INTU 04.30.12-10Q
Table of Contents


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________
FORM 10-Q
R
 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the quarterly period ended April 30, 2012
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
(State of incorporation)
 
77-0034661
(IRS employer identification no.)
 
2700 Coast Avenue, Mountain View, CA 94043
(Address of principal executive offices)
 
 
 
 
 
(650) 944-6000
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes R No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No o
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer R
 
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 R
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 293,668,960 shares of Common Stock, $0.01 par value, were outstanding at May 18, 2012.
 



INTUIT INC.
FORM 10-Q
INDEX

 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-31.01

 EX-31.02
 EX-32.01
 EX-32.02
 EX-101.INS XBRL Instance Document
 EX-101.SCH XBRL Taxonomy Extension Schema
 EX-101.CAL XBRL Taxonomy Extension Calculation Linkbase
 EX-101.LAB XBRL Taxonomy Extension Label Linkbase
 EX-101.PRE XBRL Taxonomy Extension Presentation Linkbase
 EX-101.DEF XBRL Taxonomy Extension Definition Linkbase

Intuit, the Intuit logo, QuickBooks, TurboTax, Lacerte, ProSeries, Quicken and Mint, 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.

2

Table of Contents

PART I
ITEM 1
FINANCIAL STATEMENTS

INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
(In millions, except per share amounts)
April 30,
2012
 
April 30,
2011
 
April 30,
2012
 
April 30,
2011
Net revenue:
 
 
 
 
 
 
 
Product
$
598

 
$
602

 
$
1,239

 
$
1,248

Service and other
1,347

 
1,246

 
2,319

 
2,010

Total net revenue
1,945

 
1,848

 
3,558

 
3,258

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
Cost of product revenue
32

 
32

 
116

 
110

Cost of service and other revenue
166

 
132

 
456

 
384

Amortization of acquired technology
4

 
4

 
12

 
13

Selling and marketing
365

 
351

 
945

 
901

Research and development
167

 
164

 
502

 
478

General and administrative
102

 
93

 
289

 
271

Amortization of other acquired intangible assets
2

 
11

 
33

 
33

Total costs and expenses
838

 
787

 
2,353

 
2,190

Operating income
1,107

 
1,061

 
1,205

 
1,068

Interest expense
(12
)
 
(15
)
 
(43
)
 
(45
)
Interest and other income, net
9

 
6

 
23

 
20

Income before income taxes
1,104

 
1,052

 
1,185

 
1,043

Income tax provision
370

 
364

 
397

 
352

Net income
$
734

 
$
688

 
$
788

 
$
691

 
 
 
 
 
 
 
 
Basic net income per share
$
2.49

 
$
2.27

 
$
2.65

 
$
2.23

Shares used in basic per share calculations
295

 
303

 
297

 
309

 
 
 
 
 
 
 
 
Diluted net income per share
$
2.42

 
$
2.20

 
$
2.58

 
$
2.16

Shares used in diluted per share calculations
303

 
313

 
306

 
319

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.15

 
$

 
$
0.45

 
$

See accompanying notes.


3

Table of Contents

INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

(In millions)
April 30,
2012
 
July 31,
2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
859

 
$
722

Investments
663

 
699

Accounts receivable, net
294

 
171

Income taxes receivable
5

 
72

Deferred income taxes
119

 
94

Prepaid expenses and other current assets
65

 
82

Current assets before funds held for customers
2,005

 
1,840

Funds held for customers
325

 
414

Total current assets
2,330

 
2,254

Long-term investments
90

 
63

Property and equipment, net
555

 
561

Goodwill
1,883

 
1,886

Acquired intangible assets, net
138

 
180

Long-term deferred income taxes
18

 
55

Other assets
102

 
111

Total assets
$
5,116

 
$
5,110

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$

 
$
500

Accounts payable
209

 
129

Accrued compensation and related liabilities
210

 
215

Deferred revenue
368

 
406

Income taxes payable
257

 

Other current liabilities
218

 
141

Current liabilities before customer fund deposits
1,262

 
1,391

Customer fund deposits
325

 
414

Total current liabilities
1,587

 
1,805

Long-term debt
499

 
499

Other long-term obligations
195

 
190

Total liabilities
2,281

 
2,494

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock and additional paid-in capital
3,007

 
2,886

Treasury stock, at cost
(4,878
)
 
(4,316
)
Accumulated other comprehensive income
29

 
15

Retained earnings
4,677

 
4,031

Total stockholders’ equity
2,835

 
2,616

Total liabilities and stockholders’ equity
$
5,116

 
$
5,110


See accompanying notes.

4

Table of Contents

INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

(In millions, except shares in thousands)
Shares of
Common
Stock
 
Common
Stock and
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
Stockholders'
Equity
Balance at July 31, 2011
300,597

 
$
2,886

 
$
(4,316
)
 
$
15

 
$
4,031

 
$
2,616

Components of comprehensive net income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 
788

 
788

Other comprehensive income, net of tax

 

 

 
14

 

 
14

Comprehensive net income
 
 
 
 
 
 
 
 
 
 
802

Issuance of treasury stock under employee stock plans
8,705

 
(63
)
 
231

 

 
(8
)
 
160

Stock repurchases under stock repurchase programs
(14,973
)
 

 
(793
)
 

 

 
(793
)
Cash dividends declared ($0.45 per share)

 

 

 

 
(134
)
 
(134
)
Tax benefit from share-based compensation plans

 
64

 

 

 

 
64

Share-based compensation expense

 
120

 

 

 

 
120

Balance at April 30, 2012
294,329

 
$
3,007

 
$
(4,878
)
 
$
29

 
$
4,677

 
$
2,835


(In millions, except shares in thousands)
Shares of
Common
Stock
 
Common
Stock and
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
Stockholders'
Equity
Balance at July 31, 2010
313,861

 
2,728

 
(3,315
)
 
11

 
3,397

 
2,821

Components of comprehensive net income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 
691

 
691

Other comprehensive income, net of tax

 

 

 
4

 

 
4

Comprehensive net income
 
 
 
 
 
 
 
 
 
 
695

Issuance of treasury stock under employee stock plans
13,069

 
(73
)
 
308

 

 

 
235

Stock repurchases under stock repurchase programs
(23,349
)
 

 
(1,110
)
 

 

 
(1,110
)
Tax benefit from share-based compensation plans

 
68

 

 

 

 
68

Share-based compensation expense

 
112

 

 

 

 
112

Balance at April 30, 2011
303,581

 
2,835

 
(4,117
)
 
15

 
4,088

 
2,821



See accompanying notes.

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Table of Contents

INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
(In millions)
April 30,
2012
 
April 30,
2011
 
April 30,
2012
 
April 30,
2011
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
734

 
$
688

 
$
788

 
$
691

 Adjustments to reconcile net income to net cash provided by
 operating activities:
 
 
 
 
 
 
 
Depreciation
42

 
42

 
130

 
120

Amortization of acquired intangible assets
10

 
19

 
55

 
58

Share-based compensation expense
37

 
39

 
120

 
112

Deferred income taxes
18

 
9

 
1

 
25

Tax benefit from share-based compensation plans
19

 
20

 
64

 
68

Excess tax benefit from share-based compensation plans
(19
)
 
(18
)
 
(62
)
 
(59
)
Other
1

 
3

 
3

 
14

Total adjustments
108

 
114

 
311

 
338

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
297

 
215

 
(124
)
 
(130
)
Prepaid expenses, income taxes receivable and other assets
102

 
132

 
84

 
17

Accounts payable
(4
)
 
(4
)
 
80

 
42

Accrued compensation and related liabilities
42

 
53

 
(5
)
 
(6
)
Deferred revenue
(218
)
 
(226
)
 
(36
)
 
(41
)
Income taxes payable
256

 
208

 
257

 
195

Other liabilities
(39
)
 
(42
)
 
73

 
79

Total changes in operating assets and liabilities
436

 
336

 
329

 
156

Net cash provided by operating activities
1,278

 
1,138

 
1,428

 
1,185

Cash flows from investing activities:
 
 
 
 
 
 
 
Purchases of available-for-sale debt securities
(149
)
 
(80
)
 
(492
)
 
(803
)
Sales of available-for-sale debt securities
116

 
55

 
382

 
1,470

Maturities of available-for-sale debt securities
49

 
33

 
138

 
254

Net change in money market funds and other cash equivalents held
 to satisfy customer fund obligations
5

 
(46
)
 
89

 
(20
)
Net change in customer fund deposits
(5
)
 
46

 
(89
)
 
46

Purchases of property and equipment
(33
)
 
(31
)
 
(125
)
 
(166
)
Acquisitions of intangible assets

 

 

 
(3
)
Other

 
(1
)
 
15

 
2

Net cash (used in) provided by investing activities
(17
)
 
(24
)
 
(82
)
 
780

Cash flows from financing activities:
 
 
 
 
 
 
 
Repayment of debt
(500
)
 

 
(500
)
 

Net proceeds from issuance of treasury stock under
 employee stock plans
54

 
48

 
160

 
235

Purchases of treasury stock
(207
)
 
(250
)
 
(793
)
 
(1,110
)
Cash dividends paid to stockholders
(45
)
 

 
(134
)
 

Excess tax benefit from share-based compensation plans
19

 
18

 
62

 
59

Net cash used in financing activities
(679
)
 
(184
)
 
(1,205
)
 
(816
)
Effect of exchange rates on cash and cash equivalents

 
6

 
(4
)
 
6

Net increase in cash and cash equivalents
582

 
936

 
137

 
1,155

Cash and cash equivalents at beginning of period
277

 
433

 
722

 
214

Cash and cash equivalents at end of period
$
859

 
$
1,369

 
$
859

 
$
1,369


See accompanying notes.

6

Table of Contents

INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.
Description of Business and Summary of Significant Accounting Policies
Description of Business
Intuit Inc. provides business and financial management solutions for small and medium-sized businesses, consumers, accounting professionals and financial institutions. Our flagship products and services, including QuickBooks, TurboTax and Quicken, simplify small business management including payment and payroll processing, tax preparation and filing, and personal finance. Lacerte and ProSeries are Intuit’s tax preparation offerings for professional accountants. Our Financial Services business provides online banking solutions and services to banks and credit unions. Incorporated in 1984 and headquartered in Mountain View, California, we sell our products and services primarily in the United States.
Basis of Presentation
These condensed consolidated financial statements include the financial statements of Intuit and its wholly owned subsidiaries. We have eliminated all significant intercompany balances and transactions in consolidation. We have included all adjustments, consisting only of normal recurring items, which we considered necessary for a fair presentation of our financial results for the interim periods presented. These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2011. Results for the three and nine months ended April 30, 2012 do not necessarily indicate the results we expect for the fiscal year ending July 31, 2012 or any other future period.
Seasonality
Our QuickBooks, Consumer Tax and Accounting Professionals businesses are highly seasonal. Revenue from our QuickBooks software products tends to be highest during our second and third fiscal quarters. Sales of income tax preparation products and services are heavily concentrated in the period from November through April. 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 core operating expenses such as research and development continue at relatively consistent levels.
Significant Accounting Policies
We describe our significant accounting policies in Note 1 to the financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2011. There have been no changes to our significant accounting policies during the first nine months of fiscal 2012.
Computation of Net Income (Loss) Per Share
We compute basic net income or loss per share using the weighted average number of common shares outstanding during the period. We compute diluted net income per share using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares include shares issuable upon the exercise of stock options and upon the vesting of restricted stock units (RSUs) under the treasury stock method.
We include stock options with combined exercise prices, unrecognized compensation expense and tax benefits that are less than the average market price for our common stock, and RSUs with unrecognized compensation expense and tax benefits that are less than the average market price for our common stock, in the calculation of diluted net income per share. We exclude stock options with combined exercise prices, unrecognized compensation expense and tax benefits that are greater than the average market price for our common stock, and RSUs with unrecognized compensation expense and tax benefits that are greater than the average market price for our common stock, from the calculation of diluted net income per share because their effect is anti-dilutive. Under the treasury stock method, the amount that must be paid to exercise stock options, the amount of compensation expense for future service that we have not yet recognized 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.
In loss periods, basic net loss per share and diluted net loss per share are the same since the effect of potential common shares is anti-dilutive and therefore excluded.

7

Table of Contents

The following table presents the composition of shares used in the computation of basic and diluted net income per share for the periods indicated.
 
Three Months Ended
 
Nine Months Ended
(In millions, except per share amounts)
April 30,
2012
 
April 30,
2011
 
April 30,
2012
 
April 30,
2011
Numerator:
 
 
 
 
 
 
 
Net income
$
734

 
$
688

 
$
788

 
$
691

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Shares used in basic per share amounts:
 
 
 
 
 
 
 
Weighted average common shares outstanding
295

 
303

 
297

 
309

 
 
 
 
 
 
 
 
Shares used in diluted per share amounts:
 
 
 
 
 
 
 
Weighted average common shares outstanding
295

 
303

 
297

 
309

Dilutive common equivalent shares from stock options
 
 
 
 
 
 
 
and restricted stock awards
8

 
10

 
9

 
10

Dilutive weighted average common shares outstanding
303

 
313

 
306

 
319

 
 
 
 
 
 
 
 
Basic and diluted net income per share:
 
 
 
 
 
 
 
Basic net income per share
$
2.49

 
$
2.27

 
$
2.65

 
$
2.23

Diluted net income per share
$
2.42

 
$
2.20

 
$
2.58

 
$
2.16

 
 
 
 
 
 
 
 
Weighted average stock options and restricted stock units excluded from calculation due to anti-dilutive effect

 
1

 
3

 

Concentration of Credit Risk and Significant Customers
No customer accounted for 10% or more of total net revenue in the three or nine months ended April 30, 2012 or April 30, 2011. No customer accounted for 10% or more of total accounts receivable at April 30, 2012 or July 31, 2011.
Recent Accounting Pronouncements
ASU 2011-05 and ASU 2011-12, “Comprehensive Income (Topic 220)”
On June 16, 2011 the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (ASU 2011-05) and on December 23, 2011 the FASB issued ASU No. 2011-12, "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05." These updates amend ASC Topic 220, “Comprehensive Income” to provide that total comprehensive income will be reported in one continuous statement or two separate but consecutive statements of financial performance. Presentation of total comprehensive income in the statement of stockholders' equity or the footnotes will no longer be allowed. The calculation of net income and basic and diluted net income per share will not be affected. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2011, which means that it will be effective for our fiscal year beginning August 1, 2012. Retrospective adoption is required and early adoption is permitted. We do not believe that adoption of ASU 2011-05 will have a significant impact on our consolidated financial statements.
ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350)”
On September 15, 2011, the FASB issued ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (ASU 2011-08)." This update amends ASC Topic 350, “Intangibles – Goodwill and Other” to give companies the option to perform a qualitative assessment that may allow them to skip the annual two-step test and reduce costs. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011, which means that it will be effective for our fiscal year beginning August 1, 2012. Early adoption is permitted. We are in the process of evaluating this update and therefore have not yet determined the impact that adoption of ASU 2011-08 will have on our consolidated financial statements.

8

Table of Contents



2.
Fair Value Measurements
The authoritative guidance defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, we consider the principal or most advantageous market for an asset or liability and assumptions that market participants would use when pricing the asset or liability. In addition, we consider and use all valuation methods that are appropriate in estimating the fair value of an asset or liability.
The authoritative guidance establishes a fair value hierarchy that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities. In general, the authoritative guidance requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the measurement of its fair value. The three levels of input defined by the authoritative guidance are as follows:
Level 1 uses unadjusted quoted prices that are available in active markets for identical assets or liabilities.
Level 2 uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data for substantially the full term of the assets or liabilities.
Level 3 uses one or more significant inputs that are supported by little or no market activity and that are significant to the determination of fair value. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.

9

Table of Contents

Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes financial assets and financial liabilities that we measured at fair value on a recurring basis at the dates indicated, classified in accordance with the fair value hierarchy described above.

 
April 30, 2012
 
July 31, 2011
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents, primarily money market funds
$
798

 
$

 
$

 
$
798

 
$
854

 
$

 
$

 
$
854

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds

 
388

 

 
388

 

 
434

 

 
434

Municipal auction rate securities

 

 
54

 
54

 

 

 
59

 
59

Corporate notes

 
319

 

 
319

 

 
288

 

 
288

U.S. agency securities

 
131

 

 
131

 

 
152

 

 
152

Marketable equity securities
35

 

 

 
35

 

 

 

 

Total available-for-sale securities
35

 
838

 
54

 
927

 

 
874

 
59

 
933

Total assets measured at fair value on a recurring basis
$
833

 
$
838

 
$
54

 
$
1,725

 
$
854

 
$
874

 
$
59

 
$
1,787

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior notes (1)
$

 
$
576

 
$

 
$
576

 
$

 
$
1,084

 
$

 
$
1,084

______________________________

(1)
Carrying value on our balance sheet at April 30, 2012 was $499 million and at July 31, 2011 was $999 million. See Note 6.

The following table summarizes our cash equivalents and available-for-sale debt and equity securities by balance sheet classification and level in the fair value hierarchy at the dates indicated.

 
April 30, 2012
 
July 31, 2011
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In cash and cash equivalents
$
648

 
$

 
$

 
$
648

 
$
615

 
$

 
$

 
$
615

In funds held for customers
150

 

 

 
150

 
239

 

 

 
239

Total cash equivalents
$
798

 
$

 
$

 
$
798

 
$
854

 
$

 
$

 
$
854

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In investments
$

 
$
663

 
$

 
$
663

 
$

 
$
699

 
$

 
$
699

In funds held for customers

 
175

 

 
175

 

 
175

 

 
175

In long-term investments
35

 

 
54

 
89

 

 

 
59

 
59

Total available-for-sale securities
$
35

 
$
838

 
$
54

 
$
927

 
$

 
$
874

 
$
59

 
$
933



We value our Level 1 assets, consisting primarily of money market funds, using quoted prices in active markets for identical instruments. Financial assets whose fair values we measure on a recurring basis using Level 2 inputs consist of municipal bonds, corporate notes and U.S. agency securities. We measure the fair values of these assets using quoted prices in active markets for similar instruments. Financial liabilities whose fair values we measure using Level 2 inputs consist of debt. See

10

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Note 6. We measure the fair value of our senior notes based on their trading prices and the interest rates we could obtain for other borrowings with similar terms. Financial assets whose fair values we measure using significant unobservable (Level 3) inputs consist of municipal auction rate securities that are no longer liquid. There were no transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the nine months ended April 30, 2012.
The following table presents a reconciliation of activity for our Level 3 assets for the nine months ended April 30, 2012.

 
Nine Months
 
Ended
(In millions)
April 30,
2012
Beginning balance
$
59

Settlements at par
(5
)
Ending balance
$
54


We estimated the fair values of these municipal auction rate securities at April 30, 2012 and July 31, 2011 using a discounted cash flow model whose key inputs included the projected future 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 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. Any significant changes in the inputs to the model may have a significant impact on the estimated fair values of these securities.

Using our discounted cash flow model we determined that the fair values of the municipal auction rate securities we held at April 30, 2012 were approximately equal to their par values. As a result, we recorded no decrease in the fair values of those securities for the nine months then ended. These securities are included in long-term investments on our balance sheets at April 30, 2012 and July 31, 2011 based on the maturities of the underlying securities. We do not intend to sell our municipal auction rate securities and it is not more likely than not that we will be required to sell them before recovery at par, which may be at maturity. 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.


3.
Cash and Cash Equivalents, Investments and Funds Held for Customers
We consider highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. 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. Funds held for customers consist of cash and cash equivalents and available-for-sale investment-grade debt securities. Long-term investments consist primarily of municipal auction rate securities that we carry at fair value and an available-for-sale equity investment. Except for direct obligations of the United States government, securities issued by agencies of the United States government, and money market funds, we diversify our investments in debt securities by limiting our holdings with any individual issuer.
The following table summarizes our cash and cash equivalents, investments and funds held for customers by balance sheet classification at the dates indicated.

 
April 30, 2012
 
July 31, 2011
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Classification on balance sheets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
859

 
$
859

 
$
722

 
$
722

Investments
663

 
663

 
698

 
699

Funds held for customers
324

 
325

 
413

 
414

Long-term investments
59

 
90

 
63

 
63

Total cash and cash equivalents, investments, and funds
held for customers
$
1,905

 
$
1,937

 
$
1,896

 
$
1,898



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

 
April 30, 2012
 
July 31, 2011
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Type of issue:
 
 
 
 
 
 
 
Total cash and cash equivalents
$
1,009

 
$
1,009

 
$
961

 
$
961

Available-for-sale debt securities:
 
 
 
 
 
 
 
Municipal bonds
387

 
388

 
434

 
434

Municipal auction rate securities
54

 
54

 
59

 
59

Corporate notes
318

 
319

 
287

 
288

U.S. agency securities
131

 
131

 
151

 
152

Total available-for-sale debt securities
890

 
892

 
931

 
933

Available-for-sale equity securities
5

 
35

 

 

Other long-term investments
1

 
1

 
4

 
4

Total cash and cash equivalents, investments, and funds
held for customers
$
1,905

 
$
1,937

 
$
1,896

 
$
1,898



We use the specific identification method to compute gains and losses on investments. We include realized gains and losses on our available-for-sale debt securities in interest and other income, net in our statements of operations. Gross realized gains and losses on our available-for-sale debt securities for the three and nine months ended April 30, 2012 and April 30, 2011 were not significant. We accumulate unrealized gains and losses on our available-for-sale debt and equity 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 at April 30, 2012 and July 31, 2011 were not significant. The gross unrealized gain on our available-for-sale equity security was approximately $30 million at April 30, 2012.
We periodically review our investment portfolios to determine if any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. We believe that the investments we held at April 30, 2012 were not other-than-temporarily impaired. Unrealized losses at April 30, 2012 were not significant and were due to changes in interest rates, including market credit spreads, and not due to increased credit risks associated with specific securities. We do not intend to sell these investments and it is not more likely than not that we will be required to sell them before recovery at par, which may be at maturity.
The following table summarizes our available-for-sale debt securities classified by the stated maturity date of the security at the dates indicated.

 
April 30, 2012
 
July 31, 2011
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Due within one year
$
279

 
$
279

 
$
267

 
$
267

Due within two years
293

 
295

 
323

 
324

Due within three years
188

 
188

 
190

 
191

Due after three years
130

 
130

 
151

 
151

Total available-for-sale debt securities
$
890

 
$
892

 
$
931

 
$
933


Available-for-sale debt securities due after three years in the table above include our municipal auction rate securities. See Note 2, "Fair Value Measurements," for more information. All of the remaining securities in that category had effective maturities of three years or less due to interest reset dates or mandatory call dates.



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4.
Accumulated Other Comprehensive Income

Accumulated other comprehensive income in the equity section of our balance sheet at April 30, 2012 consisted primarily of an unrealized gain on a marketable equity security and cumulative foreign currency translation adjustments. Accumulated other comprehensive income at July 31, 2011 consisted primarily of cumulative foreign currency translation adjustments.


5.
Current Liabilities
Current Portion of Long-Term Debt
The current portion of long-term debt at July 31, 2011 consisted of $500 million of 5.40% senior unsecured notes due on March 15, 2012, less the unamortized discount. During the third quarter of fiscal 2012 we paid off those notes when they became due using cash from operations. See Note 6, "Long-Term Obligations - Long-Term Debt," for more information.
Unsecured Revolving Credit Facility
On February 17, 2012 we entered into an agreement with certain institutional lenders for a $500 million unsecured revolving credit facility that will expire on February 17, 2017. Advances under the credit facility will accrue interest at rates that are equal to, at our election, either JP Morgan's alternate base rate plus a margin that ranges from 0.0% to 0.5% or LIBOR plus a margin that ranges from 0.9% to 1.5%. Actual margins under either election will be based on our senior debt credit ratings. The agreement includes customary affirmative and negative covenants, including financial 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 as of any date and a ratio of annual EBITDA to interest payable of not less than 3.00 to 1.00 as of the last day of each fiscal quarter. We remained in compliance with these covenants at all times during the quarter ended April 30, 2012. We may use amounts borrowed under this credit facility for general corporate purposes, including future acquisitions. To date we have not borrowed under this credit facility.
Other Current Liabilities
Other current liabilities were as follows at the dates indicated:

(In millions)
April 30,
2012
 
July 31,
2011
Reserve for product returns
$
74

 
$
20

Reserve for rebates
35

 
11

Current portion of license fee payable
10

 
10

Current portion of deferred rent
7

 
7

Interest payable
3

 
21

Executive deferred compensation plan liabilities
55

 
50

Other
34

 
22

Total other current liabilities
$
218

 
$
141


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, “Description of Business and Summary of Significant Accounting Policies - Seasonality,” for more information.


6.
Long-Term Obligations
Long-Term Debt
On March 12, 2007 we issued $500 million of 5.40% senior unsecured notes due on March 15, 2012 (the 2012 Notes) and $500 million of 5.75% senior unsecured notes due on March 15, 2017 (the 2017 Notes) (together, the Notes), for a total principal amount of $1 billion. During the third quarter of fiscal 2012 we paid off the 2012 Notes when they became due using cash from operations. We carried the Notes at face value less the unamortized discount in current portion of long-term debt and long-term debt on our balance sheets at April 30, 2012 and July 31, 2011. The 2017 Notes are redeemable by Intuit at any time, subject to a make-whole premium, and 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 million in cash for interest on the Notes during the nine months ended April 30, 2012 and $56 million during the nine months ended April 30, 2011.

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Other Long-Term Obligations
Other long-term obligations were as follows at the dates indicated:

(In millions)
April 30,
2012
 
July 31,
2011
Total license fee payable
$
63

 
$
60

Total deferred rent
53

 
52

Long-term deferred revenue
42

 
40

Long-term income tax liabilities
43

 
42

Long-term payables
8

 
12

Other
4

 
1

Total long-term obligations
213

 
207

Less current portion (included in other current liabilities)
(18
)
 
(17
)
Long-term obligations due after one year
$
195

 
$
190



7.
Income Taxes
Effective Tax Rate
We compute our provision for or benefit from income taxes by applying the estimated annual effective tax rate to income or loss from recurring operations and adding the effects of any discrete income tax items specific to the period. Our effective tax rates for the three months ended April 30, 2012 and April 30, 2011 were approximately 34% and 35% and did not differ significantly from the federal statutory rate of 35%.
Our effective tax rate for the nine months ended April 30, 2012 was approximately 34% and did not differ significantly from the federal statutory rate of 35%. Our effective tax rate for the nine months ended April 30, 2011 was approximately 34%. Excluding discrete tax benefits primarily related to the retroactive reinstatement of the federal research and experimentation credit as described below, our effective tax rate for that period was 35% and did not differ significantly from the statutory rate of 35%.
In December 2010 the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010 was signed into law. The Act included a reinstatement of the federal research and experimentation credit through December 31, 2011 that was retroactive to January 1, 2010.
Unrecognized Tax Benefits and Other Considerations
The total amount of our unrecognized tax benefits at July 31, 2011 was $41 million. Net of related deferred tax assets, unrecognized tax benefits were $35 million at that date. If we were to recognize these net benefits, our income tax expense would reflect a favorable net impact of $35 million. There were no material changes to these amounts during the nine months ended April 30, 2012. We do not believe that it is reasonably possible that there will be a significant increase or decrease in our unrecognized tax benefits over the next 12 months.


8.
Stockholders’ Equity
Stock Repurchase Programs
Intuit’s Board of Directors has authorized a series of common stock repurchase programs. Shares of common stock repurchased under these programs become treasury shares. We repurchased 15.0 million shares for $793 million under these programs during the nine months ended April 30, 2012 and 23.3 million shares for $1.1 billion under these programs during the nine months ended April 30, 2011. At April 30, 2012, we had authorization from our Board of Directors to expend up to an additional $1.8 billion for stock repurchases through August 15, 2014. Future stock repurchases under the current program are at the discretion of management, and authorization of future stock repurchase programs is subject to the final determination of our Board of Directors.
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

14

Table of Contents

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.
Dividends on Common Stock
During the three months ended October 31, 2011, January 31, 2012 and April 30, 2012 we declared and paid quarterly cash dividends of $0.15 per share that totaled approximately $45 million, $44 million and $45 million. In May 2012 our Board of Directors declared a quarterly cash dividend of $0.15 per share of outstanding common stock payable on July 18, 2012 to stockholders of record at the close of business on July 10, 2012. Future declarations of dividends and the establishment of future record dates and payment dates are subject to the final determination of our Board of Directors.
Share-Based Compensation Expense
The following table summarizes the total share-based compensation expense that we recorded for the periods shown.

 
Three Months Ended
 
Nine Months Ended
(In millions, except per share amounts)
April 30,
2012
 
April 30,
2011
 
April 30,
2012
 
April 30,
2011
Cost of revenue
$
1

 
$
2

 
$
4

 
$
5

Selling and marketing
14

 
12

 
43

 
33

Research and development
11

 
13

 
37

 
38

General and administrative
11

 
12

 
36

 
36

Total share-based compensation expense
37

 
39

 
120

 
112

Income tax benefit
(12
)
 
(14
)
 
(39
)
 
(39
)
Decrease in net income
$
25

 
$
25

 
$
81

 
$
73

Decrease in net income per share:
 
 
 
 

 

Basic
$
0.08

 
$
0.08

 
$
0.27

 
$
0.24

Diluted
$
0.08

 
$
0.08

 
$
0.26

 
$
0.23



Stock Option Activity and Related Share-Based Compensation Expense
A summary of activity under all share-based compensation plans for the nine months ended April 30, 2012 was as follows:

 
 
 
Options Outstanding
(Shares in thousands)
Shares
Available
for Grant
 
Number
of Shares
 
Weighted
Average
Exercise
Price
Per Share
Balance at July 31, 2011
30,716

 
22,679

 
$
32.38

Options granted
(378
)
 
378

 
51.76

Restricted stock units granted (2)
(1,333
)
 

 

Options exercised

 
(6,300
)
 
28.31

Options canceled or expired (1)
407

 
(413
)
 
37.22

Restricted stock units forfeited (1)(2)
1,297

 

 

Balance at April 30, 2012
30,709

 
16,344

 
$
34.28

 
 
 
 
 
 
Exercisable at April 30, 2012
 
 
10,600

 
$
30.32

________________________________
(1)
Stock options and restricted stock units canceled, expired or forfeited under our 2005 Equity Incentive Plan are returned to the pool of shares available for grant. Stock options and restricted stock units canceled, expired or forfeited under older expired plans are not returned to the pool of shares available for grant.
(2)
Under the terms of our 2005 Equity Incentive Plan as amended on January 19, 2011, RSUs granted from the pool of shares available for grant on or after November 1, 2010 reduce the pool by 2.3 shares for each share granted. RSUs forfeited and returned

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to the pool of shares available for grant increase the pool by 2.3 shares for each share forfeited.

At April 30, 2012, there was approximately $43 million of unrecognized compensation cost related to non-vested stock options that we expect to recognize as expense in the future. We will adjust unrecognized compensation cost for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average vesting period of 1.7 years.
Restricted Stock Unit Activity and Related Share-Based Compensation Expense
A summary of restricted stock unit activity for the nine months ended April 30, 2012 was as follows:

 
Restricted Stock Units
(Shares in thousands)
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Nonvested at July 31, 2011
11,055

 
$
37.92

Granted
580

 
49.43

Vested
(2,661
)
 
28.84

Forfeited
(579
)
 
38.71

Nonvested at April 30, 2012
8,395

 
$
41.54



At April 30, 2012, there was approximately $169 million of unrecognized compensation cost related to non-vested RSUs and restricted stock that we expect to recognize as expense in the future. We will adjust unrecognized compensation cost for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average vesting period of 2.0 years.


9.
Litigation
On January 13, 2012, two putative class actions were filed against Intuit Inc. in connection with our TurboTax income tax preparation software: Smith v. Intuit Inc. (U.S. District Court, Northern District of California) and Quildon v. Intuit Inc. (California Superior Court, Santa Clara County). The plaintiffs in both cases assert that the fees charged for the refund processing service offered within TurboTax are “refund anticipation loans” and the disclosures about those fees do not comply with California and federal laws. The Smith case was brought in federal court on behalf of a proposed nationwide class and subclasses; the Quildon case was brought in state court on behalf of a proposed California class and subclasses. Otherwise the two complaints are substantively identical. In each case the plaintiffs seek monetary relief (including restitution, statutory damages, treble damages, and interest) in an unspecified amount, as well as attorneys' fees and costs. On February 22, 2012, Intuit removed the Quildon case to federal court. On March 16, 2012, the plaintiffs filed a motion to remand the Quildon case to state court. On March 19, 2012, Intuit filed motions to dismiss the plaintiffs' claims in both cases. On May 25, 2012, the federal court remanded the Quildon case to state court and denied as moot the motion to dismiss that case. A hearing on Intuit's motion to dismiss the Smith case is currently scheduled for June 1, 2012. We continue to believe we have meritorious defenses to the claims asserted in these actions and intend to defend vigorously against them. We believe that liabilities associated with these cases, while possible, are not probable, and therefore we have not recorded any accrual for them as of April 30, 2012. Further, any possible range of loss cannot be reasonably estimated at this time.
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, in addition to any amounts accrued, the amount of potential losses, if any, for any pending claims of any type (either alone or combined) will not have a material impact on our consolidated financial statements. The ultimate outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on Intuit because of defense costs, negative publicity, diversion of management resources and other factors. Our failure to obtain necessary license or other rights, or litigation arising out of intellectual property claims, could adversely affect our business.



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Table of Contents

10.
Segment Information
We have defined seven reportable segments 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.
All of our business segments except Other Businesses operate primarily in the United States and sell primarily to customers 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 unallocated corporate items. Unallocated corporate items also include amortization of acquired technology, amortization of other acquired intangible assets, and goodwill and intangible asset impairment charges.
The accounting policies of our reportable segments are the same as those described in the summary of significant accounting policies in Note 1 to the financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2011. Except for goodwill and purchased intangible assets, we do not generally track assets by reportable segment and, consequently, we do not disclose total assets by reportable segment.
The following table shows our financial results by reportable segment for the periods indicated.

 
Three Months Ended
 
Nine Months Ended
(In millions)
April 30,
2012
 
April 30,
2011
 
April 30,
2012
 
April 30,
2011
Net revenue:
 
 
 
 
 
 
 
Financial Management Solutions
$
197

 
$
183

 
$
564

 
$
524

Employee Management Solutions
129

 
115

 
378

 
338

Payment Solutions
107

 
93

 
300

 
258

Consumer Tax
1,072

 
1,036

 
1,408

 
1,270

Accounting Professionals
236

 
225

 
394

 
372

Financial Services
91

 
89

 
272

 
254

Other Businesses
113

 
107

 
242

 
242

Total net revenue
$
1,945

 
$
1,848

 
$
3,558

 
$
3,258

 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
Financial Management Solutions
$
72

 
$
61

 
$
181

 
$
154

Employee Management Solutions
81

 
70

 
228

 
197

Payment Solutions
25

 
20

 
72

 
44

Consumer Tax
845

 
853

 
931

 
877

Accounting Professionals
194

 
187

 
261

 
241

Financial Services
23

 
20

 
66

 
57

Other Businesses
49

 
42

 
58

 
59

Total segment operating income
1,289

 
1,253

 
1,797

 
1,629

Unallocated corporate items:
 
 
 
 
 
 
 
Share-based compensation expense
(37
)
 
(39
)
 
(120
)
 
(112
)
Other common expenses
(139
)
 
(138
)
 
(427
)
 
(403
)
Amortization of acquired technology
(4
)
 
(4
)
 
(12
)
 
(13
)
Amortization of other acquired intangible assets
(2
)
 
(11
)
 
(33
)
 
(33
)
Total unallocated corporate items
(182
)
 
(192
)
 
(592
)
 
(561
)
Total operating income
$
1,107

 
$
1,061

 
$
1,205

 
$
1,068




17

Table of Contents

11.
Subsequent Event

On May 18, 2012 we acquired all of the outstanding equity interests of Demandforce, Inc. for total cash and other consideration of approximately $423.5 million. Demandforce is a provider of online marketing and customer communication solutions for small and medium-sized businesses (SMBs) and became part of our Financial Management Solutions segment. We acquired Demandforce to expand our online SMB offerings in support of our connected services strategy. We will include Demandforce's results of operations in our consolidated results of operations from the date of acquisition. Demandforce's results of operations for periods prior to the date of acquisition were not material when compared with our consolidated results of operations.


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Table of Contents

ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our Management’s 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.
Significant changes since our most recent Annual Report on Form 10-K in the 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 Item 1A in Part II of this Quarterly Report on Form 10-Q 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 Part I, Item 1 of this report and our Annual Report on Form 10-K for the fiscal year ended July 31, 2011.

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 the first nine months of fiscal 2012 as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Quarterly Report on Form 10-Q.
About Intuit
Intuit is a leading provider of business and financial management solutions for small and medium-sized businesses, consumers, accounting professionals and financial institutions. We organize our portfolio of businesses into four principal categories — Small Business Group, Tax, Financial Services and Other Businesses. These categories include seven financial reporting segments.
Small Business Group: This category includes three segments — Financial Management Solutions, Employee Management Solutions, and Payment Solutions.
Our Financial Management Solutions segment includes QuickBooks financial and business management software and services; QuickBooks technical support; financial supplies; Intuit Websites, which provides website design and hosting services for small and medium-sized businesses; and QuickBase.
Our Employee Management Solutions segment provides payroll products and services for small businesses.
Our Payment Solutions segment provides merchant services for small businesses, including credit and debit card processing, electronic check conversion and automated clearing house services.
     Tax: This category includes two segments — Consumer Tax and Accounting Professionals.
Our Consumer Tax segment includes TurboTax income tax preparation products and services for consumers and small businesses.
Our Accounting Professionals segment includes Lacerte, ProSeries and Intuit Tax Online (formerly ProLine Tax Online) professional tax products and services. This segment also includes QuickBooks Premier Accountant Edition and the QuickBooks ProAdvisor Program for accounting professionals.

Financial Services: This segment consists primarily of outsourced online financial management solutions for banks and credit unions provided by our Intuit Financial Services business.
Other Businesses: This segment includes Quicken personal finance products and services; Mint.com online personal finance services; Intuit Health online patient-to-provider communication solutions; and our businesses in Canada, the United Kingdom, India and Singapore.

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Table of Contents

Seasonality and Trends
Our QuickBooks, Consumer Tax and Accounting Professionals businesses are highly seasonal. Revenue from our QuickBooks software products tends to be highest during our second and third fiscal 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. The availability of tax forms or the ability of taxing agencies to receive submissions can cause revenue to shift between our second fiscal quarter and subsequent fiscal quarters. 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 core operating expenses such as research and development continue at relatively consistent levels. We believe the seasonality of our revenue is likely to continue in the future. In our MD&A we often focus on year-to-date results for our seasonal businesses as they are generally more meaningful than quarterly results.
Overview of Financial Results
Total net revenue for the first nine months of fiscal 2012 was $3.6 billion, an increase of 9% compared with the same period of fiscal 2011. Our Consumer Tax segment and our Small Business Group were the key drivers of revenue growth in the first nine months of fiscal 2012. Revenue in our Consumer Tax segment increased 11% compared with the same period a year ago due to 7% growth in paid federal units and favorable offering mix. Revenue in our Small Business Group grew 11% compared with the same period a year ago due to growth in connected services offerings and improved offering mix. Operating income for the first nine months of fiscal 2012 was $1.2 billion, an increase of 13% compared with the same period of fiscal 2011. Higher revenue was partially offset by higher costs and expenses, including higher spending for staffing and share-based compensation. Net income increased 14% in the first nine months of fiscal 2012 compared with the same period of fiscal 2011, in line with the increase in operating income. Diluted net income per share for the first nine months of fiscal 2012 increased 19% to $2.58 as a result of the increase in net income and the decline in weighted average diluted common shares compared with the same period of fiscal 2011.
We ended the first nine months of fiscal 2012 with cash, cash equivalents and investments totaling $1.5 billion. In the first nine months of fiscal 2012 we generated cash from operations and from the issuance of common stock under employee stock plans. During the same period we used cash for the repayment of debt, for the repurchase of shares of our common stock under our stock repurchase programs, for the payment of cash dividends, and for capital expenditures. At April 30, 2012, we had authorization from our Board of Directors to expend up to an additional $1.8 billion for stock repurchases through August 15, 2014.


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 in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2011 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. We believe that there were no significant changes in those critical accounting policies and estimates during the first nine months of fiscal 2012. Senior management has reviewed the development and selection of our critical accounting policies and estimates and their disclosure in this Quarterly Report on Form 10-Q with the Audit and Risk Committee of our Board of Directors.



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Results of Operations
Financial Overview
(Dollars in millions, except per share amounts)
Q3
FY12
 
Q3
FY11
 
$
Change
 
%
Change
 
YTD
Q3
FY12
 
YTD
Q3
FY11
 
$
Change
 
%
Change
Total net revenue
$
1,945

 
$
1,848

 
$
97

 
5
%
 
$
3,558

 
$
3,258

 
$
300

 
9
%
Operating income
1,107

 
1,061

 
46

 
4
%
 
1,205

 
1,068

 
137

 
13
%
Net income
734

 
688

 
46

 
7
%
 
788

 
691

 
97

 
14
%
Diluted net income
per share
$
2.42

 
$
2.20

 
$
0.22

 
10
%
 
$
2.58

 
$
2.16

 
$
0.42

 
19
%

Current Fiscal Quarter
Total net revenue increased $97 million or 5% in the third quarter of fiscal 2012 compared with the same quarter of fiscal 2011. In our Small Business Group, revenue was up 11%. Financial Management Solutions segment revenue increased 8% due to growth in QuickBooks Online and QuickBooks Enterprise revenue and, to a lesser extent, to higher Financial Supplies revenue. Employee Management Solutions segment revenue increased 12% due to favorable offering mix, improved customer adoption of payroll direct deposit services, and price increases for desktop payroll customers. Payment Solutions segment revenue increased 14% due to fee structure changes, higher total card transaction volume, and growth in the merchant customer base. In our Consumer Tax segment, revenue increased 3% due to growth in paid federal units and favorable offering mix. These results include the impact of last year's delay in the Internal Revenue Service's acceptance of certain electronically filed tax returns, which contributed to a shift in Consumer Tax revenue from the second quarter of fiscal 2011 to the third quarter of fiscal 2011. Accounting Professionals segment revenue increased 5% due to price increases in our professional tax business and higher QuickBooks Premier Accountant Edition and ProAdvisor Program revenue. Financial Services segment revenue increased 2%, or 7% when adjusted for the March 2012 sale of our corporate banking business. Revenue growth in this segment was primarily due to higher mobile banking revenue. Other Businesses segment revenue increased 6% due to growth in global revenue.
Operating income increased 4% in the third quarter of fiscal 2012 compared with the same quarter of fiscal 2011 due to the increase in revenue described above partially offset by higher costs and operating expenses. Cost of service and other revenue as a percentage of service and other revenue increased slightly due to costs associated with new programs in our Consumer Tax segment. Total operating expenses were also $17 million higher in the fiscal 2012 quarter, primarily due to higher staffing expenses. See "Cost of Revenue" and "Operating Expenses” later in this Item 2 for more information.
Net income increased 7% in the third quarter of fiscal 2012 compared with the same quarter of fiscal 2011 due to higher operating income as described above and a slightly lower effective tax rate in the fiscal 2012 quarter. See "Non-Operating Income and Expenses – Income Taxes" later in this Item 2 for more information. Diluted net income per share for the third quarter of fiscal 2012 increased 10% to $2.42 as a result of the increase in net income and the decline in weighted average diluted common shares compared with the same quarter of fiscal 2011.
Fiscal Year to Date
Total net revenue increased $300 million or 9% in the first nine months of fiscal 2012 compared with the same period of fiscal 2011. In our Small Business Group, revenue was up 11%. Financial Management Solutions segment revenue increased 8% due to growth in QuickBooks Online and QuickBooks Enterprise revenue and, to a lesser extent, to higher Financial Supplies revenue. Employee Management Solutions segment revenue increased 12% due to favorable offering mix, improved customer adoption of payroll direct deposit services, and price increases for desktop payroll customers. Payment Solutions segment revenue increased 16% due to fee structure changes, higher total card transaction volume, and growth in the merchant customer base. In our Consumer Tax segment, revenue increased 11% due to 7% growth in paid federal units and favorable offering mix. Accounting Professionals segment revenue grew 6% due to price increases in our professional tax business and higher QuickBooks Premier Accountant Edition and ProAdvisor Program revenue. Financial Services segment revenue increased 7%, or 9% when adjusted for the March 2012 sale of our corporate banking business. Revenue growth in this segment was primarily due to higher mobile banking revenue and, to a lesser extent, to higher bill-pay revenue. Other Businesses segment revenue was flat due to 9% growth in global revenue offset by lower Quicken revenue.
Operating income increased 13% in the first nine months of fiscal 2012 compared with the same period of fiscal 2011 due to the increase in revenue described above partially offset by higher costs and operating expenses. Cost of service and other revenue as a percentage of service and other revenue increased slightly due to costs associated with new programs in our Consumer Tax segment. Total operating expenses were also $86 million higher in the fiscal 2012 period, including about $75 million for higher staffing expenses and about $9 million for higher share-based compensation expenses. See "Cost of Revenue"

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and "Operating Expenses” later in this Item 2 for more information.
Net income increased 14% in the first nine months of fiscal 2012 compared with the same period of fiscal 2011, in line with the increase in operating income. Diluted net income per share for the first nine months of fiscal 2012 increased 19% to $2.58 as a result of the increase in net income and the decline in weighted average diluted common shares compared with the same period of fiscal 2011.
Business Segment Results
The information below is organized in accordance with our seven reportable business segments. All of our business segments except Other Businesses operate primarily in the United States and sell primarily to customers in the United States. International total net revenue was less than 5% of consolidated total net revenue for all periods presented.
Segment operating income or loss is segment net revenue less segment cost of revenue and operating expenses. See “Executive Overview – Seasonality and Trends” earlier in this Item 2 for a description of the seasonality of our business. 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 $547 million in the first nine months of fiscal 2012 and $515 million in the first nine months of fiscal 2011. Unallocated costs increased in the fiscal 2012 period due to increases in corporate product development and selling and marketing expenses in support of the growth of our businesses, and to a lesser extent to increases in share-based compensation expenses.
Segment expenses also do not include amortization of acquired technology, amortization of other acquired intangible assets, and goodwill and intangible asset impairment charges. See Note 10 to the financial statements in Part I, Item 1 of this report for reconciliations of total segment operating income or loss to consolidated operating income or loss for each fiscal period presented.
We calculate revenue growth rates and segment operating margin figures using dollars in thousands. Those results may vary from figures calculated using the dollars in millions presented below.
Financial Management Solutions
(Dollars in millions)
Q3
FY12
 
Q3
FY11
 
%
Change
 
YTD
Q3
FY12
 
YTD
Q3
FY11
 
%
Change
Product revenue
$
111

 
$
107

 
 
 
$
316

 
$
306

 
 
Service and other revenue
86

 
76

 
 
 
248

 
218

 
 
Total segment revenue
$
197

 
$
183

 
8
%
 
$
564

 
$
524

 
8
%
% of total revenue
10
%
 
10
%
 
 
 
16
%
 
16
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment operating income
$
72

 
$
61

 
18
%
 
$
181

 
$
154

 
18
%
% of related revenue
36
%
 
33
%
 
 
 
32
%
 
29
%
 
 

Financial Management Solutions (FMS) product revenue is derived primarily from QuickBooks desktop software products and financial supplies such as paper checks, envelopes, invoices, business cards and business stationery. FMS service and other revenue is derived primarily from QuickBooks Online; QuickBooks technical support plans; Intuit Websites, which provides website design and hosting services for small and medium-sized businesses; QuickBase; and royalties from small business online services.
FMS total net revenue increased $14 million or 8% in the third quarter of fiscal 2012 compared with the same quarter of fiscal 2011 and increased $40 million or 8% in the first nine months of fiscal 2012 compared with the same period of fiscal 2011. Total QuickBooks software units increased 1% in the first nine months of fiscal 2012. Strong growth in QuickBooks Online and QuickBooks Enterprise revenue drove higher average selling prices for QuickBooks offerings overall. Higher revenue from financial supplies also contributed to FMS revenue growth in both periods, fueled by sales of our new Secure Plus checks with ChecklockTM fraud protection.
FMS segment operating income as a percentage of related revenue increased to 36% in the third quarter of fiscal 2012 from 33% in the same quarter of fiscal 2011 and increased to 32% in the first nine months of fiscal 2012 from 29% in the same period of fiscal 2011. Segment operating income was higher in the first nine months of fiscal 2012 due to the increase in revenue described above and about $12 million in lower expenses for advertising and other marketing programs, partially offset by about $16 million for higher staffing expenses associated with higher headcount.

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Employee Management Solutions

(Dollars in millions)
Q3
FY12
 
Q3
FY11
 
%
Change
 
YTD
Q3
FY12
 
YTD
Q3
FY11
 
%
Change
Product revenue
$
70

 
$
66

 
 
 
$
207

 
$
193

 
 
Service and other revenue
59

 
49

 
 
 
171

 
145

 
 
Total segment revenue
$
129

 
$
115

 
12
%
 
$
378

 
$
338

 
12
%
% of total revenue
7
%
 
6
%
 
 
 
11
%
 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment operating income
$
81

 
$
70

 
16
%
 
$
228

 
$
197

 
16
%
% of related revenue
62
%
 
61
%
 
 
 
60
%
 
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