 for a more complete description of these dispositions and
discontinued operations and for a summary of the impact that discontinued operations have had on
our statements of operations for those fiscal years.
Intuit Distribution Management Solutions Discontinued Operations
In August 2007 we sold our Intuit Distribution Management Solutions (IDMS) business for
approximately $100 million in cash and recorded a net gain on disposal of $27.5 million. IDMS was
part of our Other Businesses segment. In accordance with the provisions of SFAS 144, Accounting
for the Impairment or Disposal of Long-lived Assets, we have accounted for IDMS as a discontinued
operation and segregated its operating results from continuing operations in our statements of
operations for all periods prior to the sale. Revenue from IDMS was $1.9 million in fiscal 2008,
$52.0 million in fiscal 2007 and $49.3 million in fiscal 2006.
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Sale of Outsourced Payroll Assets
In March 2007 we sold certain assets related to our Complete Payroll and Premier Payroll Service
businesses to ADP for a purchase price of up to approximately $135 million in cash. The final
purchase price was contingent upon the number of customers that transitioned to ADP pursuant to the
purchase agreement over a period of approximately one year from the date of sale. We recorded
pre-tax gains of $51.6 million in fiscal 2008 and $31.7 million in fiscal 2007 in our statement of
operations for customers who transitioned to ADP during those periods. We received a total purchase
price of $93.6 million and recorded a total pre-tax gain of $83.2 million from the inception of
this transaction through its completion in the third quarter of fiscal 2008. In accordance with the
provisions of SFAS 144, we did not account for this transaction as a discontinued operation. The
assets were part of our Payroll and Payments segment.
Intuit Information Technology Solutions Discontinued Operations
In December 2005 we sold our Intuit Information Technology Solutions (ITS) business for
approximately $200 million in cash and recorded a net gain on disposal of $34.3 million. In
accordance with the provisions of SFAS 144, we have accounted for ITS as a discontinued operation
and segregated its operating results from continuing operations in our statements of operations for
all periods prior to the sale. Revenue from ITS was $20.2 million in fiscal 2006.
Liquidity and Capital Resources
Overview
At July 31, 2008, our cash, cash equivalents and investments totaled $827.8 million, a decrease of
$475.9 million from July 31, 2007. This decrease was due to the reclassification of $285.3 million
in municipal auction rate securities to long-term investments (see Auction Rate Securities below)
and to the factors described in Statements of Cash Flows below. Our primary source of liquidity
has been cash from operations, which entails the collection of accounts receivable for products and
services. Our primary uses of cash have been for research and development programs, selling and
marketing activities, capital projects, debt service costs, repurchases of common stock and
acquisitions of businesses.
In March 2007 we issued five-year and ten-year senior unsecured notes totaling $1 billion. We also
have a $500 million unsecured revolving line of credit facility that is described later in this
Item 7. To date we have not borrowed under the facility.
The following table summarizes selected measures of our liquidity and capital resources at the
dates indicated:
July 31, | July 31, | $ | % | |||||||||||||
(Dollars in millions) | 2008 | 2007 | Change | Change | ||||||||||||
Cash, cash equivalents and investments |
$ | 827.8 | $ | 1,303.7 | $ | (475.9 | ) | (37 | %) | |||||||
Long-term investments |
288.3 | | 288.3 | NM | ||||||||||||
Long-term debt |
998.0 | 997.8 | 0.2 | 0 | % | |||||||||||
Working capital |
306.3 | 791.8 | (485.5 | ) | (61 | %) | ||||||||||
Ratio of current assets to current liabilities |
1.2 | : 1 | 1.7 | : 1 | ||||||||||||
NM = Not Meaningful
Auction Rate Securities
At July 31, 2008, we held $285.3 million in municipal auction rate securities. These securities are
collateralized long-term debt instruments that provide liquidity through a Dutch auction process
that resets the applicable interest rate at pre-determined intervals, typically every 35 days. Due
to a decrease in liquidity in the global credit markets, in February 2008 auctions began failing
for the municipal auction rate securities we held. Regularly scheduled
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auctions for these securities have generally continued to fail since that time. When these auctions
initially failed, higher interest rates for many of the securities went into effect. Of the total
auction rate securities we held at July 31, 2008, the underlying assets of $220.7 million or 77%
were student loans which are guaranteed by the U.S. Department of Education and $241.2 million or
85% were rated AAA/Aaa by the major credit rating agencies.
We estimated the fair values of the municipal auction rate securities we held at July 31, 2008
based on valuation reports from third parties and a discounted cash flow model that we prepared.
Using the valuation reports from third parties and our discounted cash flow model we determined
that the fair values of the municipal auction rate securities we held at July 31, 2008 were
substantially equal to their par values. As a result, we recorded no decrease in the fair values of
those securities for the twelve months then ended. Based on our ability and intent to hold these
auction rate securities until liquidity returned to the market or they matured, we classified them
as long-term investments on our balance sheet at July 31, 2008.
In August 2008 the broker-dealers for our auction rate securities announced settlements under which
they may provide liquidity solutions for, or purchase, the auction rate securities held by their
institutional clients. Details of the agreements are still being finalized.
Based on our expected operating cash flows and our other sources of cash, we do not believe that
the reduction in liquidity of our municipal auction rate securities will have a material impact on
our overall ability to meet our liquidity needs.
Statements of Cash Flows
The following table summarizes selected items from our statements of cash flows for fiscal 2008,
2007 and 2006. See the financial statements in Item 8 for complete statements of cash flows for
those periods.
Fiscal | Fiscal | Fiscal | ||||||||||
(In millions) | 2008 | 2007 | 2006 | |||||||||
Net cash provided by operating activities of continuing operations |
$ | 830.2 | $ | 726.8 | $ | 595.5 | ||||||
Net income from continuing operations |
477.5 | 441.1 | 377.4 | |||||||||
Depreciation |
116.6 | 94.2 | 94.2 | |||||||||
Amortization |
99.9 | 64.4 | 32.5 | |||||||||
Share-based compensation |
113.3 | 77.3 | 71.4 | |||||||||
Net cash used in investing activities of continuing operations |
(86.1 | ) | (1,412.5 | ) | (210.0 | ) | ||||||
Acquisitions of businesses, net of cash acquired |
(264.5 | ) | (1,271.8 | ) | (42.2 | ) | ||||||
Net liquidation (purchases) of available-for-sale debt securities |
347.9 | 59.8 | (111.1 | ) | ||||||||
Purchases of property and equipment |
(261.9 | ) | (104.9 | ) | (44.5 | ) | ||||||
Capitalization of internal use software |
(44.2 | ) | (48.3 | ) | (37.6 | ) | ||||||
Net cash provided by (used in) financing activities |
(586.5 | ) | 733.9 | (478.8 | ) | |||||||
Issuance of long-term debt, net of discounts |
| 997.8 | | |||||||||
Purchase of treasury stock |
(800.0 | ) | (506.8 | ) | (784.2 | ) | ||||||
Net proceeds from issuance of common stock |
194.7 | 211.4 | 279.3 | |||||||||
Net cash provided by discontinued operations |
(0.8 | ) | 19.8 | 185.9 | ||||||||
Net increase in cash and cash equivalents |
158.1 | 75.6 | 95.8 | |||||||||
Operating Activities
During fiscal 2008 we generated $830.2 million in cash from our continuing operations. This
included net income from continuing operations of $477.5 million, adjustments for depreciation and
amortization of $216.5 million, and an adjustment for share-based compensation of $113.3 million.
Depreciation expense increased in fiscal 2008
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compared with fiscal 2007 due in part to the amortization of leasehold improvements for new office
facilities that we occupied in early fiscal 2008. Amortization expense increased in the same period
primarily due to our February 2007 acquisition of Digital Insight. Share-based compensation
increased in fiscal 2008 compared with fiscal 2007 due to our broad use of restricted stock units
in addition to stock options. During fiscal 2007 we generated $726.8 million in cash from our
continuing operations. This included net income from continuing operations of $441.1 million,
adjustments for depreciation and amortization of $158.6 million, and an adjustment for share-based
compensation of $77.3 million. Amortization expense increased in fiscal 2007 compared with fiscal
2006 due to our February 2007 acquisition of Digital Insight. During fiscal 2006 we generated
$595.5 million in cash from our continuing operations. This included net income from continuing
operations of $377.4 million, adjustments for depreciation and amortization of $126.7 million, and
an adjustment for share-based compensation of $71.4 million.
Investing Activities
Investing activities used $86.1 million in cash during fiscal 2008, including $264.5 million for
acquisitions of businesses (primarily Homestead and ECHO) and $306.1 million for capital
expenditures, partially offset by the receipt of $347.9 million from sales of investments and the
receipt of $132.0 million from the sale of our Intuit Distribution Management Solutions business
and certain outsourced payroll assets. Investing activities used $1.4 billion in cash during fiscal
2007, including $1.3 billion for the acquisition of Digital Insight and $153.2 million for capital
expenditures. Investing activities used $210.0 million in cash during fiscal 2006, including $111.1
million for purchases of investments and $82.1 million in cash for capital expenditures.
Our capital expenditures increased from a total of $153.2 million in fiscal 2007 to a total of
$306.1 million in fiscal 2008. This increase in capital expenditures was related to investments in
a new data center and expansion of office capacity to support the expected growth in our business.
We expect total capital expenditures to decrease to approximately $200 million in fiscal 2009.
Financing Activities
We used $586.5 million in cash for financing activities during fiscal 2008, including $800 million
for the repurchase of common stock under our stock repurchase programs partially offset by $194.7
million from the issuance of common stock under employee stock plans. Financing activities provided
$733.9 million during fiscal 2007, including $1 billion from the issuance of senior notes and
$211.4 million from the issuance of common stock under employee stock plans, partially offset by
the use of $506.8 million for the repurchase of common stock. We used $478.8 million in cash for
financing activities during fiscal 2006, including $784.2 million for the repurchase of common
stock under our stock repurchase programs partially offset by $279.3 million from the issuance of
common stock under employee stock plans.
Stock Split
On July 6, 2006 we implemented a two-for-one stock split in the form of a 100% stock dividend. All
share and per share figures in this Item 7 and in the statements of operations and notes to the
financial statements in Item 8 retroactively reflect this stock split.
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 fiscal 2008, 2007 and
2006 we repurchased 27.2 million, 17.1 million and 31.0 million shares of our common stock for
$800.0 million, $506.6 million and $784.2 million under our repurchase programs. From the inception
of these programs in May 2001 through the end of fiscal 2008, we repurchased 185.9 million shares
of our common stock for $4.6 billion. At July 31, 2008, we had authorization from our Board to
expend up to $600 million for stock repurchases through May 15, 2011.
Unsecured Revolving Credit Facility
On March 22, 2007 we entered into an agreement with certain institutional lenders for a $500
million unsecured revolving credit facility that will expire on March 22, 2012. Advances under the
credit facility will accrue interest at rates that are equal to, at our election, either Citibanks
base rate or the London InterBank Offered Rate (LIBOR)
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plus a margin that ranges from 0.18% to 0.575% based on our senior debt credit ratings. The
applicable interest rate will be increased by 0.05% for any period in which the total principal
amount of advances and letters of credit under the credit facility exceeds $250 million. The
agreement includes covenants that require us to maintain a ratio of total debt to annual earnings
before interest, taxes, depreciation and amortization (EBITDA) of not greater than 3.25 to 1.00 and
a ratio of annual EBITDA to interest payable of not less than 3.00 to 1.00. We may use amounts
borrowed under this credit facility for general corporate purposes or for future acquisitions or
expansion of our business. To date we have not borrowed under the credit facility, but we may
borrow under the credit facility from time to time as opportunities and needs arise. See Note 9 to
the financial statements in Item 8.
Liquidity and Capital Resource Requirements
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 and cash
equivalents, investments, and our revolving line of credit facility to fund such activities in the
future.
Based on past performance and current expectations, we believe that our cash and cash equivalents,
investments and cash generated from operations will be sufficient to meet anticipated seasonal
working capital needs, capital expenditure requirements, contractual obligations, commitments and
other liquidity requirements associated with our operations for at least the next 12 months. As
discussed above in this Item 7 under Auction Rate Securities, we do not believe that the
reduction in the liquidity of our municipal auction rate securities will have a material impact on
our overall ability to meet our liquidity needs.
Off-Balance Sheet Arrangements
At July 31, 2008, we did not have any significant off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of Regulation S-K.
Contractual Obligations
The following table summarizes our known contractual obligations to make future payments at July
31, 2008:
Payments Due by Period | ||||||||||||||||||||
Less than | 1-3 | 3-5 | More than | |||||||||||||||||
(In millions) | 1 year | years | years | 5 years | Total | |||||||||||||||
Amounts due under executive deferred
compensation plan |
$ | 38.2 | $ | | $ | | $ | | $ | 38.2 | ||||||||||
Senior unsecured notes |
| | 500.0 | 500.0 | 1,000.0 | |||||||||||||||
Interest and fees due on long-term obligations |
55.8 | 112.5 | 84.9 | 115.0 | 368.2 | |||||||||||||||
Capital lease obligations |
0.4 | 0.5 | | | 0.9 | |||||||||||||||
Operating leases (1) |
52.1 | 101.6 | 81.4 | 140.2 | 375.3 | |||||||||||||||
Purchase obligations (2) |
55.0 | 41.7 | 2.7 | | 99.4 | |||||||||||||||
Total contractual obligations (3) |
$ | 201.5 | $ | 256.3 | $ | 669.0 | $ | 755.2 | $ | 1,882.0 | ||||||||||
(1) | Includes our lease on Woodland Hills, California office space that is currently under construction by the landlord. See Item 2, Properties. | |
(2) | Represents agreements to purchase products and services that are enforceable, legally binding and specify terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the payments. | |
(3) | Excludes $47.9 million of non-current uncertain tax benefits under FIN 48, which are included in other long-term obligations on our balance sheet at July 31, 2008. We have not included this amount in the table above because we cannot make a reasonably reliable estimate regarding the timing of settlements with taxing authorities, if any. |
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Innovative Merchant Solutions Loan and Buyout Commitments
In April 2005 our wholly owned subsidiary, Innovative Merchant Solutions (IMS), became a member of
Superior Bankcard Services, LLC (SBS), a newly formed entity that acquires merchant accounts for
IMS. In connection with the formation of this entity IMS agreed to provide to SBS revolving loans
in an amount of up to $24.5 million under the terms of a credit agreement. In June 2006 IMS entered
into an amendment to the credit agreement to increase the amount of funds IMS may loan under that
agreement to $40.0 million. The credit agreement expires in July 2013, although certain events,
such as a sale of SBS, can trigger earlier termination. Amounts outstanding under the agreement at
July 31, 2008 totaled $8.5 million at interest rates of 6.0% to 8.5%. Amounts outstanding under the
agreement at July 31, 2007 totaled $11.2 million at an interest rate of 9.25%. There are no
scheduled repayments on the outstanding loan balance. All unpaid principal amounts and the related
accrued interest are due and payable in full at the loan expiration date.
The operating agreement of SBS requires that, no later than July 2009, either IMS agree to purchase
the minority members interests in SBS at a price to be set by negotiation or arbitration, or IMS
and the minority members pursue a sale of their interests in SBS to a third party.
Recent Accounting Pronouncements
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 fiscal years beginning after November 15, 2007,
which means that it will be effective for our fiscal year beginning August 1, 2008. 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 standards 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 companys 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 for fiscal
years beginning after November 15, 2007, which means that it will be effective for our fiscal year
beginning August 1, 2008. 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.
SFAS 141 (revised 2007), Business Combinations
In December 2007 the FASB issued SFAS 141 (revised 2007), Business Combinations. SFAS 141R will
significantly change the accounting for business combinations in a number of areas, including the
measurement of assets and liabilities acquired and the treatment of contingent consideration,
contingencies, acquisition costs, in-process research and development and restructuring costs. In
addition, under SFAS 141R, changes in deferred tax asset valuation allowances and acquired income
tax uncertainties in a business combination after the measurement period will affect the income tax
provision. SFAS 141R is effective for business combinations for which the
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acquisition date is on or after the beginning of the first annual reporting period beginning after
December 15, 2008, which means that it will be effective for our fiscal year beginning August 1,
2009. Early adoption is prohibited. We are in the process of evaluating this standard and therefore
have not yet determined the impact that the adoption of SFAS 141R will have on our financial
position, results of operations or cash flows.
SFAS 160, Noncontrolling Interests in Consolidated Financial Statements
In December 2007 the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial
Statements, which establishes accounting and reporting standards for the noncontrolling (minority)
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for
business arrangements entered into in fiscal years beginning on or after December 15, 2008, which
means that it will be effective for our fiscal year beginning August 1, 2009. Early adoption is
prohibited. We are in the process of evaluating this standard and therefore have not yet determined
the impact that the adoption of SFAS 160 will have on our financial position, results of operations
or cash flows.
FSP SFAS 142-3, Determination of the Useful Life of Intangible Assets
In April 2008 the FASB issued FASB Staff Position (FSP) SFAS 142-3, Determination of the Useful
Life of Intangible Assets. FSP SFAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS 142, Goodwill and Other Intangible Assets. This new staff position is
intended to improve the consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under
SFAS 141(R), Business Combinations. FSP SFAS 142-3 is effective for fiscal years beginning after
December 15, 2008, which means that it will be effective for our fiscal year beginning August 1,
2009. We are in the process of evaluating this staff position and therefore have not yet determined
the impact that adoption of FSP SFAS 142-3 will have on our financial position, results of
operations or cash flows.
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ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment Portfolio
Our investments consist of instruments that meet quality standards that are consistent with our
investment policy. This policy specifies that, except for direct obligations of the United States
government, securities issued by agencies of the United States government, and money market funds,
we diversify our investments by limiting our holdings with any individual issuer. We do not hold
derivative financial instruments in our portfolio of investments.
See Note 2 to the financial statements in Item 8, Managements Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and Capital Resources, in Item 7; and
Risk Factors in Item 1A of this Annual Report on Form 10-K for a description of market events
that have affected the liquidity of certain municipal auction rate securities that we held at July
31, 2008.
The following table presents our portfolio of cash equivalents and available-for-sale debt
securities as of July 31, 2008 by stated maturity. The table is classified by the original maturity
date listed on the security and includes cash equivalents, which consist primarily of money market
funds. At July 31, 2008, the weighted average interest rate earned on our money market accounts was
2.73% and the weighted average tax adjusted interest rate earned on our investments was 6.03%.
Years Ending July 31, | ||||||||||||||||||||||||||||
2014 and | ||||||||||||||||||||||||||||
(In thousands) | 2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | Total | |||||||||||||||||||||
Cash equivalents |
$ | 382,702 | $ | | $ | | $ | | $ | | $ | | $ | 382,702 | ||||||||||||||
Investments |
109,562 | 193,444 | 10,402 | 1,992 | 1,251 | 97,842 | 414,493 | |||||||||||||||||||||
Long-term investments |
| 14,700 | | | | 270,625 | 285,325 | |||||||||||||||||||||
Total |
$ | 492,264 | $ | 208,144 | $ | 10,402 | $ | 1,992 | $ | 1,251 | $ | 368,467 | $ | 1,082,520 | ||||||||||||||
Interest Rate Risk
Our cash equivalents and investments are subject to market risk due to changes in interest rates.
Interest rate movements affect the interest income we earn on cash equivalents and investments and
the value of those investments. Should the Federal Reserve Target Rate increase by 25 basis points
from the level of July 31, 2008, the value of our investments would decline by approximately $1.1
million. Should interest rates increase by 100 basis points from the level of July 31, 2008, the
value of our investments would decline by approximately $4.4 million.
We are also exposed to the impact of changes in interest rates as they affect our $500 million
revolving credit facility. Advances under the credit facility accrue interest at rates that are
equal to Citibanks base rate or the London InterBank Offered Rate (LIBOR) plus a margin that
ranges from 0.18% to 0.575% based on our senior debt credit ratings. Consequently, our interest
expense would fluctuate with changes in the general level of these interest rates if we were to
borrow any amounts under the credit facility. At July 31, 2008, no amounts were outstanding under
the credit facility.
On March 12, 2007 we issued $500 million of 5.40% senior unsecured notes due on March 15, 2012 and
$500 million of 5.75% senior unsecured notes due on March 15, 2017. Since these senior notes bear
interest at fixed rates, they are not subject to market risk due to changes in interest rates.
Impact of Foreign Currency Rate Changes
The functional currencies of our international operating subsidiaries are the local currencies. We
translate the assets and liabilities of our foreign subsidiaries at the exchange rates in effect on
the balance sheet date. We translate their revenue, costs and expenses at the average rates of
exchange in effect during the period. We include translation
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gains and losses in the stockholders equity section of our balance sheet. We include net gains and
losses resulting from foreign exchange transactions in interest and other income in our statements
of operations.
Since we translate foreign currencies (primarily Canadian dollars, British pounds and Indian
rupees) into U.S dollars for financial reporting purposes, currency fluctuations can have an impact
on our financial results. The historical impact of currency fluctuations has generally been
immaterial. We believe that our exposure to currency exchange fluctuation risk is not significant
primarily because our global subsidiaries invoice customers and satisfy their financial obligations
almost exclusively in their local currencies. Although the impact of currency fluctuations on our
financial results has generally been immaterial in the past and we believe that for the reasons
cited above currency fluctuations will not be significant in the future, there can be no guarantee
that the impact of currency fluctuations will not be material in the future. As of July 31, 2008 we
did not engage in foreign currency hedging activities.
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ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. | INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | |
The following financial statements are filed as part of this Report: |
Page | ||||
61 | ||||
63 | ||||
64 | ||||
65 | ||||
66 | ||||
67 |
2. | INDEX TO FINANCIAL STATEMENT SCHEDULES | |
The following financial statement schedule is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements: |
Schedule | Page | |||
II Valuation and Qualifying Accounts |
106 |
All other schedules not listed above have been omitted because they are inapplicable or are
not required.
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REPORT OF ERNST & YOUNG LLP,
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Intuit Inc.
We have audited the accompanying consolidated balance sheets of Intuit Inc. as of July 31, 2008 and
2007, and the related consolidated statements of operations, stockholders equity and cash flows
for each of the three years in the period ended July 31, 2008. Our audits also included the
financial statement schedule listed in the Index at Item 15(a) 2. These financial statements and
schedule are the responsibility of Intuit Inc.s management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Intuit Inc. at July 31, 2008 and 2007, and the
consolidated results of its operations and its cash flows for each of the three years in the period
ended July 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects the information set
forth therein.
As discussed in Note 11 to the consolidated financial statements, effective August 1, 2007, the
Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No 109.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Intuit Inc.s internal control over financial reporting as of July 31, 2008,
based on criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated September 11, 2008
expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
San Jose, California
September 11, 2008
September 11, 2008
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REPORT OF ERNST & YOUNG LLP,
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Intuit Inc.
We have audited Intuit Inc.s internal control over financial reporting as of July 31, 2008, based
on criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). Intuit Inc.s management
is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the
accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the companys internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies and procedures may deteriorate.
In our opinion, Intuit Inc. maintained, in all material respects, effective internal control over
financial reporting as of July 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the fiscal 2008 consolidated financial statements of Intuit Inc. and our
report dated September 11, 2008 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
San Jose, California
September 11, 2008
September 11, 2008
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INTUIT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve Months Ended July 31, | ||||||||||||
(In thousands, except per share amounts) | 2008 | 2007 | 2006 | |||||||||
Net revenue: |
||||||||||||
Product |
$ | 1,496,655 | $ | 1,447,392 | $ | 1,335,430 | ||||||
Service and other |
1,574,319 | 1,225,555 | 957,580 | |||||||||
Total net revenue |
3,070,974 | 2,672,947 | 2,293,010 | |||||||||
Costs and expenses: |
||||||||||||
Cost of revenue: |
||||||||||||
Cost of product revenue |
154,147 | 169,101 | 165,949 | |||||||||
Cost of service and other revenue |
414,100 | 309,419 | 232,588 | |||||||||
Amortization of purchased intangible assets |
56,011 | 30,926 | 8,785 | |||||||||
Selling and marketing |
859,647 | 742,368 | 657,588 | |||||||||
Research and development |
605,818 | 472,516 | 385,795 | |||||||||
General and administrative |
294,966 | 291,083 | 267,233 | |||||||||
Acquisition-related charges |
35,518 | 19,964 | 9,478 | |||||||||
Total costs and expenses |
2,420,207 | 2,035,377 | 1,727,416 | |||||||||
Operating income from continuing operations |
650,767 | 637,570 | 565,594 | |||||||||
Interest expense |
(52,290 | ) | (27,091 | ) | | |||||||
Interest and other income |
46,520 | 52,689 | 43,023 | |||||||||
Gains on marketable equity securities and other
investments, net |
1,417 | 1,568 | 7,629 | |||||||||
Gain on sale of outsourced payroll assets |
51,571 | 31,676 | | |||||||||
Income from continuing operations before
income taxes |
697,985 | 696,412 | 616,246 | |||||||||
Income tax provision |
245,579 | 251,607 | 234,592 | |||||||||
Minority interest expense, net of tax |
1,656 | 1,337 | 691 | |||||||||
Net income from continuing operations |
450,750 | 443,468 | 380,963 | |||||||||
Net income (loss) from discontinued operations |
26,012 | (3,465 | ) | 36,000 | ||||||||
Net income |
$ | 476,762 | $ | 440,003 | $ | 416,963 | ||||||
Basic net income per share from
continuing operations |
$ | 1.37 | $ | 1.29 | $ | 1.10 | ||||||
Basic net income (loss) per share
from discontinued operations |
0.08 | (0.01 | ) | 0.10 | ||||||||
Basic net income per share |
$ | 1.45 | $ | 1.28 | $ | 1.20 | ||||||
Shares used in basic per share amounts |
328,545 | 342,637 | 347,854 | |||||||||
Diluted net income per share from
continuing operations |
$ | 1.33 | $ | 1.25 | $ | 1.06 | ||||||
Diluted net income (loss) per share from
discontinued operations |
$ | 0.08 | (0.01 | ) | 0.10 | |||||||
Diluted net income per share |
$ | 1.41 | $ | 1.24 | $ | 1.16 | ||||||
Shares used in diluted per share amounts |
339,268 | 355,815 | 360,471 | |||||||||
See accompanying notes.
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INTUIT INC.
CONSOLIDATED BALANCE SHEETS
July 31, | ||||||||
(In thousands, except par value) | 2008 | 2007 | ||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 413,340 | $ | 255,201 | ||||
Investments |
414,493 | 1,048,470 | ||||||
Accounts receivable, net of allowance for doubtful accounts
of $15,636 and $15,248 |
127,230 | 131,691 | ||||||
Income taxes receivable |
60,564 | 54,178 | ||||||
Deferred income taxes |
101,730 | 84,682 | ||||||
Prepaid expenses and other current assets |
45,457 | 54,854 | ||||||
Current assets of discontinued operations |
| 8,515 | ||||||
Current assets before funds held for customers |
1,162,814 | 1,637,591 | ||||||
Funds held for customers |
610,748 | 314,341 | ||||||
Total current assets |
1,773,562 | 1,951,932 | ||||||
Long-term investments |
288,310 | | ||||||
Property and equipment, net |
507,499 | 298,396 | ||||||
Goodwill |
1,698,087 | 1,517,036 | ||||||
Purchased intangible assets, net |
273,087 | 292,884 | ||||||
Long-term deferred income taxes |
52,491 | 72,066 | ||||||
Other assets |
73,548 | 67,501 | ||||||
Long-term assets of discontinued operations |
| 52,211 | ||||||
Total assets |
$ | 4,666,584 | $ | 4,252,026 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 115,198 | $ | 119,799 | ||||
Accrued compensation and related liabilities |
229,819 | 192,286 | ||||||
Deferred revenue |
359,936 | 313,753 | ||||||
Income taxes payable |
16,211 | 33,278 | ||||||
Other current liabilities |
135,326 | 171,650 | ||||||
Current liabilities of discontinued operations |
| 15,002 | ||||||
Current liabilities before customer fund deposits |
856,490 | 845,768 | ||||||
Customer fund deposits |
610,748 | 314,341 | ||||||
Total current liabilities |
1,467,238 | 1,160,109 | ||||||
Long-term debt |
997,996 | 997,819 | ||||||
Other long-term obligations |
121,489 | 57,756 | ||||||
Total liabilities |
2,586,723 | 2,215,684 | ||||||
Commitments and contingencies |
||||||||
Minority interest |
6,907 | 1,329 | ||||||
Stockholders equity: |
||||||||
Preferred stock, $0.01 par value |
| | ||||||
Authorized - 1,345 shares total; 145 shares designated Series A;
250 shares designated Series B Junior Participating |
||||||||
Issued and
outstanding - None |
||||||||
Common stock, $0.01 par value |
3,226 | 3,391 | ||||||
Authorized - 750,000 shares |
||||||||
Issued and outstanding - 322,600 shares at July 31, 2008
and 339,157 shares at July 31, 2007 |
||||||||
Additional paid-in capital |
2,404,523 | 2,247,755 | ||||||
Treasury stock, at cost |
(2,786,499 | ) | (2,207,114 | ) | ||||
Accumulated other comprehensive income |
7,722 | 6,096 | ||||||
Retained earnings |
2,443,982 | 1,984,885 | ||||||
Total stockholders equity |
2,072,954 | 2,035,013 | ||||||
Total liabilities and stockholders equity |
$ | 4,666,584 | $ | 4,252,026 | ||||
See accompanying notes.
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INTUIT INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common Stock | Paid-In | Treasury | Deferred | Comprehensive | Retained | Stockholders | ||||||||||||||||||||||||||
(Dollars in thousands) | Shares | Amount | Capital | Stock | Compensation | Income | 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 |
| | | | | | 416,963 | 416,963 | ||||||||||||||||||||||||
Other comprehensive income, net of tax |
| | | | | 910 | | 910 | ||||||||||||||||||||||||
Comprehensive net income |
417,873 | |||||||||||||||||||||||||||||||
Issuance of common stock under employee stock plans - pre-split |
8,098,645 | 81 | | 374,814 | | | (104,090 | ) | 270,805 | |||||||||||||||||||||||
Stock repurchases under stock repurchase programs - pre-split |
(15,507,013 | ) | (155 | ) | | (784,031 | ) | | | | (784,186 | ) | ||||||||||||||||||||
Tax benefit from employee stock option transactions |
| | 57,956 | | | | | 57,956 | ||||||||||||||||||||||||
Share-based compensation (1) |
186 | | 71,638 | | | | | 71,638 | ||||||||||||||||||||||||
Stock split effected in the form of a 100% stock dividend |
171,861,694 | 1,719 | | | | | (1,719 | ) | | |||||||||||||||||||||||
Issuance of common stock upon exercise of options and other - post-split |
447,205 | 4 | | 23,014 | | | (14,517 | ) | 8,501 | |||||||||||||||||||||||
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 |
| | | | | | 440,003 | 440,003 | ||||||||||||||||||||||||
Other comprehensive income, net of tax |
| | | | | 5,012 | | 5,012 | ||||||||||||||||||||||||
Comprehensive net income |
445,015 | |||||||||||||||||||||||||||||||
Issuance of common stock under employee stock plans |
12,013,581 | 119 | 12,452 | 242,168 | | | (41,907 | ) | 212,832 | |||||||||||||||||||||||
Restricted stock units released, net of taxes |
61,904 | 1 | (1,462 | ) | 1,334 | | | (1,335 | ) | (1,462 | ) | |||||||||||||||||||||
Assumed vested stock options from purchase acquisitions |
| | 13,898 | | | | | 13,898 | ||||||||||||||||||||||||
Stock repurchases under stock repurchase programs |
(17,083,600 | ) | (171 | ) | | (506,422 | ) | | | | (506,593 | ) | ||||||||||||||||||||
Repurchase of vested restricted stock |
(5,362 | ) | | | (158 | ) | | | | (158 | ) | |||||||||||||||||||||
Tax benefit from employee stock option transactions |
| | 56,081 | | | | | 56,081 | ||||||||||||||||||||||||
Share-based compensation (2) |
| | 77,314 | | | | | 77,314 | ||||||||||||||||||||||||
Balance at July 31, 2007 |
339,157,302 | 3,391 | 2,247,755 | (2,207,114 | ) | | 6,096 | 1,984,885 | 2,035,013 | |||||||||||||||||||||||
Components of comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
| | | | | | 476,762 | 476,762 | ||||||||||||||||||||||||
Other comprehensive income, net of tax |
| | | | | 1,626 | | 1,626 | ||||||||||||||||||||||||
Comprehensive net income |
478,388 | |||||||||||||||||||||||||||||||
Issuance of common stock under employee stock plans |
10,266,359 | 102 | | 213,519 | | | (10,838 | ) | 202,783 | |||||||||||||||||||||||
Restricted stock units released, net of taxes |
347,251 | 4 | (8,122 | ) | 6,823 | | | (6,827 | ) | (8,122 | ) | |||||||||||||||||||||
Issuance of restricted stock units pursuant to Management Stock Purchase Plan |
| | 2,284 | | | | | 2,284 | ||||||||||||||||||||||||
Assumed vested stock options from purchase acquisitions |
| | 11,096 | | | | | 11,096 | ||||||||||||||||||||||||
Stock repurchases under stock repurchase programs |
(27,171,082 | ) | (271 | ) | | (799,727 | ) | | | | (799,998 | ) | ||||||||||||||||||||
Tax benefit from employee stock option transactions |
| | 38,226 | | | | | 38,226 | ||||||||||||||||||||||||
Share-based compensation (3) |
| | 113,284 | | | | | 113,284 | ||||||||||||||||||||||||
Balance at July 31, 2008 |
322,599,830 | $ | 3,226 | $ | 2,404,523 | $ | (2,786,499 | ) | $ | | $ | 7,722 | $ | 2,443,982 | $ | 2,072,954 | ||||||||||||||||
(1) | Includes $70,340 for continuing operations and $1,298 for discontinued operations. | |
(2) | Includes $76,313 for continuing operations and $1,001 for discontinued operations. | |
(3) | Includes $113,238 for continuing operations and $46 for discontinued operations. |
See accompanying notes.
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INTUIT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Months Ended July 31, | ||||||||||||
(In thousands) | 2008 | 2007 | 2006 | |||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 476,762 | $ | 440,003 | $ | 416,963 | ||||||
Net (income) loss from discontinued operations (1) |
755 | 1,140 | (39,533 | ) | ||||||||
Net income from continuing operations (1) |
477,517 | 441,143 | 377,430 | |||||||||
Adjustments to reconcile net income from continuing operations
to net cash provided by operating activities: |
||||||||||||
Depreciation |
116,572 | 94,175 | 94,237 | |||||||||
Amortization of intangible assets |
99,891 | 64,353 | 32,502 | |||||||||
Share-based compensation |
113,284 | 77,314 | 71,361 | |||||||||
Net gains on marketable equity securities and other investments |
(1,417 | ) | (1,568 | ) | (7,629 | ) | ||||||
Gain on sale of outsourced payroll assets |
(51,571 | ) | (31,676 | ) | | |||||||
Gain on sale of Intuit Distribution Management Solutions |
(45,667 | ) | | | ||||||||
Deferred income taxes |
60,550 | (39,200 | ) | (18,943 | ) | |||||||
Tax benefit from share-based compensation plans |
38,226 | 56,081 | 57,956 | |||||||||
Excess tax benefit from share-based compensation plans |
(20,764 | ) | (30,913 | ) | (26,981 | ) | ||||||
Other |
13,612 | 6,212 | 2,630 | |||||||||
Subtotal |
800,233 | 635,921 | 582,563 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
11,427 | (3,913 | ) | (10,981 | ) | |||||||
Prepaid expenses, income taxes and other current assets |
(14,360 | ) | 1,600 | (2,912 | ) | |||||||
Accounts payable |
(17,504 | ) | 18,574 | 4,256 | ||||||||
Accrued compensation and related liabilities |
28,508 | 3,641 | 26,438 | |||||||||
Deferred revenue |
47,472 | 23,250 | 18,656 | |||||||||
Income taxes payable |
(15,147 | ) | (1,202 | ) | (6,276 | ) | ||||||
Other liabilities |
(10,439 | ) | 48,889 | (16,284 | ) | |||||||
Total changes in operating assets and liabilities |
29,957 | 90,839 | 12,897 | |||||||||
Net cash provided by operating activities of
continuing operations (1) |
830,190 | 726,760 | 595,460 | |||||||||
Net cash provided by operating activities of
discontinued operations (1) |
| | 14,090 | |||||||||
Net cash provided by operating activities |
830,190 | 726,760 | 609,550 | |||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of available-for-sale debt securities |
(934,335 | ) | (2,466,642 | ) | (1,636,765 | ) | ||||||
Sales of available-for-sale debt securities |
1,045,321 | 1,997,825 | 1,388,216 | |||||||||
Maturities of available-for-sale debt securities |
236,895 | 528,647 | 137,440 | |||||||||
Net change in funds held for customers money market funds
and other cash equivalents |
(290,462 | ) | (51,242 | ) | 539 | |||||||
Purchases of property and equipment |
(261,901 | ) | (104,922 | ) | (44,522 | ) | ||||||
Capitalization of internal use software |
(44,226 | ) | (48,335 | ) | (37,552 | ) | ||||||
Net change in customer fund deposits |
290,462 | (42,958 | ) | (539 | ) | |||||||
Acquisitions of businesses and intangible assets, net of cash acquired |
(264,525 | ) | (1,271,791 | ) | (42,231 | ) | ||||||
Cash received from acquirer of outsourced payroll assets |
34,883 | 54,900 | | |||||||||
Proceeds from divestiture of businesses |
97,147 | | 23,169 | |||||||||
Other |
4,691 | (7,958 | ) | 2,248 | ||||||||
Net cash used in investing activities
of continuing operations (1) |
(86,050 | ) | (1,412,476 | ) | (209,997 | ) | ||||||
Net cash provided by (used in) investing activities of
discontinued operations (1) |
(755 | ) | 19,849 | 171,833 | ||||||||
Net cash used in investing activities |
(86,805 | ) | (1,392,627 | ) | (38,164 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from bridge credit facility |
| 1,000,000 | | |||||||||
Retirement of bridge credit facility |
| (1,000,000 | ) | | ||||||||
Issuance of long-term debt, net of discounts |
| 997,755 | | |||||||||
Net proceeds from issuance of common stock under stock plans |
194,661 | 211,370 | 279,306 | |||||||||
Purchases of treasury stock |
(799,998 | ) | (506,751 | ) | (784,186 | ) | ||||||
Excess tax benefit from share-based compensation plans |
20,764 | 30,913 | 26,981 | |||||||||
Issuance of restricted stock units pursuant to
Management Stock Purchase Plan |
2,284 | | | |||||||||
Other |
(4,220 | ) | 573 | (923 | ) | |||||||
Net cash provided by (used in) financing activities |
(586,509 | ) | 733,860 | (478,822 | ) | |||||||
Effect of exchange rates on cash and cash equivalents |
1,263 | 7,607 | 3,195 | |||||||||
Net increase in cash and cash equivalents |
158,139 | 75,600 | 95,759 | |||||||||
Cash and cash equivalents at beginning of period |
255,201 | 179,601 | 83,842 | |||||||||
Cash and cash equivalents at end of period |
$ | 413,340 | $ | 255,201 | $ | 179,601 | ||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Interest paid |
$ | 56,481 | $ | 6,196 | $ | | ||||||
Income taxes paid |
$ | 185,549 | $ | 221,701 | $ | 228,282 | ||||||
Increases in property and equipment and in other liabilities in
connection with leasehold improvement additions that were directly
funded by landlord allowances under certain operating leases |
$ | 4,926 | $ | 24,478 | $ | 353 | ||||||
(1) | We have segregated the cash flows of our ITS discontinued operations on these statements of cash flows. Because the cash flows of our IDMS discontinued operations were not material for any period presented, we have not segregated the cash flows of that business on these statements of cash flows. See Note 7 to the financial statements. |
See accompanying notes.
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INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
Intuit Inc. provides business and financial management solutions for small and medium sized
businesses, financial institutions, consumers, and accounting professionals. Our flagship software
products and services, including QuickBooks, Quicken and TurboTax, simplify small business
management and payroll processing, personal finance, and tax preparation and filing. Lacerte and
ProSeries are Intuits tax preparation offerings for professional accountants. Our financial
institutions division, anchored by Digital Insight, provides outsourced online banking services to
banks and credit unions. Founded in 1983 and headquartered in Mountain View, California, we sell
our products and services primarily in the United States.
Basis of Presentation
These 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 and
reportable segments.
These consolidated financial statements also include the financial position, results of operations
and cash flows of Superior Bankcard Services, LLC (SBS), an entity formed in April 2005 that
acquires merchant accounts for our Innovative Merchant Solutions (IMS) business. IMS provides
merchant services to small businesses that include credit card, debit card and other payment
processing services. At July 31, 2008 and 2007, SBS had total assets of $12.8 million and $14.8
million. SBS had total revenue of $17.6 million, $13.5 million and $7.1 million for the twelve
months ended July 31, 2008, 2007 and 2006. 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 on our balance sheets. The operating agreement of
SBS requires that, no later than July 2009, either IMS agree to purchase the minority members
interests in SBS at a price to be set by negotiation or arbitration, or IMS and the minority
members pursue a sale of their interests in SBS to a third party. See Note 10.
In February 2007 we acquired Digital Insight Corporation for a total purchase price of
approximately $1.34 billion. In December 2007 we acquired Homestead Technologies Inc. for total
consideration of approximately $170 million and in February 2008 we acquired Electronic Clearing
House, Inc. for a total purchase price of approximately $131 million. Accordingly, we have included
the results of operations for these companies in our consolidated results of operations from their
respective dates of acquisition. See Note 6.
As discussed in Note 7, in August 2007 we sold our Intuit Distribution Management Solutions (IDMS)
business and in December 2005 we sold our Intuit Information Technology Solutions (ITS) business.
Accordingly, we have reclassified our financial statements for all periods prior to the sales to
reflect IDMS and ITS as discontinued operations. Unless noted otherwise, discussions in these notes
pertain to our continuing operations.
On July 6, 2006 we implemented a two-for-one stock split in the form of a 100% stock dividend. All
share and per share figures in the statements of operations and the notes to the financial
statements retroactively reflect this stock split.
Seasonality
Our QuickBooks, Consumer Tax and Accounting Professionals businesses are highly seasonal. Some of
our other offerings are also seasonal, but to a lesser extent. Revenue from our QuickBooks software
products tends to be highest during our second and third fiscal quarters, 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
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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. Despite our intention to establish accurate estimates and use
reasonable assumptions, actual results may differ from our estimates.
Revenue Recognition
We derive revenue from the sale of packaged software products, license fees, software
subscriptions, product support, hosting services, payroll services, merchant services, professional
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 (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 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.
In accordance with the Financial Accounting Standard 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 our customers download products from the Web, 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 certain 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 record revenue net of our sales tax obligations.
We recognize product revenue in accordance with SFAS 48, Revenue Recognition When Right of Return
Exists. 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 and
historical redemption trends by product and by type of promotional program.
Service Revenue
We recognize revenue from 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
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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 QuickBooks Online and TurboTax Online, and
electronic tax filing services in both our Consumer Tax and Accounting Professionals 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 Real Estate Solutions business. 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.
We recognize revenue from our outsourced online banking services for financial institutions, for
which we host our customers Internet banking and business banking applications, in two ways.
Revenue earned for upfront fees for implementation services is recognized ratably over the greater
of the initial life of the customer contract or the estimated life of the customer service
relationship, which is approximately seven years. Revenue and amounts billed for recurring monthly
services are earned as services are performed.
Other Revenue
Other revenue consists primarily of revenue from revenue-sharing arrangements with third-party
service providers. We recognize transaction fees from revenue-sharing arrangements as end-user
sales are reported to us by these partners.
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 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 arrangements 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 an
undelivered service element, we recognize the revenue from the entire arrangement as the services
are delivered. 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.
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 in our
statements of operations. Product revenue from shipping and handling was not significant for the
twelve months ended July 31, 2008, 2007 or 2006.
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Customer Service and Technical Support
We include the costs of providing customer service under paid technical support contracts on the
cost of service and other revenue line in our statements of operations. We include customer service
and free technical support costs on the sales and marketing expense line in 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
generally 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.
Software Development Costs
Statement of Financial Accounting Standards (SFAS) 86, Accounting for Costs of Computer Software
to be Sold, Leased, or otherwise Marketed, requires companies to expense software development
costs as they incur them until technological feasibility has been established, at which time those
costs are capitalized until the product is available for general release to customers. To date, our
software has been available for general release concurrent with the establishment of technological
feasibility and, accordingly, we have not capitalized any development costs. SFAS 2, Accounting
for Research and Development Costs, establishes accounting and reporting standards for research
and development. In accordance with SFAS 2, costs we incur to enhance our existing products or
after the general release of the service using the product are expensed in the period they are
incurred and included in research and development costs in our statements of operations.
Internal Use Software
We capitalize costs related to computer software developed or obtained for internal use in
accordance with SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. Software obtained for internal use has generally been enterprise-level business and
finance software that we customize to meet our specific operational needs. Costs incurred in the
application development phase are capitalized and amortized over their useful lives, generally
three to five years. We have not sold, leased or licensed software developed for internal use to
our customers and we have no intention of doing so in the future.
Advertising
We expense advertising costs as we incur them. We recorded advertising expense of approximately
$120.6 million, $94.9 million and $64.5 million for the twelve months ended July 31, 2008, 2007 and
2006.
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 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 other 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
other 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 in our statements of operations.
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Capitalization of Interest Expense
In accordance with SFAS 34, Capitalization of Interest Cost, we capitalize interest on capital
projects, including facilities build-out projects and internal use computer software projects.
Capitalization commences with the first expenditure for the project and continues until the project
is substantially complete and ready for its intended use. We amortize capitalized interest to
depreciation expense using the straight-line method over the same lives as the related assets.
Capitalized interest was not significant for the twelve months ended July 31, 2008, 2007 or 2006.
Foreign Currency
The functional currencies of our international operating subsidiaries are the local currencies. We
translate the assets and liabilities of our foreign subsidiaries at the exchange rates in effect on
the balance sheet date. We translate their revenue, costs and expenses at the average rates of
exchange in effect during the period. We include translation gains and losses in the stockholders
equity section of our balance sheet. We include net gains and losses resulting from foreign
exchange transactions in interest and other income in 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 estimate our current tax liability and 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 in our statement of operations.
We review the need for a valuation allowance to reflect uncertainties about whether we will be able
to utilize some of our deferred tax assets before they expire. The valuation allowance analysis is
based on our estimates of taxable income for the jurisdictions in which we operate and the periods
over which our deferred tax assets will be realizable. While we have considered future taxable
income in assessing the need for a valuation allowance for the periods presented, we could be
required to record a 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
record the increase.
We adopted FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income TaxesAn
Interpretation of FASB Statement No. 109 on August 1, 2007. As a result of our adoption of FIN 48
we recognize and measure benefits for uncertain tax positions accounted for in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, using a
two-step approach. The first step is to evaluate the tax position taken or expected to be taken in
a tax return by determining if the weight of available evidence indicates that it is more likely
than not that the tax position will be sustained upon audit, including resolution of any related
appeals or litigation processes. For tax positions that are more likely than not of being sustained
upon audit, the second step is to measure the tax benefit as the largest amount that is more than
50% likely of being realized upon settlement. Significant judgment is required to evaluate
uncertain tax positions. We evaluate our uncertain tax positions on a quarterly basis. Our
evaluations are based upon a number of factors, including changes in facts or circumstances,
changes in tax law, correspondence with tax authorities during the course of audits and effective
settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions
could result in material increases or decreases in our income tax expense in the period in which we
make the change, which could have a material impact on our effective tax rate and operating
results.
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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 per share using the weighted average
number of common shares and dilutive potential common shares outstanding during the period.
Dilutive potential common shares consist of the shares issuable upon the exercise of stock options
and upon the vesting of restricted stock units (RSUs) under the treasury stock method. 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, and RSUs with unrecognized
compensation expense that is less than the average market price for our common stock, in the
calculation of diluted net income per share. We exclude stock options with combined exercise prices
and unrecognized compensation expense that are greater than the average market price for our common
stock, and RSUs with unrecognized compensation expense that is greater than the average market
price for our common stock, from the calculation of diluted net income per share because their
effect is anti-dilutive. Under the treasury stock method, the amount that must be paid to exercise
stock options, the amount of compensation expense for future service that we have not yet
recognized for stock options and RSUs, and the amount of tax benefits that will be recorded in
additional paid-in capital when the awards become deductible are assumed to be used to repurchase
shares.
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The following table presents the composition of shares used in the computation of basic and diluted
net income per share for the periods indicated.
Twelve Months Ended July 31, | ||||||||||||
(In thousands, except per share amounts) | 2008 | 2007 | 2006 | |||||||||
Numerator: |
||||||||||||
Net income from continuing operations |
$ | 450,750 | $ | 443,468 | $ | 380,963 | ||||||
Net income (loss) from discontinued operations |
26,012 | (3,465 | ) | 36,000 | ||||||||
Net income |
$ | 476,762 | $ | 440,003 | $ | 416,963 | ||||||
Denominator: |
||||||||||||
Shares used in basic per share amounts: |
||||||||||||
Weighted average common shares outstanding |
328,545 | 342,637 | 347,854 | |||||||||
Shares used in diluted per share amounts: |
||||||||||||
Weighted average common shares outstanding |
328,545 | 342,637 | 347,854 | |||||||||
Dilutive common equivalent shares from
stock options and restricted stock awards |
10,723 | 13,178 | 12,617 | |||||||||
Dilutive weighted average common shares
outstanding |
339,268 | 355,815 | 360,471 | |||||||||
Basic and diluted net income per share: |
||||||||||||
Basic net income per share from
continuing operations |
$ | 1.37 | $ | 1.29 | $ | 1.10 | ||||||
Basic net income (loss) per share
from discontinued operations |
0.08 | (0.01 | ) | 0.10 | ||||||||
Basic net income per share |
$ | 1.45 | $ | 1.28 | $ | 1.20 | ||||||
Diluted net income per share from
continuing operations |
$ | 1.33 | $ | 1.25 | $ | 1.06 | ||||||
Diluted net income (loss) per share
from discontinued operations |
0.08 | (0.01 | ) | 0.10 | ||||||||
Diluted net income per share |
$ | 1.41 | $ | 1.24 | $ | 1.16 | ||||||
Weighted average stock options and
restricted stock awards excluded from
calculation due to anti-dilutive effect |
18,419 | 10,652 | 15,593 | |||||||||
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 AAA-rated money market funds
in all periods presented. Investments consist of available-for-sale investment-grade debt
securities that we carry at fair value. Long-term investments consist primarily of municipal
auction rate securities that we carry at fair value. Due to a decrease in liquidity in the global
credit markets, we estimate the fair values of these municipal auction rate securities based on
valuation reports from third parties and a discounted cash flow model that we prepare. See Note 2.
Except for direct obligations of the United States government, securities issued by agencies of the
United States government, and money market funds, we diversify our investments by limiting our
holdings with any individual issuer.
We use the specific identification method to compute gains and losses on investments. We include
unrealized gains and losses on investments, net of tax, in the stockholders equity section of our
balance sheet. We generally classify
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available-for-sale debt securities as current assets based upon our ability and intent 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 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.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and are not interest bearing. We maintain
an allowance for doubtful accounts to reserve for potentially uncollectible receivables. We review
our accounts receivable by aging category to identify significant customers or invoices with known
disputes or collectibility issues. For those invoices not specifically reviewed, we provide
reserves based on the age of the receivable. In determining the amount of the reserve, we make
judgments about the creditworthiness of significant customers based on ongoing credit evaluations.
We also consider our historical level of credit losses and current economic trends that might
impact the level of future credit losses.
Funds Held for Customers and Customer Fund Deposits
Funds held for customers at July 31, 2008 and 2007 represent cash held on behalf of our payroll,
payments and financial institutions customers that is invested in cash and cash equivalents.
Customer fund deposits consist of amounts we owe on behalf of our payroll, payments and financial
institutions customers, such as direct deposit payroll funds and payroll taxes.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation. We calculate
depreciation using the straight-line method over the estimated useful lives of the assets, which
range from two to 30 years. We amortize leasehold improvements using the straight-line method over
the lesser of their estimated useful lives or remaining lease terms. We include the amortization of
assets that are recorded under capital leases in depreciation expense.
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 three to eight 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.
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Share-Based Compensation Plans
We account for share-based compensation using the fair value recognition provisions of SFAS 123(R),
Share-Based Payment. We estimate the fair value of stock options granted using a lattice binomial
model and a multiple option award approach. 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. We amortize the fair value of stock options on a straight-line basis over the requisite
service periods of the awards, which are generally the vesting periods. We value restricted stock
units using the intrinsic value method. We amortize the value of restricted stock units on a
straight-line basis over the restriction period. See Note 12 for a description of our share-based
employee compensation plans and the assumptions we use to calculate the fair value of share-based
employee compensation.
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 needs, 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. Our portfolio of investments consists of investment-grade securities. Except for
direct obligations of the United States government, securities issued by agencies of the United
States government, and money market funds, we diversify our investments 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, 2008, in the midst of the 2007 consumer tax season, amounts due from our 10 largest
retailers and distributors represented approximately 49% of total gross 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
customer accounted for 10% or more of total net revenue for the twelve months ended July 31, 2008,
2007 or 2006, nor did any customer account for 10% or more of accounts receivable at July 31, 2008
or 2007.
We rely primarily on one third-party vendor to perform the manufacturing and distribution functions
for our 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 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 fiscal years beginning after November 15, 2007,
which means that it will be effective for our fiscal year beginning August 1, 2008. In February
2008 the FASB issued a Staff Position that partially defers the effective date of SFAS 157 for one
year for non-financial assets and liabilities, except for items that are recognized or disclosed at
fair value in an entitys financial statements on a recurring basis (at least annually). 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.
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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 standards 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 companys 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 for fiscal
years beginning after November 15, 2007, which means that it will be effective for our fiscal year
beginning August 1, 2008. 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.
SFAS 141 (revised 2007), Business Combinations
In December 2007 the FASB issued SFAS 141 (revised 2007), Business Combinations. SFAS 141R will
significantly change the accounting for business combinations in a number of areas, including the
measurement of assets and liabilities acquired and the treatment of contingent consideration,
contingencies, acquisition costs, in-process research and development and restructuring costs. In
addition, under SFAS 141R, changes in deferred tax asset valuation allowances and acquired income
tax uncertainties in a business combination after the measurement period will affect the income tax
provision. SFAS 141R is effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning after December 15, 2008, which
means that it will be effective for our fiscal year beginning August 1, 2009. Early adoption is
prohibited. We are in the process of evaluating this standard and therefore have not yet determined
the impact that the adoption of SFAS 141R will have on our financial position, results of
operations or cash flows.
SFAS 160, Noncontrolling Interests in Consolidated Financial Statements
In December 2007 the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial
Statements, which establishes accounting and reporting standards for the noncontrolling (minority)
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for
business arrangements entered into in fiscal years beginning on or after December 15, 2008, which
means that it will be effective for our fiscal year beginning August 1, 2009. Early adoption is
prohibited. We are in the process of evaluating this standard and therefore have not yet determined
the impact that the adoption of SFAS 160 will have on our financial position, results of operations
or cash flows.
FSP SFAS 142-3, Determination of the Useful Life of Intangible Assets
In April 2008 the FASB issued FASB Staff Position (FSP) SFAS 142-3, Determination of the Useful
Life of Intangible Assets. FSP SFAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS 142, Goodwill and Other Intangible Assets. This new staff position is
intended to improve the consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under
SFAS 141(R), Business Combinations. FSP SFAS 142-3 is effective for fiscal years beginning after
December 15, 2008, which means that it will be effective for our fiscal year beginning August 1,
2009. We are in the process of evaluating this staff position and therefore have not yet determined
the impact that adoption of FSP SFAS 142-3 will have on our financial position, results of
operations or cash flows.
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2. Cash and Cash Equivalents, Investments and Funds Held for Customers
The following table summarizes our cash and cash equivalents, investments and funds held for
customers by balance sheet classification at the dates indicated.
July 31, 2008 | July 31, 2007 | |||||||||||||||
(In thousands) | Cost | Fair Value | Cost | Fair Value | ||||||||||||
Classification on balance sheets: |
||||||||||||||||
Cash and cash equivalents |
$ | 413,340 | $ | 413,340 | $ | 255,201 | $ | 255,201 | ||||||||
Investments |
412,075 | 414,493 | 1,048,643 | 1,048,470 | ||||||||||||
Funds held for customers |
610,748 | 610,748 | 314,341 | 314,341 | ||||||||||||
Long-term investments |
288,310 | 288,310 | | | ||||||||||||
Total cash and cash equivalents, investments
and funds held for customers |
$ | 1,724,473 | $ | 1,726,891 | $ | 1,618,185 | $ | 1,618,012 | ||||||||
The following table summarizes our cash and cash equivalents, investments and funds held for
customers by investment category at the dates indicated.
July 31, 2008 | July 31, 2007 | |||||||||||||||
(In thousands) | Cost | Fair Value | Cost | Fair Value | ||||||||||||
Type of issue: |
||||||||||||||||
Total cash and cash equivalents |
$ | 1,024,088 | $ | 1,024,088 | $ | 569,542 | $ | 569,542 | ||||||||
Available-for-sale debt securities: |
||||||||||||||||
Corporate notes |
7,163 | 7,163 | | | ||||||||||||
Municipal bonds |
330,436 | 332,534 | 442,269 | 442,095 | ||||||||||||
Municipal auction rate securities |
285,325 | 285,325 | 601,524 | 601,525 | ||||||||||||
U.S. agency securities |
74,476 | 74,796 | | | ||||||||||||
Asset-backed securities |
| | 4,850 | 4,850 | ||||||||||||
Total available-for-sale debt securities |
697,400 | 699,818 | 1,048,643 | 1,048,470 | ||||||||||||
Other long-term investments |
2,985 | 2,985 | | | ||||||||||||
Total cash and cash equivalents, investments
and funds held for customers |
$ | 1,724,473 | $ | 1,726,891 | $ | 1,618,185 | $ | 1,618,012 | ||||||||
We accumulate unrealized gains and losses on our available-for-sale debt securities, net of tax, in
accumulated other comprehensive income in the stockholders 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.
July 31, | July 31, | |||||||
(In thousands) | 2008 | 2007 | ||||||
Gross unrealized gains |
$ | 2,482 | $ | 15 | ||||
Gross unrealized losses |
(64 | ) | (188 | ) | ||||
Net
unrealized gains (losses) |
$ | 2,418 | $ | (173 | ) | |||
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The following table summarizes the fair value and gross unrealized losses related to 13 and 45
available-for-sale debt securities, aggregated by type of investment and length of time that
individual securities had been in a continuous unrealized loss position, at July 31, 2008 and 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 | ||||||||||||||||||
At July 31, 2008: |
||||||||||||||||||||||||
Corporate notes |
$ | 3,151 | $ | (9 | ) | $ | | $ | | $ | 3,151 | $ | (9 | ) | ||||||||||
U.S. agency securities |
14,964 | (9 | ) | | | 14,964 | (9 | ) | ||||||||||||||||
Municipal bonds |
29,484 | (46 | ) | | | 29,484 | (46 | ) | ||||||||||||||||
Total |
$ | 47,599 | $ | (64 | ) | $ | | $ | | $ | 47,599 | $ | (64 | ) | ||||||||||
At July 31, 2007: |
||||||||||||||||||||||||
Municipal bonds |
$ | 217,304 | $ | (185 | ) | $ | 3,005 | $ | (3 | ) | $ | 220,309 | $ | (188 | ) | |||||||||
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 July 31, 2008 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 July 31, 2008 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:
Twelve Months Ended July 31, | ||||||||||||
(In thousands) | 2008 | 2007 | 2006 | |||||||||
Gross realized gains |
$ | 463 | $ | 126 | $ | 12 | ||||||
Gross realized losses |
(88 | ) | (192 | ) | (506 | ) | ||||||
Net realized
gains (losses) |
$ | 375 | $ | (66 | ) | $ | (494 | ) | ||||
At July 31, 2008, we held $285.3 million in municipal auction rate securities. These securities are
collateralized long-term debt instruments that provide liquidity through a Dutch auction process
that resets the applicable interest rate at pre-determined intervals, typically every 35 days. Due
to a decrease in liquidity in the global credit markets, in February 2008 auctions began failing
for the municipal auction rate securities we held. Regularly scheduled auctions for these
securities have generally continued to fail since that time. When these auctions initially failed,
higher interest rates for many of the securities went into effect. Of the total auction rate
securities we held at July 31, 2008, the underlying assets of $220.7 million or 77% were student
loans which are guaranteed by the U.S. Department of Education and $241.2 million or 85% were rated
AAA/Aaa by the major credit rating agencies.
We estimated the fair values of the municipal auction rate securities we held at July 31, 2008
based on valuation reports from third parties and a discounted cash flow model that we prepared.
Key inputs to our discounted cash flow model included the current contractual interest rates;
forward projections of the current contractual interest rates; the likely timing of principal
repayments; the probability of full repayment considering guarantees by the U.S. Department of
Education of the underlying student loans or insurance by other third parties; publicly available
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pricing data for recently issued student loan backed securities that are not subject to auctions;
and the impact of the reduced liquidity for auction rate securities. Using the valuation reports
from third parties and our discounted cash flow model we determined that the fair values of the
municipal auction rate securities we held at July 31, 2008 were substantially equal to their par
values. As a result, we recorded no decrease in the fair values of those securities for the twelve
months then ended. Based on our ability and intent to hold these auction rate securities until
liquidity returned to the market or they matured, we classified them as long-term investments on
our balance sheet at July 31, 2008.
In August 2008 the broker-dealers for our auction rate securities announced settlements under which
they may provide liquidity solutions, or purchase, the auction rate securities held by their
institutional clients. Details of the agreements are still being finalized.
Based on our expected operating cash flows and our other sources of cash, we do not believe that
the reduction in liquidity of our municipal auction rate securities will have a material impact on
our overall ability to meet our liquidity needs.
The following table summarizes our available-for-sale debt securities classified by the stated
maturity date of the security at the dates indicated.
July 31, 2008 | July 31, 2007 | |||||||||||||||
(In thousands) | Cost | Fair Value | Cost | Fair Value | ||||||||||||
Due within one year |
$ | 108,753 | $ | 109,562 | $ | 159,564 | $ | 159,488 | ||||||||
Due within two years |
207,157 | 208,144 | 25,856 | 25,808 | ||||||||||||
Due within three years |
10,379 | 10,402 | 14,700 | 14,700 | ||||||||||||
Due after three years |
371,111 | 371,710 | 848,523 | 848,474 | ||||||||||||
Total available-for-sale debt securities |
$ | 697,400 | $ | 699,818 | $ | 1,048,643 | $ | 1,048,470 | ||||||||
3. Property and Equipment
Property and equipment consisted of the following at the dates indicated:
Life in | July 31, | |||||||||
(Dollars in thousands) | Years | 2008 | 2007 | |||||||
Equipment |
3-5 | $ | 400,111 | $ | 357,715 | |||||
Computer software |
3-5 | 310,789 | 275,949 | |||||||
Furniture and fixtures |
3-5 | 55,590 | 41,906 | |||||||
Leasehold improvements |
2-11 | 180,621 | 139,327 | |||||||
Land |
N/A | 3,463 | 3,760 | |||||||
Buildings |
30 | 27,760 | 27,341 | |||||||
Capital in progress |
N/A | 213,735 | 62,743 | |||||||
1,192,069 | 908,741 | |||||||||
Less accumulated depreciation and amortization |
(684,570 | ) | (610,345 | ) | ||||||
Total property and equipment, net |
$ | 507,499 | $ | 298,396 | ||||||
Capital in progress consists primarily of costs related to internal use software projects and to
facilities construction projects. The increase in the balance of total capital in progress between
July 31, 2007 and July 31, 2008 relates primarily to construction costs for our new data center in
Washington state, which we expect to begin occupying in the second half of fiscal 2009. As
discussed in Note 1, Software Development Costs, we capitalize costs related to the development
of computer software for internal use in accordance with SOP 98-1. We capitalized internal use
software costs totaling $44.2 million, $48.3 million and $37.6 million for the twelve months ended
July 31, 2008,
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2007 and 2006. These amounts included capitalized labor costs of $16.1 million, $13.2 million and
$13.7 million in those periods. Costs related to internal use software projects are included in the
capital in progress category of property and equipment until project completion, at which time they
are transferred to the computer software category and amortized on a straight-line basis over their
useful lives, which are generally three to five years.
4. Goodwill and Purchased Intangible Assets
Goodwill
As discussed in Note 1, Goodwill, Purchased Intangible Assets and Other Long-Lived Assets, under
current accounting rules goodwill is not amortized but is subject to annual impairment tests.
Changes in the carrying value of goodwill by reportable segment during the twelve months ended July
31, 2008 and 2007 were as shown in the following table. Our reportable segments are described in
Note 8.
Balance | Goodwill | Foreign | Balance | Goodwill | Foreign | Balance | ||||||||||||||||||||||
July 31, | Acquired/ | Currency | July 31, | Acquired/ | Currency | July 31, | ||||||||||||||||||||||
(In thousands) | 2006 | Adjusted | Translation | 2007 | Adjusted | Translation | 2008 | |||||||||||||||||||||
QuickBooks |
$ | 4,228 | $ | 50,405 | $ | | $ | 54,633 | $ | 98,894 | $ | | $ | 153,527 | ||||||||||||||
Payroll and Payments |
249,688 | | | 249,688 | 82,492 | | 332,180 | |||||||||||||||||||||
Consumer Tax |
30,041 | | | 30,041 | | | 30,041 | |||||||||||||||||||||
Accounting Professionals |
90,507 | | | 90,507 | | | 90,507 | |||||||||||||||||||||
Financial Institutions |
| 1,002,631 | | 1,002,631 | (805 | ) | | 1,001,826 | ||||||||||||||||||||
Other Businesses |
88,751 | | 785 | 89,536 | | 470 | 90,006 | |||||||||||||||||||||
Totals |
$ | 463,215 | $ | 1,053,036 | $ | 785 | $ | 1,517,036 | $ | 180,581 | $ | 470 | $ | 1,698,087 | ||||||||||||||
The increase in goodwill in our Financial Institutions segment during the twelve months ended July
31, 2007 was due to the acquisition of Digital Insight Corporation. The increase in goodwill in our
QuickBooks segment during the twelve months ended July 31, 2008 was due to the acquisition of
Homestead Technologies Inc. (Homestead). The increase in goodwill in our Payroll and Payments
segment during the fiscal 2008 period was due to the acquisition of Electronic Clearing House, Inc.
(ECHO). See Note 6.
Purchased Intangible Assets
The following tables shows the cost, accumulated amortization and weighted average life in years
for our purchased intangible assets at the dates indicated. The increases in the cost of purchased
intangible assets during the twelve months ended July 31, 2008 were primarily due to our
acquisitions of Homestead and ECHO. See Note 6.
Trade | Covenants | |||||||||||||||||||
Customer | Purchased | Names | Not to | |||||||||||||||||
(Dollars in thousands) | Lists | Technology | and Logos | Compete | Total | |||||||||||||||
At July 31, 2008: |
||||||||||||||||||||
Cost |
$ | 397,356 | $ | 299,963 | $ | 26,248 | $ | 12,596 | $ | 736,163 | ||||||||||
Accumulated amortization |
(240,386 | ) | (193,563 | ) | (17,007 | ) | (12,120 | ) | (463,076 | ) | ||||||||||
Purchased intangible assets, net |
$ | 156,970 | $ | 106,400 | $ | 9,241 | $ | 476 | $ | 273,087 | ||||||||||
Weighted average life in years |
5 | 4 | 5 | 3 | 4 | |||||||||||||||
At July 31, 2007: |
||||||||||||||||||||
Cost |
$ | 346,425 | $ | 267,693 | $ | 23,696 | $ | 12,313 | $ | 650,127 | ||||||||||
Accumulated amortization |
(192,367 | ) | (138,566 | ) | (14,580 | ) | (11,730 | ) | (357,243 | ) | ||||||||||
Purchased intangible assets, net |
$ | 154,058 | $ | 129,127 | $ | 9,116 | $ | 583 | $ | 292,884 | ||||||||||
Weighted average life in years |
5 | 4 | 5 | 3 | 4 | |||||||||||||||
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The following table shows the expected future amortization expense for our purchased intangible
assets at July 31, 2008. Amortization of purchased technology is charged to cost of service and
other revenue and amortization of purchased intangible assets in our statements of operations.
Amortization of other purchased intangible assets such as customer lists is charged to
acquisition-related charges in our statements of operations.
Expected | ||||
Future | ||||
Amortization | ||||
(In thousands) | Expense | |||
Twelve months ending July 31, |
||||
2009 |
$ | 107,704 | ||
2010 |
74,829 | |||
2011 |
43,718 | |||
2012 |
25,160 | |||
2013 |
7,168 | |||
Thereafter |
14,508 | |||
Total expected future amortization expense |
$ | 273,087 | ||
Future acquisitions could cause these amounts to increase. In addition, if impairment events occur
they could accelerate the timing of purchased intangible asset charges.
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5. Comprehensive Net Income
SFAS 130, Reporting Comprehensive Income, establishes standards for reporting and displaying
comprehensive net income and its components in stockholders equity. SFAS 130 requires that the
components of other comprehensive income, such as changes in the fair value of available-for-sale
debt securities and foreign currency translation adjustments, be added to our net income to arrive
at comprehensive net income. Other comprehensive income items have no impact on our net income as
presented in our statements of operations.
The components of accumulated other comprehensive income, net of income taxes, were as follows for
the periods indicated:
Realized | ||||||||||||||||||||
Unrealized Gain (Loss) on | Gain on | Foreign | ||||||||||||||||||
Marketable | Derivative | Currency | ||||||||||||||||||
(In thousands) | Investments | Securities | Instruments | Translation | Total | |||||||||||||||
Balance at July 31, 2005 |
$ | (582 | ) | $ | 1,451 | $ | | $ | (695 | ) | $ | 174 | ||||||||
Unrealized (loss) gain, net of income tax benefit
of $141 and provision of $1,354 |
(179 | ) | 2,210 | | | 2,031 | ||||||||||||||
Reclassification adjustment for realized loss
(gain) included in net income, net of income
tax provision of $195 and benefit of $2,244 |
299 | (3,661 | ) | | | (3,362 | ) | |||||||||||||
Translation adjustment, net of income taxes
of $1,212 |
| | | 2,241 | 2,241 | |||||||||||||||
Other comprehensive income (loss) |
120 | (1,451 | ) | | 2,241 | 910 | ||||||||||||||
Balance at July 31, 2006 |
(462 | ) | | | 1,546 | 1,084 | ||||||||||||||
Unrealized gain, net of income tax provision of $209 |
317 | | | | 317 | |||||||||||||||
Reclassification adjustment for realized loss
included in net income, net of income
tax provision of $26 |
40 | | | | 40 | |||||||||||||||
Realized gain on derivative instruments,
net of income tax provision of $294 |
| | 450 | | 450 | |||||||||||||||
Amortization of realized gain on derivative
instruments, net of income tax provision of $9 |
| | (17 | ) | | (17 | ) | |||||||||||||
Translation adjustment, net of income taxes
of $2,791 |
| | | 4,222 | 4,222 | |||||||||||||||
Other comprehensive income |
357 | | 433 | 4,222 | 5,012 | |||||||||||||||
Balance at July 31, 2007 |
(105 | ) | | 433 | 5,768 | 6,096 | ||||||||||||||
Unrealized
gain, net of income tax provision of $1,178 |
1,788 | | | | 1,788 | |||||||||||||||
Reclassification adjustment for realized gain
included in net income, net of income
tax benefit of $149 |
(226 | ) | | | | (226 | ) | |||||||||||||
Amortization of realized gain on derivative
instruments, net of income tax provision of $28 |
| | (41 | ) | | (41 | ) | |||||||||||||
Translation adjustment, net of income taxes
of $71 |
| | | 105 | 105 | |||||||||||||||
Other comprehensive income |
1,562 | | (41 | ) | 105 | 1,626 | ||||||||||||||
Balance at July 31, 2008 |
$ | 1,457 | $ | | $ | 392 | $ | 5,873 | $ | 7,722 | ||||||||||
6. Acquisitions
Electronic Clearing House, Inc.
On February 29, 2008 we acquired all of the outstanding equity interests of Electronic Clearing
House, Inc. (ECHO) for a total purchase price of approximately $131 million in cash. ECHO is a
provider of electronic payment processing services to small businesses and became part of our
Payroll and Payments segment. We acquired ECHO in order to expand our merchant services
capabilities.
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Under the purchase method of accounting we allocated the total purchase price to the tangible and
identifiable intangible assets acquired and liabilities assumed based on their estimated fair
values on the date of acquisition. We estimated the fair values with the assistance of a third
party appraisal firm. The fair values assigned to identifiable intangible assets acquired were
based on estimates and assumptions determined by management. We recorded the excess of purchase
price over the aggregate fair values as goodwill. Using information available at the time the
acquisition closed, we allocated approximately $6 million of the purchase price to tangible assets
and liabilities and approximately $44 million of the purchase price to identified intangible
assets. We recorded the excess purchase price of approximately $81 million as goodwill, none of
which is deductible for income tax purposes. We may adjust the preliminary purchase price
allocation after obtaining more information about asset valuations and liabilities assumed. The
identified intangible assets are being amortized over a weighted average life of eight years.
We have included ECHOs results of operations in our consolidated results of operations from the
date of acquisition. ECHOs results of operations for periods prior to the date of acquisition were
not material when compared with our consolidated results of operations.
Homestead Technologies Inc.
On December 18, 2007 we acquired Homestead Technologies Inc. (Homestead), including all of its
outstanding equity interests, for total consideration of approximately $170 million on a fully
diluted basis. The total consideration was comprised of the purchase price of $146 million (which
included the fair value of vested stock options assumed) plus the $24 million fair value of
unvested stock options and restricted stock units assumed. Homestead is a provider of Web site
design and hosting services to small businesses and became part of our QuickBooks segment. We
acquired Homestead as part of our strategy to help small businesses acquire and serve customers
through the Internet.
Under the purchase method of accounting we allocated the total purchase price to the tangible and
identifiable intangible assets acquired and liabilities assumed based on their estimated fair
values on the date of acquisition. We estimated the fair values with the assistance of a third
party appraisal firm. The fair values assigned to identifiable intangible assets acquired were
based on estimates and assumptions determined by management. We recorded the excess of purchase
price over the aggregate fair values as goodwill. Using information available at the time the
acquisition closed, we allocated approximately $14 million of the purchase price to tangible assets
and liabilities and approximately $22 million of the purchase price to identified intangible
assets. We recorded the excess purchase price of approximately $110 million as goodwill, none of
which is deductible for income tax purposes. In the third quarter of fiscal 2008 we recorded an $11
million increase to tangible assets and a corresponding decrease to goodwill. The increase in the
tangible assets was the result of a determination made after we obtained additional information
regarding the realizability of certain deferred tax assets not previously recorded. We may continue
to adjust the preliminary purchase price allocation after obtaining more information about asset
valuations and liabilities assumed. The identified intangible assets are being amortized over a
weighted average life of five years.
We have included Homesteads results of operations in our consolidated results of operations from
the date of acquisition. Homesteads results of operations for periods prior to the date of
acquisition were not material when compared with our consolidated results of operations.
Digital Insight Corporation
Purchase Price
On February 6, 2007 we acquired all of the outstanding shares of Digital Insight Corporation for a
total purchase price of approximately $1.34 billion including the value of vested options assumed.
Digital Insight is a provider of outsourced online banking services to banks and credit unions. We
intend to combine workflows in our financial management tools with online banking capabilities
offered by Digital Insight to create new, easier to use, and better-value offerings for consumers
and small businesses. We have included Digital Insights results of operations in our consolidated
results of operations from the date of acquisition. We combined Digital Insight with our existing
financial institutions group, which had been part of our Other Businesses segment, to create a new
Financial Institutions segment during the twelve months ended July 31, 2007. See Note 8.
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Pursuant to the terms of the acquisition agreement, we paid a cash amount of $39.00 per share for
each outstanding share of Digital Insight common stock and assumed options to purchase Digital
Insight common stock which were converted as of the acquisition date into options to purchase
approximately 1.5 million shares of our common stock. The total purchase price of the acquisition
was as follows:
(In thousands) | Amount | |||
Cash |
$ | 1,319,105 | ||
Fair value of assumed vested stock options |
13,898 | |||
Acquisition-related transaction costs |
11,424 | |||
Total purchase price |
$ | 1,344,427 | ||
The fair value of the assumed Digital Insight stock options was determined using a lattice binomial
model. The use of the lattice binomial model and the method of determining the variables used in
that model were consistent with our valuation of stock options in accordance with SFAS 123(R),
Share-Based Payment. In addition to vested stock options valued at $13.9 million, we assumed
unvested stock options valued at $7.9 million that will be amortized to share-based compensation
expense over a weighted average vesting period of 2.4 years. The acquisition-related transaction
costs included legal, accounting and investment banking fees.
Under the purchase method of accounting, in the third quarter of fiscal 2007 we allocated the total
purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed
based on their estimated fair values on the date of acquisition. We estimated the fair values with
the assistance of a third party appraisal firm. The fair values assigned to identifiable intangible
assets acquired were based on estimates and assumptions determined by management. We recorded the
excess of purchase price over the aggregate fair values as goodwill, none of which is deductible
for income tax purposes. The acquired goodwill was assigned to our Financial Institutions segment.
See Note 4. We allocated the purchase price using the information available at the time the
acquisition closed. In the fourth quarter of fiscal 2007 we recorded a $10.7 million decrease to
the net deferred income tax liability and a corresponding decrease to goodwill. We decreased the
net deferred income tax liability as a result of a determination, after obtaining additional
information, regarding the realizability of certain deferred tax assets not previously recorded.
The total allocation of the Digital Insight purchase price is as follows:
(In thousands) | Amount | |||
Cash and cash equivalents |
$ | 124,662 | ||
Accounts receivable |
35,385 | |||
Property and equipment, net |
21,549 | |||
Goodwill |
1,002,631 | |||
Intangible assets |
291,500 | |||
Other current and noncurrent assets |
7,267 | |||
Deferred income taxes |
(69,349 | ) | ||
Accounts payable |
(31,127 | ) | ||
Accrued compensation |
(21,202 | ) | ||
Deferred revenue |
(5,297 | ) | ||
Other current and long-term liabilities |
(11,592 | ) | ||
Total preliminary purchase price allocation |
$ | 1,344,427 | ||
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Intangible assets consist of customer lists (including existing contractual relationships),
purchased technology, trade names and logos, and covenants not to compete. The customer lists
intangible assets relate to Digital Insights ability to sell existing, in-process and future
versions of its products to its existing customers. We amortize purchased intangible assets on a
straight-line basis over their respective useful lives. The following table presents the details of
the identifiable intangible assets acquired.
Estimated | ||||||||
Useful Life | ||||||||
(Dollars in thousands) | (in Years) | Amount | ||||||
Customer lists |
5 | $ | 146,000 | |||||
Purchased technology |
3 | 134,800 | ||||||
Trade names and logos |
5 | 10,000 | ||||||
Covenants not to compete |
3 | 700 | ||||||
Total identifiable intangible assets |
$ | 291,500 | ||||||
Pro Forma Financial Information
The unaudited financial information in the table below summarizes the combined results of
operations of Intuit and Digital Insight on a pro forma basis, as though the companies had been
combined as of the beginning of each of the periods presented. The pro forma financial information
is presented for informational purposes only and is not indicative of the results of operations
that would have been achieved if the acquisition and the issuance of $1 billion of related senior
notes (see Note 10) had taken place at the beginning of each of the periods presented. The pro
forma financial information for all periods presented also includes adjustments to share-based
compensation expense for stock options assumed, adjustments to depreciation expense for acquired
property and equipment, amortization charges for acquired intangible assets, adjustments to
interest income, and related tax effects.
The pro forma financial information for the twelve months ended July 31, 2007 combines our results
for that period, which include the results of Digital Insight subsequent to February 6, 2007, the
date of acquisition, and the historical results for Digital Insight for the six months ended
December 31, 2006. The pro forma financial information for the twelve months ended July 31, 2006
combines our historical results for that period with the historical results of Digital Insight for
the twelve months ended June 30, 2006.
The following table summarizes the pro forma financial information:
Twelve Months Ended | Twelve Months Ended | |||||||||||||||
July 31, 2007 | July 31, 2006 | |||||||||||||||
As | Pro | As | Pro | |||||||||||||
(In thousands) | Reported | Forma | Reported | Forma | ||||||||||||
Total net revenue |
$ | 2,672,947 | $ | 2,797,943 | $ | 2,293,010 | $ | 2,520,747 | ||||||||
Net income from continuing operations |
443,468 | 414,527 | 380,963 | 324,041 | ||||||||||||
Basic net income per share from
continuing operations |
$ | 1.29 | $ | 1.21 | $ | 1.10 | $ | 0.93 | ||||||||
Diluted net income per share from
continuing operations |
$ | 1.25 | $ | 1.17 | $ | 1.06 | $ | 0.90 | ||||||||
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7. Dispositions and Discontinued Operations
Intuit Distribution Management Solutions Discontinued Operations
In August 2007 we sold our Intuit Distribution Management Solutions (IDMS) business for
approximately $100 million in cash and recorded a net gain on disposal of $27.5 million. The
decision to sell IDMS was a result of managements desire to focus resources on Intuits core
products and services. IDMS was part of our Other Businesses segment.
In accordance with the provisions of SFAS 144, Accounting for the Impairment or Disposal of
Long-lived Assets, we determined that IDMS became a discontinued operation in the fourth quarter
of fiscal 2007. We have therefore segregated the net assets and operating results of IDMS from
continuing operations on our balance sheets and in our statements of operations for all periods
prior to the sale. Assets held for sale at July 31, 2007 consisted primarily of goodwill and
purchased intangible assets. Because IDMS operating cash flows were not material for any period
presented, we have not segregated them from continuing operations on our statements of cash flows.
We have presented the effect of the gain on disposal of IDMS on our statement of cash flows for the
twelve months ended July 31, 2008. See the table later in this Note 7 for the components of revenue
and net income or loss from discontinued operations.
Sale of Outsourced Payroll Assets
In March 2007 we sold certain assets related to our Complete Payroll and Premier Payroll Service
businesses to Automatic Data Processing, Inc. (ADP) for a price of up to approximately $135 million
in cash. The final purchase price was contingent upon the number of customers that transitioned to
ADP pursuant to the purchase agreement over a period of approximately one year from the date of
sale. In the twelve months ended July 31, 2008 and 2007 we recorded pre-tax gains of $51.6 million
and $31.7 million on our statement of operations for customers who transitioned to ADP during those
periods. We received a total purchase price of $93.6 million and recorded a total pre-tax gain of
$83.2 million from the inception of this transaction through its completion in the third quarter of
fiscal 2008. The assets were part of our Payroll and Payments segment.
In accordance with the provisions of SFAS 144, Accounting for the Impairment or Disposal of
Long-lived Assets, we have not accounted for this transaction as a discontinued operation because
the operations and cash flows of the assets could not be clearly distinguished, operationally or
for financial reporting purposes, from the rest of our outsourced payroll business. We held
deposits received from ADP of $30.3 million in other current liabilities on our balance sheet at
July 31, 2007. Assets held for sale at July 31, 2007 consisted of $5.1 million in customer lists
and were included in purchased intangible assets on our balance sheet. There were no deposits
received from ADP or assets held for sale on our balance sheet at July 31, 2008.
Intuit Information Technology Solutions Discontinued Operations
In December 2005 we sold our Intuit Information Technology Solutions (ITS) business for
approximately $200 million in cash and recorded a net gain on disposal of $34.3 million. The
decision to sell ITS was a result of our desire to focus resources on our core products and
services. ITS was part of our Other Businesses segment.
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 statements
of operations and statements of cash flows for all periods prior to the sale. See the table later
in this Note 7 for the components of revenue and net income or loss from discontinued operations.
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Components of Net Income (Loss) from Discontinued Operations
The components of net income (loss) from discontinued operations in our statements of operations as
well as net revenue from discontinued operations and income (loss) from discontinued operations
before income taxes are as follows for the periods indicated:
Twelve Months Ended July 31, | ||||||||||||
(In thousands) | 2008 | 2007 | 2006 | |||||||||
Net income (loss) from discontinued operations |
||||||||||||
Net income from Intuit Information Technology
Solutions operations |
$ | | $ | | $ | 5,209 | ||||||
Net gain (loss) on disposal of Intuit Information
Technology Solutions discontinued operations |
(755 | ) | (1,140 | ) | 34,324 | |||||||
Net loss from Intuit Distribution Management
Solutions operations |
(747 | ) | (2,325 | ) | (3,533 | ) | ||||||
Net gain on disposal of Intuit Distribution
Management Solutions discontinued operations |
27,514 | | | |||||||||
Total net income (loss) from discontinued operations |
$ | 26,012 | $ | (3,465 | ) | $ | 36,000 | |||||
Net revenue from discontinued operations |
||||||||||||
Intuit Information Technology Solutions |
$ | | $ | | $ | 20,167 | ||||||
Intuit Distribution Management Solutions |
1,916 | 52,001 | 49,293 | |||||||||
Total net revenue from discontinued operations |
$ | 1,916 | $ | 52,001 | $ | 69,460 | ||||||
Income (loss) from discontinued operations
before income taxes |
||||||||||||
Intuit Information Technology Solutions |
$ | | $ | | $ | 9,100 | ||||||
Intuit Distribution Management Solutions |
(1,240 | ) | (3,995 | ) | (6,035 | ) | ||||||
Total income (loss) from discontinued operations
before income taxes |
$ | (1,240 | ) | $ | (3,995 | ) | $ | 3,065 | ||||
Income tax provision (benefit) on income (loss)
from discontinued operations |
||||||||||||
Intuit Information Technology Solutions |
$ | | $ | | $ | 3,891 | ||||||
Intuit Distribution Management Solutions |
(493 | ) | (1,670 | ) | (2,502 | ) | ||||||
Total income tax provision (benefit) |
$ | (493 | ) | $ | (1,670 | ) | $ | 1,389 | ||||
The $27.5 million net gain on disposal of IDMS that we recorded for the twelve months ended July
31, 2008 included $41.8 for goodwill. The $34.3 million net gain on disposal of ITS that we
recorded for the twelve months ended July 31, 2006 included $150.3 million for goodwill and $9.2
million for the estimated tax payable in connection with the taxable gain on the sale of ITS.
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8. 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 six reportable
segments, described below, based on factors such as how we manage our operations and how our chief
operating decision maker views results. We define the chief operating decision maker as our Chief
Executive Officer and our Chief Financial Officer. Our chief operating decision maker organizes and
manages our business primarily on the basis of product and service offerings. 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, invoices, business cards and business
stationery. QuickBooks service and other revenue is derived primarily from QuickBooks Online,
QuickBooks support plans, Web site design and hosting services for small businesses, 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, federal and state payroll tax
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 tax filing
services.
Accounting Professionals product revenue is derived primarily from Lacerte and ProSeries
professional tax preparation software products and from QuickBooks Premier Accountant Edition and
ProAdvisor Program for professional accountants. Accounting Professionals service and other revenue
is derived primarily from electronic tax filing services, bank product transmission services and
training services.
Financial Institutions service and other revenue is derived primarily from outsourced online
banking software products that are hosted in our data centers and delivered as on-demand service
offerings to banks and credit unions by our Digital Insight business.
Other Businesses consist primarily of Quicken, Intuit Real Estate Solutions (IRES), and our
business in Canada. Quicken product revenue is derived primarily from Quicken desktop software
products. Quicken service and other revenue is derived primarily from Quicken Online and fees from
consumer online transactions. IRES product revenue is derived primarily from property management
software licenses. Service and other revenue in our IRES business consists primarily of revenue
from support plans, hosting services and professional services. In Canada, product revenue is
derived primarily from localized versions of QuickBooks and Quicken as well as consumer desktop tax
return preparation software and 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, Accounting Professionals and Financial
Institutions 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 expenses such as corporate selling and marketing, product development, and general and
administrative expenses and share-based compensation expenses that are not allocated to specific
segments in a category we call Corporate. The Corporate category also includes amortization of
purchased intangible assets, acquisition-related charges, interest expense, interest and other
income, and realized net gains or losses on marketable equity securities and other investments.
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The accounting policies of our 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. See Note 4 for goodwill by reportable segment.
The following tables show our financial results by reportable segment for the twelve months ended
July 31, 2008, 2007 and 2006. We have reclassified segment results for all periods presented to
reflect changes that align our product groups more closely with the customer groups they serve. We
transferred QuickBooks Premier Accountant Edition and ProAdvisor Program product revenue from our
QuickBooks segment to our Professional Tax segment and renamed that segment Accounting
Professionals. Revenue from these products was $31.5 million, $22.5 million and $20.0 million in
the twelve months ended July 31, 2008, 2007 and 2006. We also transferred QuickBase service revenue
from our Other Businesses segment to our QuickBooks segment. QuickBase revenue was $15.6 million,
$10.5 million and $7.1 million in those periods.
Payroll | ||||||||||||||||||||||||||||||||
and | Consumer | Accounting | Financial | Other | ||||||||||||||||||||||||||||
(In thousands) | QuickBooks | Payments | Tax | Professionals | Institutions | Businesses | Corporate | Consolidated | ||||||||||||||||||||||||
Twelve Months Ended
July 31, 2008 |
||||||||||||||||||||||||||||||||
Product revenue |
$ | 471,795 | $ | 219,282 | $ | 311,607 | $ | 301,511 | $ | 759 | $ | 191,701 | $ | | $ | 1,496,655 | ||||||||||||||||
Service and other
revenue |
149,966 | 341,503 | 617,822 | 25,212 | 297,781 | 142,035 | | 1,574,319 | ||||||||||||||||||||||||
Total net revenue |
621,761 | 560,785 | 929,429 | 326,723 | 298,540 | 333,736 | | 3,070,974 | ||||||||||||||||||||||||
Segment operating
income (loss) |
172,270 | 216,257 | 594,534 | 162,589 | 56,982 | 101,043 | | 1,303,675 | ||||||||||||||||||||||||
Common expenses |
| | | | | | (561,379 | ) | (561,379 | ) | ||||||||||||||||||||||
Subtotal |
172,270 | 216,257 | 594,534 | 162,589 | 56,982 | 101,043 | (561,379 | ) | 742,296 | |||||||||||||||||||||||
Amortization of
purchased
intangible assets |
| | | | | | (56,011 | ) | (56,011 | ) | ||||||||||||||||||||||
Acquisition-related
charges |
| | | | | | (35,518 | ) | (35,518 | ) | ||||||||||||||||||||||
Interest expense |
| | | | | | (52,290 | ) | (52,290 | ) | ||||||||||||||||||||||
Interest and other
income |
| | | | | | 46,520 | 46,520 | ||||||||||||||||||||||||
Gains on marketable
equity
securities and other
investments, net |
| | | | | | 1,417 | 1,417 | ||||||||||||||||||||||||
Gain on sale of
outsourced
payroll assets |
| | | | | | 51,571 | 51,571 | ||||||||||||||||||||||||
Income (loss) from
continuing operations
before income taxes |
$ | 172,270 | $ | 216,257 | $ | 594,534 | $ | 162,589 | $ | 56,982 | $ | 101,043 | $ | (605,690 | ) | $ | 697,985 | |||||||||||||||
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Payroll | ||||||||||||||||||||||||||||||||
and | Consumer | Accounting | Financial | Other | ||||||||||||||||||||||||||||
(In thousands) | QuickBooks | Payments | Tax | Professionals | Institutions | Businesses | Corporate | Consolidated | ||||||||||||||||||||||||
Twelve Months Ended
July 31, 2007 |
||||||||||||||||||||||||||||||||
Product revenue |
$ | 484,904 | $ | 208,885 | $ | 300,725 | $ | 283,812 | $ | 150 | $ | 168,916 | $ | | $ | 1,447,392 | ||||||||||||||||
Service and other
revenue |
101,304 | 307,856 | 512,179 | 30,439 | 150,200 | 123,577 | | 1,225,555 | ||||||||||||||||||||||||
Total net revenue |
586,208 | 516,741 | 812,904 | 314,251 | 150,350 | 292,493 | | 2,672,947 | ||||||||||||||||||||||||
Segment operating
income (loss) |
178,798 | 215,377 | 508,616 | 154,355 | 38,845 | 98,675 | | 1,194,666 | ||||||||||||||||||||||||
Common expenses |
| | | | | | (506,206 | ) | (506,206 | ) | ||||||||||||||||||||||
Subtotal |
178,798 | 215,377 | 508,616 | 154,355 | 38,845 | 98,675 | (506,206 | ) | 688,460 | |||||||||||||||||||||||
Amortization of
purchased
intangible assets |
| | | | | | (30,926 | ) | (30,926 | ) | ||||||||||||||||||||||
Acquisition-related
charges |
| | | | | | (19,964 | ) | (19,964 | ) | ||||||||||||||||||||||
Interest expense |
| | | | | | (27,091 | ) | (27,091 | ) | ||||||||||||||||||||||
Interest and other
income |
| | | | | | 52,689 | 52,689 | ||||||||||||||||||||||||
Gains on marketable
equity
securities and other
investments, net |
| | | | | | 1,568 | 1,568 | ||||||||||||||||||||||||
Gain on sale of
outsourced
payroll assets |
| | | | | | 31,676 | 31,676 | ||||||||||||||||||||||||
Income (loss) from
continuing operations
before income taxes |
$ | 178,798 | $ | 215,377 | $ | 508,616 | $ | 154,355 | $ | 38,845 | $ | 98,675 | $ | (498,254 | ) | $ | 696,412 | |||||||||||||||
Payroll | ||||||||||||||||||||||||||||||||
and | Consumer | Accounting | Financial | Other | ||||||||||||||||||||||||||||
(In thousands) | QuickBooks | Payments | Tax | Professionals | Institutions | Businesses | Corporate | Consolidated | ||||||||||||||||||||||||
Twelve Months Ended
July 31, 2006 |
||||||||||||||||||||||||||||||||
Product revenue |
$ | 446,253 | $ | 194,097 | $ | 265,748 | $ | 264,991 | $ | 199 | $ | 164,142 | $ | | $ | 1,335,430 | ||||||||||||||||
Service and other
revenue |
79,790 | 267,944 | 440,328 | 27,898 | 24,202 | 117,418 | | 957,580 | ||||||||||||||||||||||||
Total net revenue |
526,043 | 462,041 | 706,076 | 292,889 | 24,401 | 281,560 | | 2,293,010 | ||||||||||||||||||||||||
Segment operating
income (loss) |
167,397 | 181,927 | 467,118 | 136,663 | 12,225 | 83,758 | | 1,049,088 | ||||||||||||||||||||||||
Common expenses |
| | | | | | (465,231 | ) | (465,231 | ) | ||||||||||||||||||||||
Subtotal |
167,397 | 181,927 | 467,118 | 136,663 | 12,225 | 83,758 | (465,231 | ) | 583,857 | |||||||||||||||||||||||
Amortization of
purchased
intangible assets |
| | | | | | (8,785 | ) | (8,785 | ) | ||||||||||||||||||||||
Acquisition-related
charges |
| | | | | | (9,478 | ) | (9,478 | ) | ||||||||||||||||||||||
Interest and other
income |
| | | | | | 43,023 | 43,023 | ||||||||||||||||||||||||
Gains on marketable
equity
securities and other
investments, net |
| | | | | | 7,629 | 7,629 | ||||||||||||||||||||||||
Income (loss) from
continuing operations
before income taxes |
$ | 167,397 | $ | 181,927 | $ | 467,118 | $ | 136,663 | $ | 12,225 | $ | 83,758 | $ | (432,842 | ) | $ | 616,246 | |||||||||||||||
9. Current Liabilities
Bridge Credit Facility
In connection with our February 6, 2007 acquisition of Digital Insight (see Note 6), we borrowed $1
billion under a one-year unsecured bridge credit facility with two institutional lenders in order
to pay a portion of the purchase price of Digital Insight. This bridge credit facility accrued
interest at 5.77%. On March 12, 2007 we retired this bridge credit facility with the proceeds of
our issuance of $1 billion in long-term senior unsecured notes. See Note 10.
Unsecured Revolving Credit Facility
On March 22, 2007 we entered into an agreement with certain institutional lenders for a $500
million unsecured revolving credit facility that will expire on March 22, 2012. Advances under the
credit facility will accrue interest at
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rates that are equal to, at our election, either Citibanks base rate or the London InterBank
Offered Rate (LIBOR) plus a margin that ranges from 0.18% to 0.575% based on our senior debt credit
ratings. The applicable interest rate will be increased by 0.05% for any period in which the total
principal amount of advances and letters of credit under the credit facility exceeds $250 million.
The agreement includes covenants that require us to maintain a ratio of total debt to annual
earnings before interest, taxes, depreciation and amortization (EBITDA) of not greater than 3.25 to
1.00 and a ratio of annual EBITDA to interest payable of not less than 3.00 to 1.00. We were in
compliance with these covenants at July 31, 2008. We may use amounts borrowed under this credit
facility for general corporate purposes or for future acquisitions or expansion of our business. To
date we have not borrowed under this credit facility.
Other Current Liabilities
Other current liabilities were as follows at the dates indicated:
July 31, | ||||||||
(In thousands) | 2008 | 2007 | ||||||
Reserve for product returns |
$ | 27,910 | $ | 25,833 | ||||
Reserve for rebates |
13,408 | 18,918 | ||||||
Interest payable |
20,597 | 21,061 | ||||||
Deposits received from acquirer of outsourced payroll assets |
| 30,257 | ||||||
Executive deferred compensation plan |
38,234 | 35,898 | ||||||
Other |
35,177 | 39,683 | ||||||
Total other current liabilities |
$ | 135,326 | $ | 171,650 | ||||
The balances of several of our other current liabilities, particularly our reserves for product
returns and rebates, are affected by the seasonality of our business. See Note 1.
Restructuring Liability
In the fourth quarter of fiscal 2008 we announced a reorganization plan that has resulted in a
reduction of our workforce. We recorded a $23.3 million restructuring liability related to the
workforce reduction in the fourth quarter of fiscal 2008 that consisted of approximately $16.0
million for employee severance costs and approximately $7.3 million for facilities costs. We paid
$3.9 million of the facilities costs in cash during the three months ended July 31, 2008 and we
expect to pay all of the employee severance costs in cash during the three months ending October
31, 2008.
10. Long-Term Obligations and Commitments
Senior Unsecured Notes
On March 12, 2007 we issued $500 million of 5.40% senior unsecured notes due on March 15, 2012 and
$500 million of 5.75% senior unsecured notes due on March 15, 2017 (together, the Notes), for a
total principal amount of $1 billion. The Notes are redeemable by Intuit at any time, subject to a
make-whole premium. On March 12, 2007 we retired the bridge credit facility described in Note 9
with the proceeds of our issuance of these senior unsecured notes. The Notes include covenants that
limit our ability to grant liens on our facilities and to enter into sale and leaseback
transactions, subject to significant allowances. We paid $56.2 million in cash for interest on the
Notes during the twelve months ended July 31, 2008. Based on the trading prices of the Notes at
July 31, 2008 and 2007 and the interest rates we could obtain for other borrowings with similar
terms at those dates, the estimated fair value of the Notes at those dates was approximately $964.7
million and $963.0 million.
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The following table summarizes our senior unsecured notes:
July 31, | ||||||||
(In thousands) | 2008 | 2007 | ||||||
Senior notes: |
||||||||
5.40% fixed-rate notes, due 2012 |
$ | 500,000 | $ | 500,000 | ||||
5.75% fixed-rate notes, due 2017 |
500,000 | 500,000 | ||||||
Total senior notes |
1,000,000 | 1,000,000 | ||||||
Unamortized discount |
(2,004 | ) | (2,181 | ) | ||||
Total |
$ | 997,996 | $ | 997,819 | ||||
Derivative Instruments
In December 2006 we entered into a $500 million notional amount five-year forward starting swap and
a $500 million notional amount 10-year forward starting swap designated as cash flow hedges of the
interest payments on the senior notes described above. Under these interest rate swap contracts, we
made fixed-rate interest payments and received variable-rate interest payments based on the London
Interbank Offered Rate (LIBOR). The effect of these swaps was to offset changes in the fixed rate
between the date we entered into the interest rate swaps and the issuance date of the senior notes.
We settled the interest rate swaps on March 7, 2007 for a cumulative gain of $0.7 million which
will be amortized using the effective yield method as an adjustment of interest expense over the
term of the related debt in our statements of operations. At July 31, 2008, the net unamortized
gain of $0.4 million was included in other comprehensive income in the stockholders equity section
of our balance sheet.
Other Long-Term Obligations
Other long-term obligations were as follows at the dates indicated:
July 31, | ||||||||
(In thousands) | 2008 | 2007 | ||||||
Capital lease obligations: Monthly installments through
2011; interest rates of 4.50% to 6.75% |
$ | 1,562 | $ | 2,377 | ||||
Total deferred rent |
61,747 | 49,205 | ||||||
Long-term deferred revenue |
12,939 | 8,715 | ||||||
Long-term income tax liabilities |
47,857 | | ||||||
Other |
6,446 | 4,843 | ||||||
Total long-term obligations |
130,551 | 65,140 | ||||||
Less current portion (included in other current liabilities) |
(9,062 | ) | (7,384 | ) | ||||
Long-term obligations due after one year |
$ | 121,489 | $ | 57,756 | ||||
Innovative Merchant Solutions Loan and Buyout Commitments
In April 2005 our wholly owned subsidiary, Innovative Merchant Solutions (IMS), became a member of
Superior Bankcard Services, LLC (SBS), a newly formed entity that acquires merchant accounts for
IMS. Our consolidated financial statements include the financial position, results of operations
and cash flows of SBS, after elimination of all significant intercompany balances and transactions,
including amounts outstanding under the credit agreement described below. See Note 1. In connection
with the formation of this entity IMS agreed to provide to SBS revolving loans in an amount of up
to $24.5 million under the terms of a credit agreement. In June 2006 IMS entered into an amendment
to the credit agreement to increase the amount of funds IMS may loan under that agreement to $40.0
million. The credit agreement expires in July 2013, although certain events, such as a sale of SBS,
can trigger earlier termination. Amounts outstanding under this agreement at July 31, 2008 totaled
$8.5 million at interest rates of 6.0%
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to 8.5%. Amounts outstanding under this agreement at July 31, 2007 totaled $11.2 million at an
interest rate of 9.25%. There are no scheduled repayments on the outstanding loan balance. All
unpaid principal amounts and the related accrued interest are due and payable in full at the loan
expiration date.
The operating agreement of SBS requires that, no later than July 2009, either IMS agree to purchase
the minority members interests in SBS at a price to be set by negotiation or arbitration, or IMS
and the minority members pursue a sale of their interests in SBS to a third party.
Operating Leases
We lease office facilities and equipment under various operating lease agreements. Our facilities
leases generally provide for periodic rent increases and many contain escalation clauses and
renewal options. Certain leases require us to pay property taxes, insurance and routine
maintenance. Annual minimum commitments under all of these leases are shown in the table below.
Operating | ||||
Lease | ||||
(In thousands) | Commitments | |||
Fiscal year ending July 31, |
||||
2009 |
$ | 52,105 | ||
2010 |
52,535 | |||
2011 |
49,036 | |||
2012 |
42,827 | |||
2013 |
38,587 | |||
Thereafter |
140,183 | |||
Total operating lease commitments |
$ | 375,273 | ||
Rent expense totaled $49.2 million, $36.0 million and $27.3 million for the twelve months ended
July 31, 2008, 2007 and 2006.
Purchase Obligations
At July 31, 2008, we had unconditional purchase obligations of approximately $99.4 million. These
unconditional purchase obligations represent agreements to purchase products and services that are
enforceable, legally binding, and specify terms that include fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate timing of the payments.
The largest of these commitments totaled $52.0 million and relates to future outsourced payment
fulfillment and bill management services to financial institutions that contract with our Digital
Insight business for Internet banking services. This commitment expires in June 2010.
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11. Income Taxes
The provision (benefit) for income taxes from continuing operations consisted of the following for
the periods indicated:
Twelve Months Ended July 31, | ||||||||||||
(In thousands) | 2008 | 2007 | 2006 | |||||||||
Current: |
||||||||||||
Federal |
$ | 179,835 | $ | 220,064 | $ | 204,289 | ||||||
State |
35,046 | 54,372 | 33,150 | |||||||||
Foreign |
8,458 | 8,103 | 14,550 | |||||||||
223,339 | 282,539 | 251,989 | ||||||||||
Deferred: |
||||||||||||
Federal |
13,099 | (24,158 | ) | (18,684 | ) | |||||||
State |
9,381 | (7,596 | ) | 4,786 | ||||||||
Foreign |
(240 | ) | 822 | (3,499 | ) | |||||||
22,240 | (30,932 | ) | (17,397 | ) | ||||||||
Total provision for income taxes from
continuing operations |
$ | 245,579 | $ | 251,607 | $ | 234,592 | ||||||
The sources of income from continuing operations before the provision for income taxes consisted of
the following for the periods indicated:
Twelve Months Ended July 31, | ||||||||||||
(In thousands) | 2008 | 2007 | 2006 | |||||||||
United States |
$ | 669,746 | $ | 661,966 | $ | 583,676 | ||||||
Foreign |
28,239 | 34,446 | 32,570 | |||||||||
Total |
$ | 697,985 | $ | 696,412 | $ | 616,246 | ||||||
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Differences between income taxes calculated using the federal statutory income tax rate of 35% and
the provision for income taxes from continuing operations were as follows for the periods
indicated:
Twelve Months Ended July 31, | ||||||||||||
(In thousands) | 2008 | 2007 | 2006 | |||||||||
Income from continuing operations before
income taxes |
$ | 697,985 | $ | 696,412 | $ | 616,246 | ||||||
Statutory federal income tax |
$ | 244,294 | $ | 243,744 | $ | 215,686 | ||||||
State income tax, net of federal benefit |
28,878 | 30,404 | 24,658 | |||||||||
Federal research and experimental credits |
(7,842 | ) | (13,341 | ) | (3,464 | ) | ||||||
Domestic production activities deduction |
(11,816 | ) | (4,985 | ) | (4,375 | ) | ||||||
Share-based compensation |
311 | 5,048 | 1,929 | |||||||||
Tax exempt interest |
(11,641 | ) | (15,940 | ) | (11,771 | ) | ||||||
Federal tax related to divestiture |
| | 8,748 | |||||||||
Other, net |
3,395 | 6,677 | 3,181 | |||||||||
Total provision for income taxes from
continuing operations |
$ | 245,579 | $ | 251,607 | $ | 234,592 | ||||||
In accordance with SFAS 123(R), tax savings from expected future deductions based on the expense
attributable to our stock option plans are reflected in the federal and state tax provisions for
the twelve months ended July 31, 2008, 2007 and 2006.
Excess tax benefits associated with stock option exercises are credited to stockholders equity.
The reductions of income taxes payable resulting from the exercise of employee stock options and
other employee stock programs that were credited to stockholders equity were approximately $38.2
million, $56.1 million and $58.0 million for the twelve months ended July 31, 2008, 2007 and 2006.
In December 2006 the Tax Relief and Health Care Act of 2006 was signed into law. The Act included a
reinstatement of the federal research and experimental credit through December 31, 2007 that was
retroactive to January 1, 2006. We recorded a discrete tax benefit of approximately $3.7 million
for the retroactive amount related to fiscal 2006 during the twelve months ended July 31, 2007.
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Significant deferred tax assets and liabilities were as follows at the dates indicated:
July 31, | ||||||||
(In thousands) | 2008 | 2007 | ||||||
Deferred tax assets: |
||||||||
Accruals and reserves not currently deductible |
$ | 28,178 | $ | 34,095 | ||||
Deferred rent |
13,859 | 21,363 | ||||||
Accrued and deferred compensation |
33,954 | 30,397 | ||||||
Loss and tax credit carryforwards |
38,782 | 19,448 | ||||||
Property and equipment |
12,130 | 30,385 | ||||||
Share-based compensation |
77,336 | 46,021 | ||||||
Other, net |
21,002 | 22,740 | ||||||
Total deferred tax assets |
225,241 | 204,449 | ||||||
Deferred tax liabilities: |
||||||||
Intangible assets |
65,925 | 41,152 | ||||||
Other, net |
5,095 | 4,022 | ||||||
Total deferred tax liabilities |
71,020 | 45,174 | ||||||
Total net deferred tax assets |
154,221 | 159,275 | ||||||
Valuation allowance |
| (2,527 | ) | |||||
Total net deferred tax assets, net of valuation allowance |
$ | 154,221 | $ | 156,748 | ||||
We had provided a valuation allowance related to the benefits of certain state capital loss
carryforwards and state net operating losses that we believed were unlikely to be realized. The
valuation allowance decreased by $2.5 million during the twelve months ended July 31, 2008 as a
result of the elimination of the deferred tax asset in connection with the sale of certain
outsourced payroll assets. See Note 7. The valuation allowance decreased by $1.9 million during the
twelve months ended July 31, 2007 due to utilization of $1.0 million and expired losses of $0.9
million.
The components of total net deferred tax assets, net of valuation allowance, as shown on our
balance sheet were as follows at the dates indicated:
July 31, | ||||||||
(In thousands) | 2008 | 2007 | ||||||
Current deferred income taxes |
$ | 101,730 | $ | 84,682 | ||||
Long-term deferred income taxes |
52,491 | 72,066 | ||||||
Total net deferred tax assets, net of valuation allowance |
$ | 154,221 | $ | 156,748 | ||||
We acquired Electronic Clearing House, Inc. and Homestead Technologies Inc. in fiscal 2008 and
Digital Insight in fiscal 2007. See Note 6. These companies had federal net operating loss
carryforwards at their respective dates of acquisition that totaled approximately $164 million. The
tax effects of these federal net operating loss carryforwards and other federal tax credit
carryforwards totaled approximately $66 million. We recorded the tax effects of these carryforwards
as deferred tax assets at the respective dates of acquisition. These carryforwards do not result in
an income tax provision benefit, but they reduce income taxes payable and cash paid for income
taxes as we utilize them.
At July 31, 2008, we had total federal net operating loss carryforwards of approximately $95.0
million that will expire starting in fiscal 2019. Utilization of the net operating losses is
subject to annual limitation. The annual limitation may result in the expiration of net operating
losses before utilization.
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At July 31, 2008, we had various state net operating loss and tax credit carryforwards for which we
have recorded a deferred tax asset of $4.3 million. The state net operating losses will expire
starting in fiscal 2013. Utilization of the net operating losses is subject to annual limitation.
The annual limitation may result in the expiration of net operating losses before utilization.
Adoption of FASB Interpretation No. 48
On August 1, 2007 we adopted the provisions of FASB Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109. FIN 48 prescribes a
threshold for the financial statement recognition and measurement of a tax position taken or
expected to be taken in an income tax return. FIN 48 requires that we determine whether the
benefits of tax positions are more likely than not of being sustained upon audit based on the
technical merits of the tax position. For tax positions that are more likely than not of being
sustained upon audit, we recognize the largest amount of the benefit that is more likely than not
of being sustained in our financial statements. For tax positions that are not more likely than not
of being sustained upon audit, we do not recognize any portion of the benefit in our financial
statements.
As a result of the adoption of FIN 48, there was no cumulative effect of the change on our retained
earnings. We increased deferred tax assets and income taxes payable by $8.4 million and
reclassified $30.2 million of income taxes payable from current liabilities to long-term
obligations as a result of the adoption of FIN 48.
The aggregate changes in the balance of our gross unrecognized tax benefits were as follows for the
period indicated:
Twelve | ||||
Months | ||||
Ended | ||||
(In thousands) | July 31, 2008 | |||
Gross unrecognized tax benefits at August 1, 2007
(date of adoption of FIN 48) |
$ | 33,321 | ||
Increases related to tax positions from prior fiscal years,
including acquisitions |
14,076 | |||
Decreases related to tax positions from prior fiscal years |
(1,518 | ) | ||
Increases related to tax positions taken during fiscal 2008 |
8,233 | |||
Settlements with tax authorities |
(7,898 | ) | ||
Lapses of statutes of limitations |
(1,371 | ) | ||
Gross unrecognized tax benefits at July 31, 2008 |
$ | 44,843 | ||
The total amount of our unrecognized tax benefits at July 31, 2008 was $44.8 million. Net of
related deferred tax assets, unrecognized tax benefits were $34.0 million at that date. If we were
to recognize these net benefits, our income tax expense would reflect a favorable net impact of
$18.8 million. The recognition of the balance of these net benefits would result in an increase to
stockholders equity of $5.5 million and a decrease to goodwill of $9.7 million. We do not believe
that it is reasonably possible that there will be a significant increase or decrease in
unrecognized tax benefits over the next 12 months.
We file U.S. federal, U.S. state, and foreign tax returns. Our major tax jurisdictions are U.S.
federal and the state of California. For U.S. federal tax returns we are generally no longer
subject to tax examinations for years prior to fiscal 2005. For California tax returns we are
generally no longer subject to tax examinations for years prior to fiscal 2003.
We recognize interest and penalties related to unrecognized tax benefits within the provision for
income taxes. At July 31, 2008 and as of the date of our adoption of FIN 48, we had accrued $4.9
million and $3.6 million for the payment of interest and had no accruals for the payment of
penalties. The amount of interest and penalties recognized during the twelve months ended July 31,
2008 was not material.
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12. Stockholders Equity
Stock Split
On July 6, 2006 we implemented a two-for-one stock split in the form of a 100% stock dividend. All
share and per share figures in the statements of operations and notes to the financial statements
retroactively reflect this stock split. This stock split was an equity restructuring that is
considered a modification under SFAS 123(R), but it did not result in a change in fair value of any
equity awards.
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. Under these programs, we
repurchased 27.2 million shares of our common stock for $800.0 million during the twelve months
ended July 31, 2008; 17.1 million shares of our common stock for $506.6 million during the twelve
months ended July 31, 2007; and 31.0 million shares of our common stock for $784.2 million during
the twelve months ended July 31, 2006. At July 31, 2008, we had authorization from our Board to
expend up to $600 million for stock repurchases through May 15, 2011.
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.
Description of 2005 Equity Incentive Plan
Our stockholders approved our 2005 Equity Incentive Plan on December 9, 2004. Under the 2005 Plan,
we are permitted to grant incentive and non-qualified stock options, restricted stock awards,
restricted stock units (RSUs), stock appreciation rights and stock bonus awards to our employees,
non-employee directors and consultants. The 2005 Plan provides for the automatic grant of stock
options to non-employee directors according to a formula in the plan document. For other awards,
the Compensation and Organizational Development Committee of our Board of Directors or its
delegates determine who will receive grants, when those grants will be exercisable, their exercise
price and other terms. Our stockholders have approved amendments to the 2005 Plan to permit the
issuance of up to 46,000,000 shares under the 2005 Plan. At July 31, 2008, there were 7,975,824
shares available for grant under this plan. Up to 50% of equity awards granted each year under the
2005 Plan may have an exercise or purchase price per share that is less than full fair market value
on the date of grant. All stock options granted to date under the 2005 Plan have exercise prices
equal to the fair market value of our stock on the date of grant. All RSUs are considered to be
granted at less than the fair market value of our stock on the date of grant because they have no
exercise price. Stock options granted under the 2005 Plan typically vest over three years based on
continued service and have a seven year term. RSUs granted under the 2005 Plan typically vest over
three years.
Description of Employee Stock Purchase Plan
On November 26, 1996 our stockholders adopted our Employee Stock Purchase Plan under Section 423 of
the Internal Revenue Code. The ESPP permits our eligible employees to make payroll deductions to
purchase our stock on regularly scheduled purchase dates at a discount. Our stockholders have
approved amendments to the ESPP to permit the issuance of up to 13,800,000 shares under the ESPP,
which expires on July 27, 2015. The length of the offering periods under the ESPP is three months
and shares are purchased at 85% of the lower of the closing price for Intuit common stock on the
first day or the last day of the offering period in which the employee is participating.
Under the ESPP, employees purchased 1,164,977 shares of Intuit common stock during the twelve
months ended July 31, 2008; 1,099,757 shares during the twelve months ended July 31, 2007; and
1,050,198 shares during the twelve months ended July 31, 2006. At July 31, 2008, there were
2,109,360 shares available for issuance under this plan.
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Share-Based Compensation Expense
The following table summarizes the total share-based compensation expense that we recorded for
continuing operations for the periods shown. The share-based compensation expense that we recorded
for discontinued operations for these periods was nominal.
Twelve Months Ended July 31, | ||||||||||||
(In thousands, except per share amounts) | 2008 | 2007 | 2006 | |||||||||
Cost of product revenue |
$ | 1,018 | $ | 743 | $ | 941 | ||||||
Cost of service and other revenue |
6,211 | 3,283 | 1,727 | |||||||||
Selling and marketing |
37,948 | 23,518 | 21,710 | |||||||||
Research and development |
31,841 | 21,511 | 18,896 | |||||||||
General and administrative |
36,220 | 27,258 | 27,066 | |||||||||
Reduction of operating income from continuing
operations and income from continuing operations
before income taxes |
113,238 | 76,313 | 70,340 | |||||||||
Income tax benefit |
(44,873 | ) | (24,237 | ) | (25,284 | ) | ||||||
Reduction of net income from continuing operations |
$ | 68,365 | $ | 52,076 | $ | 45,056 | ||||||
Reduction of net income per share from
continuing operations: |
||||||||||||
Basic |
$ | 0.21 | $ | 0.15 | $ | 0.13 | ||||||
Diluted |
$ | 0.20 | $ | 0.15 | $ | 0.12 | ||||||
Determining Fair Value
Valuation and Amortization Method. Effective August 1, 2006 we began estimating the fair value of
stock options granted using a lattice binomial model and a multiple option award approach. Prior to
that date we used the Black Scholes valuation model and a multiple option approach. 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 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. We amortize the fair value of options on a straight-line
basis over the requisite service periods of the awards, which are generally the vesting periods. We
value restricted stock units using the intrinsic value method. We amortize the value of restricted
stock units on a straight-line basis over the restriction period.
Expected Term. The expected term of options granted represents the period of time that they are
expected to be outstanding and is a derived output of the lattice binomial model. The expected term
of stock options is impacted by all of the underlying assumptions and calibration of our model. The
lattice binomial model assumes that option exercise behavior is a function of the options
remaining vested life and the extent to which the market price of our common stock exceeds the
option exercise price. The lattice binomial model estimates the probability of exercise as a
function of these two variables based on the history of exercises and cancellations on all past
option grants made by us. Beginning in the fourth quarter of fiscal 2006, we estimated the expected
term of options granted based on implied exercise patterns using a binomial model. For the first
three quarters of fiscal 2006, we estimated the expected term of options granted based on
historical exercise patterns.
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
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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 our option valuation
model on the implied yield in effect at the time of option grant on constant maturity U.S. Treasury
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 our option valuation model.
Forfeitures. In accordance with SFAS 123(R), we 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.
We used the following assumptions to estimate the fair value of stock options granted and shares
purchased under our Employee Stock Purchase Plan for the periods indicated:
Twelve Months Ended July 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Assumptions for stock options: |
||||||||||||
Average expected term (years) |
N/A | N/A | 2.78 | |||||||||
Expected volatility (range) |
28% - 34 | % | 24% - 27 | % | 22% - 28 | % | ||||||
Weighted average expected volatility |
33 | % | 27 | % | 25 | % | ||||||
Risk-free interest rate (range) |
2.11% - 4.56 | % | 4.47% - 5.05 | % | 3.70% - 5.14 | % | ||||||
Expected dividend yield |
0 | % | 0 | % | 0 | % | ||||||
Assumptions for ESPP: |
||||||||||||
Average expected term (years) |
N/A | N/A | 0.27 | |||||||||
Expected volatility (range) |
31% - 37 | % | 26% - 27 | % | 22% - 28 | % | ||||||
Weighted average expected volatility |
33 | % | 26 | % | 25 | % | ||||||
Risk-free interest rate (range) |
1.11% - 4.15 | % | 4.63% - 5.04 | % | 3.14% - 4.77 | % | ||||||
Expected dividend yield |
0 | % | 0 | % | 0 | % | ||||||
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Stock Option Activity and Related Share-Based Compensation Expense
A summary of activity under all share-based compensation plans for the periods indicated was as
follows:
Options Outstanding | ||||||||||||
Shares | Weighted Average | |||||||||||
Available | Number of | Exercise Price | ||||||||||
for Grant | Shares | Per Share | ||||||||||
Balance at July 31, 2005 |
2,626,380 | 64,616,560 | $ | 19.59 | ||||||||
Additional shares authorized |
13,000,000 | | | |||||||||
Options granted |
(10,816,070 | ) | 10,816,070 | 28.37 | ||||||||
Stock bonus awards granted |
(11,916 | ) | | | ||||||||
Options exercised |
| (15,594,297 | ) | 16.52 | ||||||||
Options canceled or expired and returned
to pool, net of options canceled
from expired plans |
1,270,588 | (2,906,840 | ) | 22.93 | ||||||||
Stock bonus awards canceled or expired |
3,111 | | | |||||||||
Balance at July 31, 2006 |
6,072,093 | 56,931,493 | 21.93 | |||||||||
Additional shares authorized |
10,000,000 | | | |||||||||
Options assumed and converted related to
acquisitions |
| 1,544,613 | 20.78 | |||||||||
Options granted |
(9,119,495 | ) | 9,119,495 | 30.10 | ||||||||
Restricted stock units granted |
(2,548,340 | ) | | | ||||||||
Options exercised |
| (10,913,824 | ) | 17.02 | ||||||||
Options canceled or expired and returned
to pool, net of options canceled
from expired plans |
1,766,921 | (2,192,127 | ) | 26.88 | ||||||||
Restricted stock units canceled and returned
to pool, net of restricted stock units
canceled from expired plans |
239,285 | | | |||||||||
Balance at July 31, 2007 |
6,410,464 | 54,489,650 | 24.05 | |||||||||
Additional shares authorized |
10,000,000 | | | |||||||||
Options assumed and converted related to
acquisitions |
| 647,992 | 2.00 | |||||||||
Options granted |
(8,319,960 | ) | 8,319,960 | 27.99 | ||||||||
Restricted stock units granted |
(3,045,883 | ) | | | ||||||||
Options exercised |
| (9,101,382 | ) | 19.37 | ||||||||
Options canceled or expired and returned
to pool, net of options canceled
from expired plans |
2,310,928 | (4,150,247 | ) | 30.91 | ||||||||
Restricted stock units canceled and returned
to pool, net of restricted stock units
canceled from expired plans |
620,275 | | | |||||||||
Balance at July 31, 2008 |
7,975,824 | 50,205,973 | $ | 24.70 | ||||||||
All 7,975,824 shares available for grant at July 31, 2008 were available under the 2005 Plan. The
weighted average fair values of options granted during the twelve months ended July 31, 2008, 2007
and 2006 were $8.36 per share, $8.41 per share and $6.57 per share. The total fair value of options
vested during those periods was $61.2 million, $61.5 million and $68.0 million.
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Options outstanding at July 31, 2008 were as follows:
Options Outstanding | ||||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | Aggregate | ||||||||||||||
Remaining | Exercise | Intrinsic | ||||||||||||||
Number | Contractual | Price per | Value (in | |||||||||||||
Exercise Price | Outstanding | Life (in Years) | Share | (thousands) | ||||||||||||
$0.16 - $17.50 |
5,721,659 | 2.45 | $13.73 | $ | 77,807,575 | |||||||||||
$17.97 - $19.52 |
5,199,528 | 3.04 | 18.69 | 44,916,351 | ||||||||||||
$19.63 - $21.99 |
5,457,512 | 2.60 | 21.31 | 32,861,626 | ||||||||||||
$22.01 - $24.00 |
7,398,391 | 3.40 | 23.49 | 28,424,850 | ||||||||||||
$24.05 - $27.57 |
3,568,087 | 3.78 | 25.88 | 5,179,823 | ||||||||||||
$27.68 - $27.68 |
6,273,870 | 6.98 | 27.68 | | ||||||||||||
$27.70 - $30.00 |
3,272,457 | 5.03 | 29.15 | | ||||||||||||
$30.07 - $30.07 |
6,283,824 | 5.98 | 30.07 | | ||||||||||||
$30.13 - $31.29 |
5,314,960 | 4.93 | 31.23 | | ||||||||||||
$31.36 - $61.10 |
1,715,685 | 3.19 | 33.90 | | ||||||||||||
$0.16 - $61.10 |
50,205,973 | 4.22 | $24.70 | $ | 189,190,225 | |||||||||||
Options exercisable at July 31, 2008 were as follows:
Options Exercisable | ||||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | Aggregate | ||||||||||||||
Remaining | Exercise | Intrinsic | ||||||||||||||
Number | Contractual | Price per | Value (in | |||||||||||||
Exercise Price | Exercisable | Life (in Years) | Share | (thousands) | ||||||||||||
$0.16 - $17.50 |
5,496,822 | 2.20 | $14.12 | $ | 72,632,883 | |||||||||||
$17.97 - $19.52 |
5,197,606 | 3.03 | 18.69 | 44,898,550 | ||||||||||||
$19.63 - $21.99 |
5,394,603 | 2.58 | 21.31 | 32,497,155 | ||||||||||||
$22.01 - $24.00 |
7,355,893 | 3.38 | 23.49 | 28,237,637 | ||||||||||||
$24.05 - $27.57 |
2,927,172 | 3.23 | 25.74 | 4,654,182 | ||||||||||||
$27.68 -
$27.68 |
| | 0.00 | | ||||||||||||
$27.70 - $30.00 |
1,505,264 | 3.57 | 29.11 | | ||||||||||||
$30.07 - $30.07 |
2,088,320 | 5.96 | 30.07 | | ||||||||||||
$30.13 - $31.29 |
3,583,800 | 4.86 | 31.23 | | ||||||||||||
$31.36 - $61.10 |
1,427,268 | 2.67 | 34.22 | | ||||||||||||
$0.16 - $61.10 |
34,976,748 | 3.29 | $23.02 | $ | 182,920,407 | |||||||||||
There were 37,347,856 options exercisable under our stock option plans at July 31, 2007 and
37,815,299 options exercisable at July 31, 2006.
We define in-the-money options at July 31, 2008 as options that had exercise prices that were lower
than the $27.33 market price of our common stock at that date. The aggregate intrinsic value of
options outstanding at July 31, 2008 is calculated as the difference between the exercise price of
the underlying options and the market price of our common stock for the shares that were
in-the-money at that date. The aggregate intrinsic value of options exercised during the twelve
months ended July 31, 2008, 2007 and 2006 was $96.9 million, $154.5 million and $158.1 million,
determined as of the date of exercise.
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We recorded $57.4 million, $50.9 million and $65.0 million in share-based compensation expense for
stock options and our Employee Stock Purchase Plan in continuing operations for the twelve months
ended July 31, 2008, 2007 and 2006. The total tax benefit related to this share-based compensation
expense for those periods was $20.2 million, $17.9 million and $23.4 million.
At July 31, 2008, there was $134.3 million of unrecognized compensation cost related to non-vested
stock options which we will amortize to expense in the future. Unrecognized compensation cost will
be adjusted for future changes in estimated forfeitures. We expect to recognize that cost over a
weighted average vesting period of 2.3 years.
We received $176.3 million, $185.7 million and $257.6 million in cash from option exercises under
all share-based payment arrangements for the twelve months ended July 31, 2008, 2007 and 2006. The
actual tax benefits that we realized related to tax deductions for non-qualified option exercises
and disqualifying dispositions under all share-based payment arrangements totaled $38.3 million,
$58.7 million and $62.0 million for those periods.
Due to our ongoing program of repurchasing our common stock on the open market, at July 31, 2008 we
had 107.2 million treasury shares. We satisfy option exercises and RSU vesting from this pool of
treasury shares.
Restricted Stock Unit Activity and Related Share-Based Compensation Expense
A summary of restricted stock unit (RSU) activity for the periods indicated was as follows:
Restricted Stock Units | ||||||||
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Nonvested at July 31, 2005 |
719,840 | $ | 22.60 | |||||
Granted |
11,916 | 24.58 | ||||||
Vested |
(239,316 | ) | 22.18 | |||||
Forfeited |
(4,204 | ) | 23.99 | |||||
Nonvested at July 31, 2006 |
488,236 | 23.03 | ||||||
Granted |
2,548,340 | 30.59 | ||||||
Vested |
(292,401 | ) | 23.73 | |||||
Forfeited |
(239,489 | ) | 30.54 | |||||
Nonvested at July 31, 2007 |
2,504,686 | 29.88 | ||||||
Granted |
3,045,883 | 28.24 | ||||||
Restricted stock units assumed
and converted related to
acquisitions |
561,887 | 29.78 | ||||||
Vested |
(484,427 | ) | 25.96 | |||||
Forfeited |
(630,696 | ) | 29.52 | |||||
Nonvested at July 31, 2008 |
4,997,333 | $ | 29.29 | |||||
The total fair value of RSUs vested during the twelve months ended July 31, 2008 and 2007 was $11.4
million and $6.3 million. We recorded $55.8 million, $25.4 million and $5.3 million in share-based
compensation expense for RSUs in continuing operations for the twelve months ended July 31, 2008,
2007 and 2006. The total tax benefit related to this RSU compensation expense was $24.7 million,
$6.4 million and $1.9 million for those periods.
At July 31, 2008, there was $87.2 million of unrecognized compensation cost related to non-vested
RSUs which we will amortize to expense in the future. Unrecognized compensation cost will be
adjusted for future changes in estimated forfeitures. We expect to recognize that cost over a
weighted average vesting period of 1.7 years.
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The actual tax benefits that we realized for tax deductions for RSUs during the twelve months ended
July 31, 2008 totaled $3.1 million. The actual tax benefits that we realized for tax deductions for
RSUs during the twelve months ended July 31, 2007 and 2006 were nominal.
13. Benefit Plans
Executive Deferred Compensation Plan
In December 2004 we adopted our 2005 Executive Deferred Compensation Plan, which became effective
January 1, 2005. We adopted the 2005 Plan to meet the requirements for deferred compensation under
Section 409A of the Internal Revenue Code. The plan provides that executives who meet minimum
compensation requirements are eligible to defer up to 50% of their salaries and up to 90% of their
bonuses and commissions. We have agreed to credit the participants contributions with earnings
that reflect the performance of certain independent investment funds. We may also make
discretionary employer contributions to participant accounts in certain circumstances. The timing,
amounts and vesting schedules of employer contributions are at the sole discretion of the
Compensation and Organizational Development Committee of our Board of Directors or its delegate.
The benefits under this plan are unsecured. Participants are generally eligible to receive payment
of their vested benefit at the end of their elected deferral period or after termination of their
employment with Intuit for any reason or at a later date to comply with the restrictions of Section
409A. Discretionary company contributions and the related earnings vest completely upon the
participants disability, death or a change of control of Intuit.
We made employer contributions to the plan of $0.9 million, $0.9 million and $0.5 million during
the twelve months ended July 31, 2008, 2007 and 2006. We have also entered into several agreements
in which we committed to make employer contributions on behalf of certain executives provided that
they remain employed at Intuit on certain future dates.
We held assets of $37.4 million and liabilities of $38.2 million related to this plan at July 31,
2008. We held assets of $33.8 million and liabilities of $35.9 million related to this plan at July
31, 2007. Assets related to this plan are in other long-term assets and liabilities related to this
plan are in other current liabilities on our balance sheets. The plan liabilities include accrued
employer contributions not yet funded to the plan.
401(k) Plan
Employees who participate in the Intuit Inc. 401(k) Plan may contribute up to 20% of pre-tax salary
to the plan, subject to limitations imposed by the Internal Revenue Code. The plan allows Intuit to
make matching contributions. During the twelve months ended July 31, 2008 we matched employee
contributions at 150% for the first $1,000 of salary contributed by the employee, plus up to 75% of
the next six percent of salary, subject to IRS limitations, up to a maximum matching contribution
of $10,000. Fifty percent of matching contributions vest after two years of service by the employee
and 100% of matching contributions vest after three years of service. Participating employees who
are age 50 or older may also make catch-up contributions. These contributions are not matched.
Matching contributions were $34.2 million, $27.5 million and $23.6 million during the twelve months
ended July 31, 2008, 2007 and 2006.
14. Stockholder Rights Plan
On April 29, 1998 our Board of Directors adopted a stockholder rights plan designed to protect the
long-term value of Intuit for its stockholders during any future unsolicited acquisition attempt.
On May 1, 2008 our stockholder rights plan expired pursuant to its terms, and all rights issued
under that plan expired and can no longer be exercised.
15. Litigation
Intuit is subject to certain routine legal proceedings, as well as demands, claims and threatened
litigation, that arise in the normal course of our business, including assertions that we may be
infringing patents or other intellectual property rights of others. We currently believe that the
ultimate amount of liability, if any, for any pending claims of
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any type (either alone or combined) will not materially affect our financial position, results of
operations or cash flows. 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.
16. Selected Quarterly Financial Data (Unaudited)
The following tables contain selected quarterly financial data for the twelve months ended July 31,
2008 and 2007. We accounted for our Intuit Distribution Management Solutions and Intuit Information
Technology Solutions businesses as discontinued operations and as a result the operating results of
these businesses have been segregated from continuing operations in our statements of operations
and in these tables. See Note 7.
Fiscal 2008 Quarter Ended | ||||||||||||||||
(In thousands, except per share amounts) | October 31 | January 31 | April 30 | July 31 | ||||||||||||
Total net revenue |
$ | 444,938 | $ | 834,874 | $ | 1,313,008 | $ | 478,154 | ||||||||
Cost of revenue |
131,201 | 159,718 | 139,948 | 137,380 | ||||||||||||
All other costs and expenses |
416,936 | 501,526 | 498,559 | 434,939 | ||||||||||||
Net income (loss) from continuing operations |
(47,571 | ) | 116,002 | 444,179 | (61,860 | ) | ||||||||||
Net income (loss) from discontinued operations |
26,767 | (755 | ) | | | |||||||||||
Net |