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INTU > SEC Filings for INTU > Form 10-Q on 29-Nov-2012All Recent SEC Filings

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Form 10-Q for INTUIT INC


29-Nov-2012

Quarterly Report


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, 2012. We acquired Demandforce, Inc. in May 2012 and we have included the results of operations for that business in our consolidated results of operations from the date of acquisition. We have also reclassified our financial statements for all periods presented to reflect our Intuit Websites business as discontinued operations. See "Results of Operations
- Discontinued Operations" later in this Item 2 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 business and growth strategy as well as the trends, opportunities, challenges, and risks that affect our performance and operating results. Understanding our growth strategy and the trends that affect our business provides context for the discussion of financial results and future opportunities which follows this overview. This summary is not intended to be exhaustive, nor is it 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 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 - targeting the small business market and represented 39% of our revenue in fiscal 2012.
Our Financial Management Solutions segment includes QuickBooks financial and business management software and services; QuickBooks technical support; financial supplies; and Demandforce, which provides online marketing and customer communication solutions.

Our Employee Management Solutions segment provides payroll products and services.

Our Payment Solutions segment provides merchant services, including credit and debit card processing, electronic check conversion and automated clearing house services; Web-based transaction processing services for online merchants; and GoPayment mobile payment processing services.

Tax: This category includes two segments - Consumer Tax and Accounting Professionals - and represented 45% of our revenue in fiscal 2012.
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 professional tax products and services. This segment also includes QuickBooks Premier Accountant Edition and the QuickBooks ProAdvisor Program for accounting professionals.


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Financial Services: This segment consists primarily of digital banking solutions
- both online and mobile - for financial institutions and Mint online personal finance services. This segment represented 9% of our revenue in fiscal 2012. Other Businesses: This segment represented 7% of our revenue in fiscal 2012 and includes our global businesses, primarily in Canada, the United Kingdom, and Singapore; Quicken personal finance products and services; and Intuit Health online patient-to-provider communication solutions. Our Growth Strategy
We see significant opportunities to drive future growth, based on our assessment of key technology and demographic trends and our focus on building - and enabling others to build - innovative offerings to simplify the business of life for our customers. In the first quarter of fiscal 2013 we refined our three-point growth strategy:

Focus on the product - we call it "Delivering awesome product experiences." Customers increasingly demand anytime, anywhere, any device access to their information. Therefore, we are increasingly focused on reimagining our products with a mobile-first, and in some cases mobile-only, design. Our TurboTax solutions, for example, let customers prepare and file their entire tax returns online, via tablet, mobile phone or the desktop. In addition, we believe that a key factor in growing our customer base is to deliver an amazing first-use experience, so our customers can get the value they expect as easily and quickly as possible.

Creating network effect platforms - we call it "Enabling the contributions of others." We expect to solve problems faster and more efficiently for our growing base of customers by moving to more open platforms with application programming interfaces that enable the contributions of end users and third-party developers. One example of this is QuickBooks Online, which now allows small business customers all over the world to contribute to localizing the product.

Leveraging our data for our customers' benefit - we call it "Enabling data to create delight." Our 60 million customers are generating valuable data that we seek to appropriately use to deliver better products and breakthrough benefits by eliminating the need to enter data, helping them make better decisions and improving transactions and interactions.

Industry Trends and Seasonality
The industry in which we operate is dynamic and highly competitive, and we expect it to remain so in the future. The markets for software and related services, especially highly-available connected services, are characterized by rapid technological change, shifting customer needs, and frequent new product introductions and enhancements. Competition and expertise in many of the markets we serve, particularly small business services, consumer tax, and online and mobile banking, have grown over the past few years and we expect this trend to continue. There are also large, cloud-based service companies who innovate quickly and serve small businesses and consumers. While today our competition with such companies may be limited, as we and those companies grow, our competition with them may increase. In recent years the widespread availability of the Internet, the emergence of mobile devices, and the explosion of social media have accelerated the pace of change and revolutionized the way that people throughout the world manage important financial tasks. The result is a global market that is shifting from traditional services that are paper-based, human-produced, and brick-and-mortar bound, to one where people understand, demand, and embrace the benefits of connected services. This trend toward connected services is the primary driver of the strategies in all of our businesses.
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 from November through April. In our Consumer Tax business, a greater proportion of our revenue has shifted to later in this seasonal period due in part to the growth in sales of TurboTax Online, for which we recognize revenue when tax returns are printed or electronically filed. 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 between our 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. During these quarters, 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 and profitability 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.


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For the 2012 tax season, it appears reasonably possible that federal tax legislation could occur late in calendar year 2012. This could delay the availability of some federal tax forms and the incorporation of those forms into our consumer and professional tax offerings. If we experience these types of delays, some revenue for our online tax offerings could shift from our second fiscal quarter ending on January 31, 2013 to our third fiscal quarter. Key Challenges and Risks
Our growth strategy depends upon our ability to initiate and embrace disruptive technology trends, to enter new markets and to drive broad adoption of the products and services we develop and market. Our future growth also increasingly depends on the strength of our third-party business relationships and our ability to continue to develop, maintain and strengthen new and existing relationships. To remain competitive and continue to grow, we are investing significant resources in our product development, marketing and sales capabilities, and we expect to continue to do so in the future. As we continue transitioning to offer more connected services, the ongoing operation and availability of our information technology and communication systems and those of our external service providers is becoming increasingly important. Because we help customers manage their financial lives, we face risks associated with the hosting, collection, use and retention of personal customer information and data. We are investing significant management attention and resources in our information technology infrastructure and in our privacy and security capabilities, and we expect to continue to do so in the future. For a complete discussion of the most significant risks and uncertainties affecting our business, please see "Forward-Looking Statements and Risk Factors" in Item 1A of this Report.
Overview of Financial Results
The most important financial indicators that we use to assess our business are revenue growth and operating income growth for the company as a whole and for each business segment; operating income margin; earnings per share; and cash flow from operations. We also track certain non-financial drivers of revenue growth and, when material, identify them in the applicable discussions of business segment results below. These non-financial indicators include, for example, customer growth and retention, and, in certain businesses, transaction volume. Customers for our connected services offerings have generally grown faster than those for our traditional software offerings, reflecting our strategic focus on connected services over the past few years. Connected services generated $2.7 billion or 64% of our total revenue in fiscal 2012, compared with 50% of our total revenue five years ago. We expect connected services revenue as a percentage of our total revenue to continue to grow in the future. We track transaction volume in businesses such as our Payments Solutions business, where total credit and debit card transaction volume, which correlates strongly with the macroeconomic environment, contributes to revenue growth. Total net revenue for the first three months of fiscal 2013 was $647 million, an increase of 12% compared with the same period of fiscal 2012. Our Small Business Group was the key driver of revenue growth in the first three months of fiscal 2013. Revenue in our Small Business Group grew 18% compared with the same period a year ago due to growth in connected services offerings, improved offering mix, and the May 2012 acquisition of Demandforce.
Operating loss from continuing operations for the first three months of fiscal 2013 was $69 million, a decrease of 18% compared with the same period of fiscal 2012. Higher revenue was partially offset by higher costs and expenses, including higher spending for staffing and share-based compensation. Net loss from continuing operations decreased 12% in the first three months of fiscal 2013 compared with the same period of fiscal 2012 due to the lower operating loss and a lower effective tax benefit rate in the fiscal 2013 quarter. Basic and diluted net loss per share from continuing operations for the first three months of fiscal 2013 decreased 11% to $0.17 as a result of the lower net loss and the decline in weighted average basic and diluted common shares compared with the same period of fiscal 2012.
We ended the first three months of fiscal 2013 with cash, cash equivalents and investments totaling $558 million. In the first three months of fiscal 2013 we generated cash from the issuance of common stock under employee stock plans and the sale of our Intuit Websites business. During the same period we used cash for operations, 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 October 31, 2012, we had authorization from our Board of Directors to expend up to an additional $1.6 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


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Form 10-K for the fiscal year ended July 31, 2012 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 three months of fiscal 2013. 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.

Results of Operations
Financial Overview
(Dollars in millions,
except per share              Q1                 Q1                  $                  %
amounts)                     FY13               FY12               Change            Change
Total net revenue       $         647      $         575      $           72              12  %
Operating loss from
continuing operations             (69 )              (84 )                15             (18 )%
Net loss from
continuing operations             (51 )              (58 )                 7             (12 )%
Basic and diluted net
loss per share from
continuing operations   $       (0.17 )    $       (0.19 )    $         0.02             (11 )%

Total net revenue increased $72 million or 12% in the first quarter of fiscal 2013 compared with the same quarter of fiscal 2012. In our Small Business Group, revenue was up 18%. Financial Management Solutions segment revenue increased 20%, or 9% when adjusted for our May 2012 acquisition of Demandforce. Higher revenue in this segment was driven by continuing growth in QuickBooks Online 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 21% due to fee structure changes and higher total card transaction volume. In our Consumer Tax segment, revenue decreased 11% in a seasonally light quarter because customers filed fewer extended tax returns in the fiscal 2013 quarter compared with the same quarter of the previous fiscal year. Accounting Professionals segment revenue increased 19% in a seasonally light quarter due in part to higher QuickBooks Premier Accountant Edition revenue. Financial Services segment revenue increased 4%, or 11% when adjusted for the March 2012 sale of our corporate banking business and the addition of Mint revenue in fiscal 2013. Higher revenue in this segment was due to continuing growth in mobile banking revenue. Other Businesses segment revenue increased 5%, or 12% when adjusted for the transfer of fiscal 2013 Mint revenue to our Financial Services segment. See "Business Segment Results" below for more information. Revenue growth in our Other Businesses segment was due to higher global small business revenue.
Operating loss from continuing operations decreased 18% in the first quarter of fiscal 2013 compared with the same quarter of fiscal 2012 due to the increase in revenue described above partially offset by higher costs and operating expenses. Total operating expenses were $42 million higher in the fiscal 2013 quarter, primarily due to the addition of operating expenses for Demandforce, higher staffing expenses, and higher share-based compensation expenses. See "Operating Expenses" later in this Item 2 for more information.
Net loss from continuing operations decreased 12% in the first quarter of fiscal 2013 compared with the same quarter of fiscal 2012. Interest expense was lower in the first quarter of fiscal 2013 due to the repayment of debt. We recorded a $10 million gain on the sale of a stock warrant in interest and other income in the first quarter of fiscal 2012. Our effective tax benefit rate for the first quarter of fiscal 2013 was 32% and our effective tax benefit rate for the first quarter of fiscal 2012 was 35%. See "Non-Operating Income and Expenses - Interest Expense," "Interest and Other Income, Net," and "Income Taxes" later in this Item 2 for more information. Basic and diluted net loss per share from continuing operations for the first quarter of fiscal 2013 decreased 11% to $0.17 as a result of the lower net loss and the decline in weighted average basic and diluted common shares compared with the same quarter of fiscal 2012. 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.


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Segment operating income or loss is segment net revenue less segment cost of revenue and operating expenses. See "Executive Overview - Industry Trends and Seasonality" 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 $206 million in the first three months of fiscal 2013 and $183 million in the first three months of fiscal 2012. Unallocated costs increased in the fiscal 2013 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.
Beginning in the first quarter of fiscal 2013, we moved the segment revenue and operating results for our Mint business from Personal Finance in our Other Businesses segment to our Financial Services segment. Since segment revenue and operating results for Mint were not significant for any period presented, we did not reclassify previously reported segment results to reflect this change. As a result of the reorganization of the reporting structure of Personal Finance and synergies achieved during the time it was managed as one business, we allocated a portion of the total goodwill associated with that reporting unit to Personal Finance and a portion to Mint, which was transferred to the Financial Services reporting unit. We based the allocation of the total goodwill on the fair value of the remaining Personal Finance reporting unit compared with the fair value of the Mint component at the time of the transfer. The subsequent financial performance of the Personal Finance reporting unit relative to the projections used for the allocation of goodwill will determine the realizability of that goodwill.
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

                            Q1        Q1         %
(Dollars in millions)      FY13      FY12     Change
Product revenue           $  89     $  89
Service and other revenue    91        60
Total segment revenue     $ 180     $ 149       20 %
% of total revenue           28 %      26 %

Segment operating income  $  58     $  51       14 %
% of related revenue         32 %      34 %

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; Demandforce, which provides online marketing and customer communication solutions for small businesses; QuickBase; and royalties from small business online services.
FMS total net revenue increased $31 million or 20% in the first quarter of fiscal 2013 compared with the same quarter of fiscal 2012. When adjusted to exclude revenue from Demandforce, which we acquired in May 2012, FMS revenue was 9% higher in the fiscal 2013 quarter. U.S. QuickBooks Online subscribers grew 25%, driving the revenue growth in this segment.
FMS segment operating income as a percentage of related revenue decreased to 32% in the first quarter of fiscal 2013 from 34% in the same quarter of fiscal 2012. The increase in segment revenue described above was partially offset by higher segment costs and expenses that included costs and expenses for Demandforce. Staffing expenses were about $20 million higher, driven by an increase in headcount, and marketing expenses were about $5 million higher.


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Employee Management Solutions

                            Q1        Q1         %
(Dollars in millions)      FY13      FY12     Change
Product revenue           $  71     $  68
Service and other revenue    64        53
Total segment revenue     $ 135     $ 121       12 %
% of total revenue           21 %      21 %

Segment operating income  $  85     $  75       14 %
% of related revenue         63 %      62 %

Employee Management Solutions (EMS) product revenue is derived primarily from QuickBooks Basic Payroll and QuickBooks Enhanced Payroll, which are products sold on a subscription basis that offer payroll tax tables, payroll reports, federal and state payroll tax forms, and electronic tax payment and filing to small businesses that prepare their own payrolls. EMS service and other revenue is derived primarily from QuickBooks Online Payroll, QuickBooks Assisted Payroll, Intuit Online Payroll, Intuit Full Service Payroll, fees for payroll direct deposit services, and fees for other small business payroll and employee management services. Service and other revenue for this segment also includes interest earned on funds held for customers.
EMS total net revenue increased $14 million or 12% in the first quarter of fiscal 2013 compared with the same quarter of fiscal 2012. Revenue was higher in the fiscal 2013 period due to customer growth in our Enhanced desktop payroll and online payroll solutions, improved customer adoption of payroll direct deposit services, and price increases for desktop payroll customers. At October 31, 2012, total U.S. payroll customers were up 2% while U.S. online payroll customers were up 20% compared with October 31, 2011. EMS segment operating income as a percentage of related revenue increased slightly to 63% in the first quarters of fiscal 2013 from 62% in the first quarter of fiscal 2012. Segment operating income was consistent in these periods due to the increase in segment revenue described above and relatively stable segment operating expenses.

Payment Solutions

                            Q1        Q1        %
(Dollars in millions)      FY13      FY12    Change
Product revenue           $   6     $  6
Service and other revenue   108       88
Total segment revenue     $ 114     $ 94      21  %
% of total revenue           17 %     16 %

Segment operating income  $  22     $ 24      (9 )%
% of related revenue         19 %     25 %

Payment Solutions product revenue is derived primarily from QuickBooks Point of Sale solutions, which help retailers process and track sales electronically and integrate with QuickBooks financial software. Payment Solutions service and other revenue is derived primarily from merchant services for small businesses that include credit card, debit card, electronic benefits, and gift card processing services; check verification, check guarantee and electronic check conversion, including automated clearing house (ACH) and Check21 capabilities; Web-based transaction processing services for online merchants; and GoPayment mobile payment processing services.
Payment Solutions total net revenue increased $20 million or 21% in the first quarter of fiscal 2013 compared with the same quarter of fiscal 2012. Higher revenue in the fiscal 2013 quarter was driven by fee structure changes and 10% higher U.S. total credit and debit card transaction volume. The U.S. merchant customer base grew 15% in the first quarter of fiscal 2013 compared with the first quarter of fiscal 2012.

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