UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-K
þ | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the fiscal year ended July 31, 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, including zip code)
(650) 944-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Exchange on Which Registered | ||
Common Stock, $0.01 par value | NASDAQ Global Select Market | ||
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of Intuit Inc. outstanding common stock held by non-affiliates of Intuit as of January 31, 2012, the last business day of our most recently completed second fiscal quarter, based on the closing price of $56.44 reported by the NASDAQ Global Select Market on that date, was $15.7 billion.
There were 295,371,402 shares of Intuit voting common stock outstanding as of August 31, 2012.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its Annual Meeting of Stockholders to be held on January 17, 2013 are incorporated by reference in Part III of this Annual Report on Form 10-K.
INTUIT INC.
FISCAL 2012 FORM 10-K
INDEX
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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 Extensions 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.
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This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Please see the section entitled “Forward-Looking Statements and Risk Factors” in Item 1A of this Report for important information to consider when evaluating these statements.
PART I
ITEM 1
BUSINESS
CORPORATE BACKGROUND
General
Intuit Inc. is a leading provider of innovative business and financial management solutions for small businesses, consumers, accounting professionals and financial institutions. Our flagship products and services that include QuickBooks, TurboTax and Quicken help customers solve important business and financial management problems, such as running a small business, paying bills, filing income taxes, or managing personal finances. ProSeries and Lacerte are Intuit’s leading tax preparation offerings for professional accountants. Our Intuit Financial Services business provides digital banking solutions to banks and credit unions that help them make it easier for their customers to manage money and pay bills.
Our products and services are available in the United States, Canada, the United Kingdom, India and Singapore, helping to simplify the business of life for more than 60 million people.
We had revenue of $4.2 billion in our fiscal year ended July 31, 2012, and had approximately 8,500 employees in major offices in the United States, Canada, India, the United Kingdom and other locations at that time.
Intuit was incorporated in California in March 1984. We reincorporated in Delaware and completed our initial public offering in March 1993. Our principal executive offices are located at 2700 Coast Avenue, Mountain View, California, 94043, and our main telephone number is 650-944-6000. Our corporate website, www.intuit.com, provides materials for investors and information relating to Intuit’s corporate governance. The content on any website referred to in this filing is not incorporated by reference into this filing unless expressly noted otherwise. When we refer to “we,” “our” or “Intuit” in this Annual Report on Form 10-K, we mean the current Delaware corporation (Intuit Inc.) and its California predecessor, as well as all of our consolidated subsidiaries.
Available Information
We file reports required of public companies with the Securities and Exchange Commission (SEC). These include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other reports, and amendments to these reports. The public may read and copy the materials we file with or furnish to the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. We make available free of charge on the Investor Relations section of our corporate website all of the reports we file with or furnish to the SEC as soon as reasonably practicable after the reports are filed or furnished. Copies of this Annual Report on Form 10-K may also be obtained without charge by contacting Investor Relations, Intuit Inc., P.O. Box 7850, Mountain View, California 94039-7850 or by calling 650-944-6000.
BUSINESS OVERVIEW
Intuit’s Mission
We seek to be a premier innovative growth company that improves our customers’ financial lives so profoundly they can’t imagine going back to the old way.
Our customers include consumers and small businesses, and those who serve them – accountants, financial institutions and health care providers. We help simplify the business of life in four ways:
• | Improving financial strength – Helping consumers make and save money and small businesses to grow and profit. |
• | Increasing productivity – Turning drudgery into time for what matters most. |
• | Maintaining compliance – Helping customers comply with regulations. |
• | Building confidence – Sharing the wisdom and experience of others. |
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As emerging technology and market trends change the way people live and work, we change, too. We've adapted our product line, moving from the desktop to the Web and mobile devices. By offering many services online, we're connecting customers to our solutions and with each other in ways that add more value to our products and services.
We apply this vision globally, helping our customers expand their business to overseas markets, creating and selling our own products internationally, and extending our hiring horizons beyond geographic borders.
Our Business Portfolio
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.
• | 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.
• | 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. |
Financial Services: This segment consists primarily of digital (online and mobile) banking solutions for financial institutions provided by our Intuit Financial Services business.
Other Businesses: This segment includes our global businesses, primarily in Canada, the United Kingdom, India and Singapore; our personal finance offerings, Quicken and Mint; and Intuit Health online patient-to-provider communication solutions.
Our Growth Strategy
We innovate to drive growth, adapting our approach to meet changing demographic, technology, market, and geographic trends. We build, and enable others to build, innovative offerings to solve our customers’ problems, based upon our three-point growth strategy.
• | Driving growth in our core businesses. Our leading offerings include TurboTax, QuickBooks, QuickBooks Payroll, payment solutions, ProSeries, Lacerte, and our online and mobile banking platform. We acquire new users by expanding our categories and increasing awareness. We keep existing customers by delivering greater benefits and ease of use. We also generate new revenue by expanding usage to other offerings in our portfolio. |
• | Building adjacent businesses and entering new geographies. By pursuing partnerships, completing acquisitions and creating new offerings, we’re extending our core and accelerating our entry into new businesses. Demandforce, for example, helps small businesses get and keep customers with software as a service marketing and communication solutions. In addition, we're expanding our horizons by offering solutions such as QuickBooks Online to customers around the world. |
• | Accelerating our transition to connected services. Our connected services strategy provides new ways for people and businesses to connect and share information with each other, whether on the desktop, the Web, or mobile devices. We design products with a “mobile-first” approach, recognizing customers' increasing demand for anytime, anywhere, any |
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device access to their information. Our TurboTax solutions, for example, let customers prepare and file their entire tax returns online, via tablet, mobile phone, or the desktop.
And we seek to use data to delight customers by eliminating the need to enter data, helping them make better decisions and improve transactions and interactions.
This strategy recognizes the emergence and influence of the digital generation, the increasing relevance of social networks, and customers’ growing reliance on the Web, mobile devices and information-based technology to manage important tasks. It also acknowledges the potential of new market opportunities in rapidly developing economies. The end 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.
We continue to make significant progress in this environment. Connected services generated $2.7 billion or 64 percent of our total revenue in fiscal 2012, compared with 50 percent of our total revenue five years ago. Within connected services, software as a service offerings by themselves produced about $1.6 billion, or nearly 40 percent of our total revenue in fiscal 2012.
Summary
Generations age. Borders blur. Technology advances. As the way we live and work evolves, we adapt our strategy to meet and lead these changes. Yet our commitment remains consistent: Developing innovative products and services that are so convenient and easy to use that customers actively recommend them to others. It’s been our success formula for more than a quarter-century as we’ve worked to solve people’s important business and financial management problems. And we’ll maintain that commitment as we continue to evolve, working to help people solve each other’s problems, connecting people to people and to solutions, wherever they are, whenever they want them.
PRODUCTS AND SERVICES
We offer our products and services in the seven business segments described in “Business Overview” above. The following table shows the classes of similar products or services, consistent with our reportable segments, that accounted for 10% or more of total net revenue within the last three fiscal years.
Fiscal 2012 | Fiscal 2011 | Fiscal 2010 | ||||||
Financial Management Solutions | 17 | % | 17 | % | 16 | % | ||
Employee Management Solutions | 12 | % | 12 | % | 12 | % | ||
Payment Solutions | 10 | % | 9 | % | 9 | % | ||
Consumer Tax | 35 | % | 34 | % | 34 | % | ||
Accounting Professionals | 10 | % | 11 | % | 11 | % | ||
Financial Services | 9 | % | 9 | % | 10 | % | ||
Our products and services are sold mainly in the United States and are described below. International total net revenue was less than 5% of consolidated total net revenue for fiscal 2012, 2011 and 2010. For financial information about these segments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and Note 15 to the financial statements in Item 8 of this Report.
Financial Management Solutions
QuickBooks. Our QuickBooks product line brings bookkeeping capabilities and business management tools to small business users in an easy-to-use design that does not require them to be familiar with debit and credit accounting. We offer a range of desktop and online products and services to suit the needs of different types of businesses. Our desktop software products include QuickBooks Pro and QuickBooks Pro for Mac, which provide accounting functionality for small businesses; QuickBooks Premier, which provides small businesses with advanced accounting functionality and business planning tools; and QuickBooks Enterprise Solutions, designed for larger businesses. Our Premier and Enterprise products also come in a range of industry-specific editions, including Contractor, Manufacturing and Wholesale, Nonprofit, Professional Services, and Retail. Our online offerings include QuickBooks Simple Start Online, which provides accounting functionality suitable for very small, less complex businesses. QuickBooks Online Essentials and QuickBooks Online Plus provide online accounting
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functionality suitable for progressively larger businesses. All three offerings allow multiple users to access the application from any location via the Internet using a personal computer, tablet device or smartphone.
QuickBooks Technical Support. We offer several technical support options to our QuickBooks customers. These include support plans that are sold separately and priced based on the length of the plan. We also offer a limited amount of free technical support assistance to customers, a free self-help information section on our QuickBooks.com website and free access to the QuickBooks Community, an online forum where QuickBooks users can share information with each other.
Demandforce. Our Demandforce offerings help small businesses communicate with their customers, build their online reputations, and leverage a network of local businesses for more effective online marketing. Features include e-mail and text message appointment reminders and confirmations; electronic marketing offers and newsletters; online customer reviews and referrals; and tools for tracking and measuring the effectiveness of electronic marketing efforts.
Financial Supplies. We offer a range of financial supplies designed for small businesses and individuals that use QuickBooks and Quicken. These include standard paper checks and Secure Plus checks with CheckLock™ fraud protection features; envelopes, invoices and deposit slips; and business identity products such as business cards and stationery. We also offer tax forms, tax return presentation folders and other supplies for professional tax preparers.
QuickBase. Our QuickBase offering is a software as a service platform that allows users to select ready-made online workgroup applications or create custom solutions for their businesses. The most common solutions include project collaboration, sales team management, and employee management. QuickBase customers pay a monthly or annual subscription fee that varies based on the number of users and the amount of data and file storage they need.
Intuit Partner Platform: The Intuit Partner Platform provides the tools developers need to create Web and mobile applications that add value to QuickBooks. The platform allows developers to build applications that integrate with QuickBooks data and solve the unique needs of our customers. Developers can create applications on the Intuit Partner Platform using any development platform they choose, and must pass a standards and security check before offering their programs to customers. All applications are available through the Intuit App Center at apps.com. Here QuickBooks users can find, buy and use applications connected to the platform. A growing number of companies offer applications built for the platform, including Bill.com, eBay, and Salesforce.com.
Employee Management Solutions
QuickBooks Payroll. QuickBooks Payroll is a family of products sold on a subscription basis to small businesses that use QuickBooks and prepare their own payroll or want some assistance with preparing their payroll. It is also sold to accountants who use QuickBooks and help their clients manage their payrolls. The product family includes:
• | QuickBooks Basic Payroll, which provides payroll tax tables and payroll reports; |
• | QuickBooks Enhanced Payroll, which provides payroll tax tables, payroll reports, federal and state payroll tax forms, and eFile & Pay for federal and state payroll taxes; |
• | QuickBooks Enhanced Payroll for Accountants, which has several accountant-specific features in addition to the features in QuickBooks Enhanced Payroll; and |
• | QuickBooks Online Payroll, for use with QuickBooks Online. |
We also offer QuickBooks Assisted Payroll, through which we provide the back-end aspects of payroll processing, including tax payments and filings, for customers who process their payrolls using QuickBooks. Direct deposit is included with QuickBooks Online Payroll and available with each of the other offerings for an additional fee.
Intuit Online Payroll. Intuit Online Payroll provides small business payroll services that do not require the use of QuickBooks. This offering is sold on a subscription basis and includes online payroll tax calculation, payroll reports, federal and state payroll tax forms, electronic payment of federal and state payroll taxes, and direct deposit of paychecks. We also offer an Intuit Online Payroll mobile app for smartphones.
Intuit Full Service Payroll. This offering is also sold on a subscription basis and provides comprehensive payroll services to customers who prefer not to perform payroll tasks themselves. Intuit Full Service Payroll does not require the use of QuickBooks and includes processing of payrolls based on information submitted online by the payroll customer, direct deposit
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of paychecks, electronic payment of federal and state payroll taxes, electronic filing of federal and state payroll tax forms, and preparation and issuance of year end W-2 forms.
Other Employee Management Solutions. We offer Snap Payroll, a free app that allows small businesses to calculate payroll taxes from an iPhone or iPad. ViewMyPaycheck is a Web app that allows employees of QuickBooks Payroll employers to view and print their paychecks and W-2 forms, and Paycheck Records is a Web app that allows employees of Intuit Online Payroll employers to view and print their paychecks. We also offer workers’ compensation administration to small business employers for additional fees.
Payment Solutions
Merchant Services. We offer a full range of merchant services to 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 Check 21 capabilities; and Web-based transaction processing services for online merchants. In addition to transaction processing services, we provide a full range of support for our clients that includes customer service, merchant and consumer collections, chargeback and retrieval support, and fraud and loss prevention screening.
GoPayment. GoPayment allows users to accept credit card payments using a smartphone or tablet device. They can enter the credit card information manually or use a card swiper that attaches to the phone to capture the information. They can also send electronic receipts to their customers via e-mail or text message.
Point of Sale Solutions. We offer Basic and Pro versions of QuickBooks Point of Sale, which helps retailers process sales using barcodes, track inventory and customer purchases, and integrates with QuickBooks financial software. The Pro version has advanced inventory features and provides the ability to manage up to 20 stores from a single office. We sell these software products with or without the accompanying hardware and technical support.
Intuit Payment Network. As members of the Intuit Payment Network, small businesses can send secure online payments to their vendors and receive them from their customers, from bank account to bank account, eliminating the need for paper checks.
Consumer Tax
Our TurboTax products and services are designed to enable individuals and small business owners to prepare and file their own federal and state personal and small business income tax returns quickly and accurately. They are designed to be easy to use, yet sophisticated enough for complex tax returns. Some of these offerings are available on mobile devices such as smartphones and tablets.
Tax Return Preparation Offerings. For the 2011 tax season we offered a range of software products and services that included desktop and online versions of TurboTax Basic, for simple returns; TurboTax Deluxe, for taxpayers who itemize deductions; TurboTax Premier, for taxpayers who own investments or rental property; and TurboTax Home and Business, for small business owners. We also offered TurboTax Business desktop software for larger businesses; TurboTax Free Edition online for the simplest returns; TurboTax for the Tablet; and SnapTax, an application that allows users with simple federal and state returns to prepare and electronically file them from their smartphones. We also offered free live tax advice from U.S.-based tax professionals to TurboTax customers during the 2011 tax season. All of these offerings are subject to change for the 2012 tax season. TurboTax Live Community is an online forum where participants can learn from and share information with other users while preparing their income tax returns.
Electronic Filing and Other Services. Our desktop, online and mobile tax preparation customers can electronically file their federal and state income tax returns through our electronic filing center. For the 2011 tax season our online tax preparation and filing services were offered through the websites of thousands of financial institutions, electronic retailers, and other online merchants, and on Yahoo!® Finance Tax Center, MSN Money® Tax Center, and AOL Tax Center. Financial institutions can offer our online tax preparation and filing services to their customers through a link to TurboTax Online or through TurboTax for Online Banking, which provides functionality that is integrated with their online banking services. For the 2011 tax season we also offered TurboTax customers the option to receive their income tax refunds on a prepaid debit card.
Intuit Tax Freedom Project. Under the Intuit Tax Freedom Project, we provide online federal and state income tax return preparation and electronic filing services at no charge to eligible taxpayers. For the 2011 tax season we provided approximately 1.2 million free federal returns under this initiative. We are a member of the Free File Alliance, a consortium of private sector
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companies that has entered into an agreement with the federal government to provide free online federal tax preparation and filing services to eligible taxpayers. See also “Competition — Consumer Tax” later in this Item 1 for more information on the Free File Alliance.
Accounting Professionals
Our Accounting Professionals segment provides software and services for accountants and tax preparers in public practice. These include offerings that help professional accountants and tax preparers provide accounting, payroll, tax planning and tax compliance services to their individual and business clients, and that help them manage their own practices more effectively.
Tax Offerings. Our tax offerings for accounting professionals are Lacerte, ProSeries, and Intuit Tax Online. Lacerte software is designed for full-service accounting firms that prepare the most complex returns. We offer two versions of our ProSeries software: ProSeries Professional Edition, designed for year-round tax practices that prepare moderately complex tax returns; and ProSeries Basic Edition, designed for the needs of smaller and seasonal tax practices. Intuit Tax Online is designed for year-round tax practices that prepare moderately complex tax returns and want the advantages of an online offering. Accounting professionals license these tax products for a flat fee for unlimited use, or use them to print or electronically file tax returns on a “pay-per-return” basis. Accountants and tax preparers using Lacerte, ProSeries, and Intuit Tax Online can file their clients’ tax returns using our electronic filing services.
Accounting Offerings. Our accounting offering for professionals, QuickBooks Premier Accountant Edition, provides the tools and file-sharing capabilities needed to efficiently complete bookkeeping, trial balance, write-up, and financial reporting tasks. Our QuickBooks ProAdvisor Program is a subscription-based membership that provides QuickBooks and QuickBooks Payroll software for professional accountants, technical support, training, product certification, access to marketing tools and discounts on products purchased on behalf of clients.
Financial Services
Our Intuit Financial Services business provides digital (online and mobile) banking solutions that are hosted in our data centers and delivered as software as a service to financial institutions. We also work with these financial institutions to provide other Intuit products and services, such as TurboTax for Online Banking, to their customers.
We offer digital banking services that financial institutions make available to their customers. These services include the ability to view transaction history, account balances, check images and statements; fund transfers between accounts; inter-institutional transfers; bill payment and bill presentment; financial management, alerts, remote deposit capture, and small business solutions; and TurboTax for Online Banking, which provides tax preparation and filing services that are integrated with online banking. Many of these services can be accessed from mobile devices.
Other Businesses
Personal Finance
Our personal finance offerings help users organize, understand and manage their personal finances. Our Quicken line of desktop software products allow customers to reconcile bank accounts, pay bills, record credit card and other transactions, and track investments, mortgages and other assets and liabilities. Quicken also allows customers to flag their tax-related financial transactions and download that information into our TurboTax consumer tax return preparation software. We offer Quicken Starter Edition and Quicken Deluxe as well as Quicken Premier, which offers more robust investment and tax planning tools; Quicken Home and Business, which allows customers to manage both personal and small business finances in one application; and Quicken Essentials for Mac.
Our Mint personal finance service is free to users and shows them all of their financial accounts in one online location; provides tools that help them set up budgets and monitor spending; identifies money-saving ideas; and provides step-by-step guidance and advice on achieving their financial goals. We also offer a Mint application that is accessible from smartphones.
Intuit Health
Our Intuit Health offerings provide online patient-to-provider communication solutions. Services are delivered through a standard Web browser on a subscription basis and typically include features such as appointment scheduling, patient pre-registration, prescription renewal and electronic bill payment.
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Global Business
In Canada, we offer versions of QuickBooks that we have “localized,” that is, customized to meet the unique needs of customers in that specific international location. These include QuickBooks software offerings, payroll offerings, and service plans. We also offer consumer tax return preparation software, professional tax preparation products and services, merchant payment processing services, and localized versions of Quicken and Mint in Canada. In the United Kingdom, we offer localized versions of QuickBooks and QuickBooks Payroll, including products and services sold in partnership with banks. In Singapore, we offer a localized version of Quickbooks Online in partnership with a large telecommunications provider.
PRODUCT DEVELOPMENT
Since the markets for software and related services are characterized by rapid technological change, shifting customer needs and frequent new product introductions and enhancements, a continuous high level of investment is required to innovate and quickly develop new products and services as well as enhance existing offerings. Our product development efforts are becoming more important than ever as we pursue our connected services strategy, which reflects a world where people and businesses are increasingly connected by technology and expect access to services at any time in any place.
We develop many of our products and services internally. We have a number of United States and foreign patents and pending applications that relate to various aspects of our products and technology. We supplement our internal development efforts by acquiring or licensing products and technology from third parties, and establishing other relationships that enable us to enhance or expand our offerings more rapidly. We expect to expand our third party technology relationships as we continue to pursue our connected services strategy.
Our traditional core desktop software products — QuickBooks, TurboTax, Lacerte, ProSeries, and Quicken — tend to have predictable annual development and product release cycles. We also develop innovative new offerings such as GoPayment, Snap Payroll, SnapTax, Mint Mobile, our mobile banking apps, and other mobile applications for which development cycles can be more rapid. Developing consumer and professional tax software and services presents unique challenges because of the demanding development cycle required to accurately incorporate tax law and tax form changes within a rigid timetable. The development timing for our payroll, merchant services, financial institutions, and patient-to-provider communication offerings varies with business needs and regulatory requirements and the length of the development cycle depends on the scope and complexity of each project.
In our Financial Services business, we have developed interfaces with the systems of many of the major providers of core processing software and services to financial institutions. These system interfaces leverage a common platform, allowing us to access a financial institution’s host system to provide end users access to their account data. We are enhancing many of our existing interfaces, including mobile and tablet access, in order to deliver more robust connectivity and increase operating efficiencies. We also continue to develop new functionality such as single destination page and extending payments capabilities for financial institutions and their end users.
We continue to make substantial investments in research and development, and we expect to focus our future research and development efforts on enhancing existing products and services and on developing new products and services, including new mobile and global offerings. We also expect to continue to focus significant research and development efforts on ongoing projects to update the technology platforms for several of our offerings. Our research and development expenses were $669 million or 16% of total net revenue in fiscal 2012; $620 million or 16% of total net revenue in fiscal 2011; and $564 million or 17% of total net revenue in fiscal 2010.
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. In our Consumer Tax business, a greater proportion of our revenue has been occurring later in this seasonal period due in part to the growth in sales of TurboTax Online, for which revenue is recognized upon printing or electronic filing of a tax return. The seasonality of our Consumer Tax and Accounting Professionals revenue is also affected by the timing of the availability of tax forms from taxing agencies and the ability of those agencies to receive electronic tax return submissions. Delays in the availability of tax forms or the ability of taxing agencies to receive submissions can cause revenue to shift between our fiscal quarters. These seasonal patterns mean
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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 and profitability is likely to continue in the future.
MARKETING, SALES AND DISTRIBUTION CHANNELS
Markets
Our primary target customers are small businesses, consumers, accounting professionals, and financial institutions. The markets in which we compete have always been characterized by rapid technological change, shifting customer needs, and frequent new product introductions and enhancements by competitors. Over the past several years, the widespread availability of the Internet, mobile devices, and the explosion of social media have accelerated the pace of change and revolutionized the way that customers learn about, evaluate, and purchase products and services.
Real-time, personalized online and mobile shopping experiences are rapidly becoming the standard. In addition, many customers now begin shopping in one channel and ultimately purchase in another. This creates a need for integrated, multi-channel, shop-and-buy experiences. Market and industry changes quickly make existing products and services obsolete. Our success depends on our ability to respond rapidly to these changes with new business models, updated competitive strategies, new or enhanced products and services, alternative distribution methods and other changes in the way we do business.
Our target customers for online and mobile banking services are medium-sized financial institutions seeking an outsourced solution that allows them to compete with the larger national banks in their market. We also provide online and mobile financial management solutions to financial institution customers of core processors.
Marketing Programs
To sell our products and services to small businesses, consumers and accounting professionals, we use a variety of traditional and innovative marketing programs to generate software orders, stimulate demand, and generally maintain and increase customer awareness of our product portfolio. These programs include: Web marketing and targeted advertising, such as search engine optimization and purchasing key words from major search engine companies; placing and promoting our mobile applications in "app stores;" direct-response mail and e-mail campaigns; telephone solicitations; newspaper, magazine, billboard, radio and television advertising; social media campaigns; and coordinated promotional offers with major retailers. We also use workflow-integrated, in-product discovery in some of our software products to market other related products and services, including third-party products and services. In addition, we create marketing campaigns that attract new users through free promotional offerings that are designed to ultimately convert them to paying customers.
Our Financial Services business focuses its marketing efforts on identifying potential financial institution clients and marketing our online and mobile banking services to consumer end users in cooperation with our financial institution clients. We also work with these financial institutions to provide their customers with other Intuit products and services, such as TurboTax for Online Banking.
Sales and Distribution Channels
Multi-Channel Shop-and-Buy Experiences. Our consumer and small business customers increasingly use the Internet and mobile devices, such as smartphones and tablets, to research products and services. Some customers buy and use our products and services entirely online or through their mobile devices. Others purchase desktop products and services using the Internet. Still others make their final decision at a retail location. We coordinate our websites, promotions, and retail displays to support this integrated, multi-channel, shop-and-buy model.
Direct Sales Channel. We sell many of our products and services for small businesses, consumers, and accounting professionals directly through our websites and call centers. Telesales continues to be an effective channel for serving customers that want live help to select the products and services that are right for their needs.
Our Financial Services business sells its products and services to financial institutions using a direct sales model and, to a lesser but increasing extent, in cooperation with core processing partners. Our typical sales cycle is approximately nine to 18 months for new financial institutions, and four to six months for add-on sales to existing customers.
Retail Channel. We sell our QuickBooks, TurboTax, and Quicken desktop software as well as payroll services and merchant credit card payment processing services at retail locations across the United States. We sell these products and services directly
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and through distributors to office supply superstores, warehouse clubs, consumer electronics retailers, general mass merchandisers, online retailers and catalogs. In Canada and other international markets we also rely on distributors and other third parties who sell products into the retail channel. The retail channel provides broad customer reach through retailer-sponsored advertising and exposure to retail foot traffic. This channel also gives us the opportunity to communicate our products, services and messages through multiple touch points and allows us to serve our customers at relatively modest cost.
App Stores. We distribute many of our offerings for mobile devices through proprietary online stores that provide applications for specific devices. These include the Apple App Store, which provides apps for the Apple iPhone and iPad, and Google’s Play Store, which provides apps for Android-compatible smartphones and tablets.
Other Channels. We have strategies to address the alliance partner, solution provider, and personal computer hardware manufacturer channels. Revenue from these channels is currently less significant than revenue from our direct and retail channels, but it is growing. We sell our consumer and small business products and services through selected alliance partners, primarily banks, credit unions, and securities and investment firms. These alliance partners help us reach new customers at the point of transaction and drive growth and market share by extending our online reach. Solution providers combine our products and services with value-added marketing, sales, and technical expertise to deliver a complete solution at the local level. Relationships with selected personal computer hardware manufacturers help us attract new customers for our core software offerings. As we expand our mobile and global offerings, we expect that strategic partnerships will become increasingly important to our business. For example, we are marketing and selling some of our offerings through mobile phone service and hardware providers.
Our Financial Services business has joint marketing arrangements with several core processing vendors. They include Fiserv, Inc.; Open Solutions, Inc.; Fidelity Information Services, Inc.; and Computer Services Inc. To deliver bill payment and bill presentment services to our financial institution customers, we also maintain value-added reseller relationships with major providers such as Fidelity Information Services and Fiserv.
COMPETITION
Overview
We face intense competition in all of our businesses, both domestically and internationally. Competitive interest and expertise in many of the markets we serve, particularly small business, consumer tax, and online and mobile banking, have grown markedly over the past few years and we expect this trend to continue. Some of our existing competitors have significantly greater financial, technical, and marketing resources than we do. In addition, the competitive landscape can shift rapidly as new companies enter markets in which we compete. This is particularly true for online and mobile products and services, where the barriers to entry are lower than they are for desktop software products and services. To attract customers, many online and mobile competitors are offering free or low-priced entry-level products which we must take into account in our pricing strategies.
Our most obvious competition comes from other companies that offer technology solutions similar to ours. However, for many of our products and services, other important competitive alternatives for customers are third party service providers such as professional accountants and seasonal assisted tax preparation businesses. Manual tools and processes, or general-purpose software, are also important competitive alternatives. Many of our new customers previously used pencil and paper or software such as word processors and spreadsheets, rather than competitors’ software and services, to perform financial tasks. We believe that there is a long-term trend away from manual methods and toward the use of digital methods such as desktop and online software and mobile devices to accomplish these tasks that will continue to provide growth opportunities.
Competition Specific to Business Segments
Small Business Group. Our QuickBooks desktop product is the leading small business financial management software in the U.S. retail channel. Our small business products and services face competitive challenges from companies such as The Sage Group plc, which offers software and associated services that directly target small business customers. Increasingly, our small business products and services also face competition from free or low-cost online accounting offerings as well as free online banking and bill payment services offered by financial institutions and others. In our payroll business we compete directly with Automatic Data Processing, Inc. (ADP), Paychex and many other companies with payroll offerings, including online payroll offerings. In our merchant services business we compete directly with large financial institutions such as Wells Fargo, JP Morgan Chase, and Bank of America and with many payment processors, including First Data Corporation, Elavon, Global Payments, and FIS-Certegy.
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Consumer Tax. Our future growth depends on our ability to attract new customers to the self-preparation tax category from tax stores and other seasonal assisted tax preparers. In the private sector we face intense competition from H&R Block, which provides assisted tax preparation services in its stores and a competing software offering called H&R Block At Home. We also face competition from several other large assisted tax preparation service providers, from a myriad of small seasonal tax preparers, and from numerous online self-preparation offerings, including 2nd Story Software’s TaxACT. These competing offerings subject us to significant price pressure.
We also face competitive challenges in our Consumer Tax business from publicly funded government entities that offer electronic tax preparation and filing services at no cost to individual taxpayers. We are a member of the Free File Alliance, a consortium of private sector companies that has entered into an agreement with the federal government. Under this agreement, the member companies provide online federal tax preparation and filing services at no cost to eligible federal taxpayers, and the federal government has agreed not to provide a competing service. Approximately 20 states have also adopted Free File Alliance public-private agreements while approximately 20 other states offer some form of direct government tax preparation and filing services free to qualified taxpayers. We continue to actively work with others in the private and public sectors to advance the goals of the Free File Alliance policy initiative and to support successful public-private partnerships. However, future administrative, regulatory or legislative activity in this area could harm our Consumer Tax business.
Accounting Professionals. Our Lacerte professional tax offerings face competition from competitively-priced tax and accounting solutions that include integration with non-tax functionality. These include CCH’s ProSystems fx Office Suite and Thomson Reuters’ CS Professional Suite and GoSystems Tax. Our ProSeries professional tax offerings face competition from CCH’s ATX and TaxWise offerings. We also face growing competition from online tax and accounting offerings, which may be marketed more effectively or have lower pricing than our offerings for accounting professionals.
Financial Services. The market for digital (online and mobile) banking services is highly competitive. In the area of consumer online banking, a number of companies offer online banking services to financial institutions, including Online Resources, ACI Worldwide, Inc., Q2ebanking, FundsXpress (a subsidiary of First Data Corporation), and Yodlee, Inc. In addition, several companies whose primary offerings are core processing or bill payment processing services also provide online banking services. These companies include Fiserv, Inc., Open Solutions, Inc., Fidelity Information Services, Inc., and Jack Henry and Associates, Inc. In addition, many of these firms offer our products through a referral or reseller arrangement with us. We also compete for new customers with relatively recent entrants into the online financial management solutions market. As we negotiate service contract renewals with current customers, competitive pressures may require us to make concessions on pricing and other material terms as part of the negotiation.
Competitive Factors
We believe the most important competitive factors for our core offerings — QuickBooks, TurboTax, Lacerte, ProSeries and Quicken — are ease of use, product features, size of the installed customer base, brand name recognition, value proposition, cost, reliability, and product and support quality. Access to distribution channels is also important for our QuickBooks, TurboTax and Quicken software products. In addition, support from accounting professionals and the ability for customers to upgrade within product families as their businesses grow are significant competitive factors for our QuickBooks products. Productivity is an important competitive factor for the full-service accounting firms to which we market our Lacerte software products. We believe we compete effectively on these factors as our QuickBooks, TurboTax, and Quicken products are the leading products in the U.S. retail sales channel for their respective categories.
For our service offerings such as small business payroll, merchant payment processing, outsourced online and mobile banking, and patient-to-provider communication solutions, features and ease of use, the integration of these products with related software, brand name recognition, effective distribution, quality of support, cost, and scalability of operations are important competitive factors.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
We provide customer service and technical support by telephone, e-mail, online chat, text messaging, online communities, and our customer service and technical support websites. We have full-time and outsourced customer service and technical support staffs. We supplement these staffs with seasonal employees and additional outsourcing during periods of peak call volumes, such as during the tax return filing season or following a major product launch. We outsource to several firms domestically and internationally. Most of our internationally outsourced consumer and small business customer service and technical support personnel are currently located in India and the Philippines.
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We offer free self-help information through our technical support websites for our QuickBooks, TurboTax, Accounting Professionals, and Quicken software products. Customers can use our websites to find answers to commonly asked questions and check on the status of orders. Under certain support plans, customers can also use our websites to receive product updates electronically. Support alternatives and fees vary by product. We also sponsor online user communities such as Intuit Community for small businesses and accounting professionals, and TurboTax Live Community, where consumers can share knowledge and product advice with each other. Beginning with the 2011 tax season we began offering Free Tax Advice from U.S.-based tax professionals to TurboTax users.
MANUFACTURING AND DISTRIBUTION
Desktop Software and Supplies
The key processes in manufacturing desktop software are manufacturing compact discs (CDs), printing boxes and related materials, and assembling and shipping the final products.
For retail manufacturing, we have an agreement with Arvato Digital Services, Inc. (ADiS), a division of Bertelsmann AG, under which ADiS provides a majority of the manufacturing volume for our launches of QuickBooks, TurboTax and Quicken, as well as for day-to-day replenishment after product launches. ADiS has operations in multiple locations that can provide redundancy if necessary. We also have an agreement with JVC America Inc. under which JVC provides secondary outsourced manufacturing volume for these launches and for day-to-day replenishment.
For retail distribution, we have an agreement with ADiS under which ADiS handles all logistics services. Our retail product launches are operationally complex. Our model for product delivery for retail launches and replenishment is a hybrid of direct to store deliveries and shipments to central warehouse locations. This allows improved inventory management by our retailers. We also ship products for many of our smaller retail customers through distributors.
ADiS also provides most of the manufacturing volume and distribution services for our direct desktop software orders. We have an exclusive agreement with Harland Clarke, a division of M&F Worldwide Corporation, to fulfill orders for all of our printed checks and most other products for our financial supplies business.
We have multiple sources for all of our raw materials and availability has historically not been a significant problem for us.
Prior to major product releases for our core desktop software products we tend to have significant levels of backlog, but at other times backlog is minimal and we typically ship products within a few days of receiving an order. Because of this fluctuation in backlog, we believe that backlog is not a reliable predictor of our future core desktop software sales.
Online Products and Services
Intuit’s data centers house most of the systems, networks and databases required to operate and deliver our online products and services. These include QuickBooks Online, online payroll services, merchant payment processing services, online customer marketing and communication services for small businesses, TurboTax Online, Intuit Tax Online, consumer and professional electronic tax filing services, outsourced online and mobile banking services, and Mint. Through our data centers, we connect customers to our products and services and store customer and business information. As our businesses continue to move toward delivering more online and mobile products and services in conjunction with our connected services strategy, we expect that our infrastructure will become even more critical to our business in the future.
Our primary data center is located at a facility we own in Washington state and we have a primary backup facility at a co-located data center in Nevada. We also have a number of other data centers that are primarily located in the western United States. We continue to execute on a multi-year plan to transition to fewer data centers in more geographically diverse locations.
PRIVACY AND SECURITY OF CUSTOMER INFORMATION AND TRANSACTIONS
We are subject to various federal, state and international laws and regulations and to financial institution requirements relating to the privacy and security of customer and employee personal information. We are also subject to laws and regulations that apply to the Internet, behavioral tracking, mobile applications, telemarketing, e-mail activities, data hosting and retention, financial and health information, and credit reporting. Additional laws in all of these areas are likely to be passed in the future, which could result in significant limitations on or changes to the ways in which we can collect, use, host, store or transmit the
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personal information and data of our customers or employees, communicate with our customers, and deliver products and services, or may significantly increase our compliance costs. As our business expands to new industry segments and new uses of data that are regulated for privacy and security, or to countries outside the United States that have strict data protections laws, our compliance requirements and costs will increase.
Through a Master Privacy Policy Framework designed to be consistent with globally recognized privacy principles, we comply with United States federal and other country guidelines and practices to help ensure that customers and employees are aware of, and can control, how we use information about them. Our primary websites, such as QuickBooks.com and TurboTax.com, have been certified by TRUSTe, an independent organization that operates a website privacy certification program representing industry standard practices to address users’ and regulators’ concerns about online privacy. We also use privacy statements to provide notice to customers of our privacy practices, as well as provide them the opportunity to furnish instructions with respect to use of their personal information. We participate in industry groups whose purpose is to develop or influence industry best practices, and to influence public policy for privacy and security.
To address security concerns, we use security safeguards to help protect the systems and the information customers give to us from loss, misuse and unauthorized alteration. Whenever customers transmit sensitive information, such as a credit card number or tax return data, to us through one of our websites we use industry standards to encrypt the data as it is transmitted to us. We work to protect our systems from unauthorized internal or external access using numerous commercially available computer security products as well as internally developed security procedures and practices.
GOVERNMENT REGULATION
The financial services industry is subject to extensive and complex federal and state regulation. Our financial institution customers, which include commercial banks and credit unions, operate in markets that are subject to rigorous regulatory oversight and supervision. The compliance of our products and services with these requirements depends on a variety of factors including the particular functionality, the interactive design and the charter or license of the financial institution. Our financial services customers must independently assess and determine what is required of them under these regulations and are responsible for ensuring that our systems and the design of their websites conform to their regulatory obligations.
Our Intuit Financial Services business is not directly subject to federal or state regulations specifically applicable to financial institutions such as banks and credit unions. However, as a provider of services to financial institutions, this business is examined by the Federal Financial Institution Examination Council under the Information Technology examination guidelines. Although we believe we are not subject to direct supervision by federal and state banking agencies with regard to other regulations, we have from time to time agreed to examinations of our business and operations by these agencies.
Our Consumer Tax and Accounting Professionals businesses are also subject to federal and state government requirements, including regulations related to the electronic filing of tax returns, the provision of tax preparer assistance and the use and disclosure of customer information. In addition, we offer certain other products and services, such as small business payroll, merchant payment processing services, prepaid debit cards, and patient-to-provider communication solutions, which are subject to special regulatory requirements. As we expand our products and services, we may become subject to additional government regulation. New laws or regulations may be adopted that could impose significant limitations on our business and increase our cost of compliance. We continually analyze new business opportunities, both domestically and internationally, and new businesses and business models that we pursue may require additional costs for regulatory compliance.
We are subject to federal and state laws and government regulations concerning employee safety and health and environmental matters. The Occupational Safety and Health Administration, the Environmental Protection Agency, and other federal and state agencies have the authority to put regulations in place that may have an impact on our operations.
INTELLECTUAL PROPERTY
Our success depends on the proprietary technology embodied in our offerings. We protect this proprietary technology by relying on a variety of intellectual property mechanisms, including copyright, patent, trade secret and trademark laws, restrictions on disclosure and other methods. For example, we regularly file applications for patents, copyrights and trademarks and service marks in order to protect intellectual property that we believe is important to our business. We hold a small but growing patent portfolio that we believe is important to Intuit's overall competitive advantage, although we are not materially dependent on any one patent or particular group of patents in our portfolio at this time. We also have a number of registered trademarks that include Intuit, QuickBooks, TurboTax, Lacerte, ProSeries, Quicken, and Mint. We have registered these and
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other trademarks and service marks in the United States and, depending on the relevance of each brand to other markets, in many foreign countries. Most registrations can be renewed perpetually at 10-year intervals. We also license intellectual property from third parties for use in our products.
Although our portfolio of patents is growing, the patents that have been issued to us could be determined to be invalid and may not be enforceable against competitive products in every jurisdiction. In addition, third parties have asserted and may, in the future, assert infringement claims against us and our customers. These claims and any litigation may result in invalidation of our proprietary rights or a finding of infringement along with an assessment of damages. Litigation, even if without merit, could result in substantial costs and diversion of resources and management attention. In addition, third party licenses may not continue to be available to us on commercially acceptable terms, or at all.
EMPLOYEES
As of July 31, 2012, we had approximately 8,500 employees in major offices in the United States, Canada, India, the United Kingdom and other locations. We believe our future success and growth will depend on our ability to attract and retain qualified employees in all areas of our business. We do not currently have any collective bargaining agreements with our employees, and we believe employee relations are generally good. Although we have employment-related agreements with a number of key employees, these agreements do not guarantee continued service. We believe we offer competitive compensation and a good working environment. We were named one of Fortune magazine’s “100 Best Companies to Work For” in each of the last eleven years. However, we face intense competition for qualified employees, and we expect to face continuing challenges in recruiting and retention.
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ITEM 1A
RISK FACTORS
Forward-Looking Statements and Risk Factors
This Annual Report on Form 10-K contains forward-looking statements. All statements in this report, other than statements that are purely historical, are forward-looking statements. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “forecast,” “estimate,” “seek,” and similar expressions also identify forward-looking statements. In this report, forward-looking statements include, without limitation, the following:
• | our expectations and beliefs regarding future conduct and growth of the business; |
• | our expectations regarding competition and our ability to compete effectively; |
• | our expectations regarding the development of future products, services, business models and technology platforms and our research and development efforts; |
• | our expectation that we will continue to pay a comparable cash dividend on a quarterly basis; |
• | our expectation that we will return excess cash generated by operations to our stockholders through repurchases of our common stock and the payment of cash dividends; |
• | the assumptions underlying our critical accounting policies and estimates, including our estimates regarding product rebate and return reserves; the collectability of accounts receivable; stock volatility and other assumptions used to estimate the fair value of share-based compensation; the fair value of goodwill; and expected future amortization of acquired intangible assets; |
• | our belief that the investments we hold are not other-than-temporarily impaired; |
• | our belief that our exposure to currency exchange fluctuation risk will not be significant in the future; |
• | our assessments and estimates that determine our effective tax rate; |
• | our belief that our income tax valuation allowance is sufficient; |
• | our belief that we will not need funds generated from foreign operations to fund our domestic operations; |
• | our belief that our cash and cash equivalents, investments and cash generated from operations will be sufficient to meet our seasonal working capital needs, capital expenditure requirements, contractual obligations, debt service requirements and other liquidity requirements associated with our operations for at least the next 12 months; |
• | our belief that our facilities are suitable and adequate for our near-term needs and that we will be able to locate additional facilities as needed; and |
• | our assessments and beliefs regarding the future outcome of pending legal proceedings and the liability, if any, that Intuit may incur as a result of those proceedings. |
We caution investors that forward-looking statements are only predictions based on our current expectations about future events and are not guarantees of future performance. We encourage you to read carefully all information provided in this report and in our other filings with the SEC before deciding to invest in our stock or to maintain or change your investment. These forward-looking statements are based on information as of the filing date of this Annual Report, and we undertake no obligation to revise or update any forward-looking statement for any reason.
Because forward-looking statements involve risks and uncertainties, there are important factors that may cause actual results to differ materially from those contained in the forward-looking statements. These factors include the following:
We face intense competitive pressures that may harm our operating results.
We face intense competition in all of our businesses, and we expect competition to remain intense in the future. Our competitors and potential competitors range from large and established entities to emerging start-ups. Our competitors may introduce superior products and services, reduce prices, have greater technical, marketing and other resources, have greater name recognition, have larger installed bases of customers, have well-established relationships with our current and potential customers, advertise aggressively or beat us to market with new products and services. In addition, we may face competition from existing companies, with large established consumer user-bases and broad-based platforms, who may change or expand the focus of their business strategies and target our customers, such as small businesses and financial institutions. We also face
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intensified competition from providers of free accounting, tax, payments, banking and other financial services. In order to compete, we have also introduced free offerings in several categories, but we may not be able to attract customers or effectively monetize all of these offerings, and customers who have formerly paid for Intuit’s products and services may elect to use free offerings instead. These competitive factors may diminish our revenue and profitability, and harm our ability to acquire and retain customers.
Our consumer tax business also faces significant competition from the public sector, where we face the risk of federal and state taxing authorities developing software or other systems to facilitate tax return preparation and electronic filing at no charge to taxpayers. These or similar programs may be introduced or expanded in the future, which may cause us to lose customers and revenue. Although the Free File Alliance has kept the federal government from being a direct competitor to Intuit’s tax offerings, it has fostered additional online competition and may cause us to lose significant revenue opportunities. The current agreement with the Free File Alliance is scheduled to expire in October 2014. We anticipate that governmental encroachment at both the federal and state levels may present a continued competitive threat to our business for the foreseeable future.
Future revenue growth depends upon our ability to adapt to technological change and successfully introduce new and enhanced products, services and business models.
The software as a service, desktop software and mobile technology industries are characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. As we continue to grow our software as a service, mobile and other offerings, we must continue to innovate and develop new products and features to meet changing customer needs and attract and retain talented software developers. We need to continue to develop our skills, tools and capabilities to capitalize on existing and emerging technologies, which require us to devote significant resources.
A number of our businesses also derive a significant amount of their revenue from one-time upfront license fees and rely on customer upgrades and service offerings to generate a significant portion of their revenues. In addition, our consumer and professional tax businesses depend significantly on revenue from customers who return each year to use our updated tax preparation and filing software and services. As our existing products mature, encouraging customers to purchase product upgrades becomes more challenging unless new product releases provide features and functionality that have meaningful incremental value. If we are not able to develop and clearly demonstrate the value of new or upgraded products or services to our customers, our revenues may be harmed. In addition, as we continue to introduce and expand our new business models, including offerings that are subscription-based or that are free to end users, we may be unsuccessful in monetizing or increasing customer adoption of these offerings.
The number of people who access products and services through devices other than personal computers, including mobile phones, smartphones, and handheld computers such as tablets, has increased dramatically in the past few years. We have limited experience to date in developing products and services for users of these alternative devices, and the versions of our products and services developed for these devices may not be compelling to users. Even if we are able to attract new users through these mobile offerings, the amount of revenue that we derive per user from mobile offerings may be less than the revenue that we have historically derived from users of personal computers. As new devices and new platforms are continually being released, it is difficult to predict the problems we may encounter in developing versions of our products and services for use on these alternative devices and we may need to devote significant resources to the creation, support, and maintenance of such offerings. If we are slow to develop products and technologies that are compatible with these alternative devices, of if our competitors are able to achieve those results more quickly than us, we will fail to capture a significant share of an increasingly important portion of the market for online services, which could adversely affect our business.
In some cases, we may expend a significant amount of resources and management attention on offerings that do not ultimately succeed in their markets. We have encountered difficulty in launching new products and services in the past. If we misjudge customer needs in the future, our new products and services may not succeed and our revenues and earnings may be harmed. We have also invested, and in the future expect to invest, in new business models, geographies, strategies and initiatives. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, expenses associated with the initiatives and inadequate return on investments. Because these new initiatives are inherently risky, they may not be successful and may harm our financial condition and operating results.
Business interruption or failure of our information technology and communication systems may impair the availability of our products and services, which may damage our reputation and harm our future financial results.
As we continue to transition our business to more connected services, we become more dependent on the continuing operation and availability of our information technology and communication systems and those of our external service providers. We do not have redundancy for all of our systems, many of our critical applications reside in only one of our data centers, and our
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disaster recovery planning may not account for all eventualities. We also do not maintain real-time back-up of all our data, and in the event of significant system disruption we may experience loss of data or processing capabilities, which may cause us to lose customers and may materially harm our reputation and our operating results. In addition, we are in the process of updating our customer facing applications and the supporting information technology infrastructure to meet our customers’ expectations for continuous service availability. Any difficulties in upgrading these applications or infrastructure or failure of our systems or those of our service providers may result in interruptions in our service, which may reduce our revenues and profits, cause us to lose customers and damage our reputation. Any prolonged interruptions at any time may result in lost customers, additional refunds of customer charges, negative publicity and increased operating costs, any of which may significantly harm our business, financial condition and results of operations.
We are in the process of migrating our applications and infrastructure to new data centers. If we do not execute the transition to the new data centers in an effective manner, we may experience unplanned service disruptions or unforeseen increases in costs which may harm our operating results and our business.
Our business operations, data centers, information technology and communications systems are vulnerable to damage or interruption from natural disasters, human error, malicious attacks, fire, power loss, telecommunications failures, computer viruses, computer denial of service attacks, terrorist attacks and other events beyond our control. The majority of our research and development activities, our corporate headquarters, our principal information technology systems, and other critical business operations are located near major seismic faults. We do not carry earthquake insurance for direct quake-related losses. Our future financial results may be materially harmed in the event of a major earthquake or other natural or man-made disaster.
We rely on internal systems and external systems maintained by manufacturers, distributors and other service providers to take and fulfill customer orders, handle customer service requests and host certain online activities. Any interruption or failure of our internal or external systems may prevent us or our service providers from accepting and fulfilling customer orders or cause company and customer data to be unintentionally disclosed. Our continuing efforts to upgrade and expand our network security and other information systems as well as our high-availability capabilities may be costly, and problems with the design or implementation of system enhancements may harm our business and our results of operations.
Our hosting, collection, use and retention of personal customer information and data create risk that may harm our business.
A number of our businesses collect, use and retain large amounts of personal customer information and data, including credit card numbers, tax return information, bank account numbers and passwords, personal and business financial data, social security numbers, healthcare information and payroll information. We may also develop new business models that use certain personal information, or data derived from personal information. In addition, we collect and maintain personal information of our employees in the ordinary course of our business. Some of this personal customer and employee information is held and some transactions are executed by third parties. In addition, as many of our products and services are Web-based and mobile application-based, the amount of data we store for our users on our servers and the servers of our vendors that provide hosting services (including personal information) has been increasing and will continue to increase as we further transition our businesses to connected services. We and our vendors use commercially available security technologies to protect transactions and personal information. We use security and business controls to limit access and use of personal information and require our vendors to implement similar controls. However, we may not have the ability to effectively monitor the implementation of the security measures of our vendors, and, in any event, individuals or third parties may be able to circumvent these security and business measures, and errors in the storage, use or transmission of personal information may result in a breach of customer or employee privacy or theft of assets, which may require notification under applicable data privacy regulations. We employ contractors, temporary and seasonal employees who may have access to the personal information of customers and employees or who may execute transactions in the normal course of their duties. While we conduct background checks of our employees and other individuals and limit access to systems and data, it is possible that one or more of these individuals may circumvent these controls, resulting in a security breach.
We are subject to laws, rules and regulations relating to the collection, use, and security of user data. New laws in this area have been passed by several jurisdictions, and other jurisdictions are considering imposing additional restrictions. These new laws may be interpreted and applied inconsistently from jurisdiction to jurisdiction and our current data protection policies and practices may not be consistent with those interpretations and applications. In addition, the ability to execute transactions and the possession and use of personal information and data in conducting our business subjects us to legislative and regulatory burdens that may require notification to customers or employees of a security breach, restrict our use of personal information and hinder our ability to acquire new customers or market to existing customers. As our business continues to expand to new industry segments that may be more highly regulated for privacy and data security, and to countries outside the United States that have more strict data protection laws, our compliance requirements and costs may increase. We have incurred — and may
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continue to incur — significant expenses to comply with mandatory privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations.
A major breach of our security measures or those of third parties that provide hosting services for us, execute transactions or hold and manage personal information may have serious negative consequences for our businesses, including possible fines, penalties and damages, reduced customer demand for our services, harm to our reputation and brands, further regulation and oversight by federal or state agencies, and loss of our ability to provide financial transaction services or accept and process customer credit card orders or tax returns. From time to time, we detect, or receive notices from customers or public or private agencies that they have detected, vulnerabilities in our servers, our software or third-party software components that are distributed with our products. The existence of vulnerabilities, even if they do not result in a security breach, may harm customer confidence and require substantial resources to address, and we may not be able to discover or remediate such security vulnerabilities before they are exploited. In addition, hackers develop and deploy viruses, worms and other malicious software programs that may attack our offerings. Although this is an industry-wide problem that affects software across platforms, it is increasingly affecting our offerings because hackers tend to focus their efforts on the more popular programs and offerings and we expect them to continue to do so. If hackers were able to circumvent our security measures, or if we were unable to detect an intrusion into our systems and contain such intrusion in a reasonable amount of time,we may lose personal information. Although we have commercially available network and application security, internal control measures, and physical security procedures to safeguard our systems, there can be no assurance that a security breach, intrusion, loss or theft of personal information will not occur, which may harm our business, customer reputation and future financial results and may require us to expend significant resources to address these problems, including notification under data privacy regulations.
If we are unable to develop, manage and maintain critical third party business relationships, our business may be adversely affected.
Our growth is dependent on the strength of our business relationships and our ability to continue to develop, maintain and leverage new and existing relationships. We rely on various third party partners, including software and service providers, suppliers, vendors, manufacturers, distributors, contractors, financial institutions, core processors, licensing partners and development partners, among others, in many areas of our business in order to deliver our offerings and operate our business. We also rely on third parties to support the operation of our business by maintaining our physical facilities, equipment, power systems and infrastructure. In certain instances, these third party relationships are sole source or limited source relationships and can be difficult to replace or substitute depending on the level of integration of the third party’s products or services into, or with, our offerings and/or the general availability of such third party’s products and services. In addition, there may be few or no alternative third party providers or vendors in the market. Further, there can be no assurance that we will be able to adequately retain third party contractors engaged to help us operate our business. The failure of third parties to provide acceptable and high quality products, services and technologies or to update their products, services and technologies may result in a disruption to our business operations and our customers, which may reduce our revenues and profits, cause us to lose customers and damage our reputation. Alternative arrangements and services may not be available to us on commercially reasonable terms or we may experience business interruptions upon a transition to an alternative partner.
In particular, we have relationships with banks, credit unions or other financial institutions, both as customers and as suppliers of certain critical services we offer to our other customers. If macroeconomic conditions or other factors cause any of these institutions to fail, consolidate, stop providing certain services or institute cost-cutting efforts, our business and financial results may suffer and we may be unable to offer those services to our customers.
We have also started to increasingly utilize the distribution platforms of third parties like Apple's App Store and Google's Play Store for the distribution of certain of our product offerings. Although we benefit from the strong brand recognition and large user base of these distribution platforms to attract new customers, the platform owners have wide discretion to change the pricing structure, terms of service and other policies with respect to us and other developers. Any adverse changes by these third parties could adversely affect our financial results.
Increased government regulation of our businesses may harm our operating results.
Many of our businesses are in highly regulated areas, including our tax, payroll, payments, financial services, prepaid debit card and healthcare businesses. There have been significant new regulations and heightened focus by the government on many of these areas. In addition, as we seek to grow our business, we may expand into more highly-regulated businesses or countries, which may subject us to increased regulatory scrutiny. The application of these laws and regulations to our businesses is often unclear and compliance with these regulations may involve significant costs or require changes to our business practices that result in reduced revenue. In addition, new regulations or changes in current regulations may affect our operating results. Any
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changes that we may incur as a result of any such regulations may not be sustained over time depending on a number of factors, including market and industry reactions to such regulations.
In order to meet regulatory standards, we may be required to increase investment in compliance and auditing functions or new technologies. In addition, government authorities may enact other laws, rules or regulations that place new burdens or restrictions on our business or determine that our operations are directly subject to existing rules or regulations, such as requirements related to data collection, use, transmission, retention,processing and security, which may make our business more costly, less efficient or impossible to conduct, and may require us to modify our current or future products or services, which may harm our future financial results.
The tax preparation industry continues to receive heightened attention from federal and state governments. New legislation, regulation, public policy considerations, litigation by the government or private entities, or new interpretations of existing laws may result in greater oversight of the tax preparation industry, restrict the types of products and services that we can offer or the prices we can charge, or otherwise cause us to change the way we operate our tax businesses or offer our tax products and services. This in turn may increase our cost of doing business and limit our revenue opportunities. In addition, if our practices are not consistent with new interpretations of existing laws, we may become subject to lawsuits, penalties, and other liabilities that did not previously apply. We are also required to comply with a variety of state revenue agency standards in order to successfully operate our tax preparation and electronic filing services. Changes in state-imposed requirements by one or more of the states, including the required use of specific technologies or technology standards, may significantly increase the costs of providing those services to our customers and may prevent us from delivering a quality product to our customers in a timely manner.
Our Financial Services business provides services to banks, credit unions and other financial institutions that are subject to extensive and complex federal and state regulation. As a result, our financial institution customers require that our products and services comply with the regulations applicable to these customers. If we are unable to comply with these regulations, we may incur significant costs and penalties, face litigation or governmental proceedings, and lose our ability to sell to these customers. Any of these adverse events may harm our future financial results and our reputation.
If we fail to process transactions effectively or fail to adequately protect against disputed or potential fraudulent activities, our revenue and earnings may be harmed.
Our operations process a significant volume and dollar value of transactions on a daily basis, especially in our payroll and payments businesses. Due to the size and volume of transactions that we handle, effective processing systems and controls are essential to ensure that transactions are handled appropriately. Despite our efforts, it is possible that we may make errors or that funds may be misappropriated due to fraud. The systems supporting our business are comprised of multiple technology platforms that are difficult to scale. If we are unable to effectively manage our systems and processes we may be unable to process customer data in an accurate, reliable and timely manner, which may harm our business. In our payments processing service business if merchants for whom we process payment transactions are unable to pay refunds due to their customers in connection with disputed or fraudulent merchant transactions, we may be required to pay those amounts and our payments may exceed the amount of the customer reserves we have established to make such payments.
The online tax preparation, payroll administration and online payments industries have been experiencing an increasing amount of fraudulent activities by third parties. Although we do not believe that any of this activity is uniquely targeted at our business, this type of fraudulent activity may adversely impact our own operations in our consumer tax, payroll, and payments businesses. In addition to any direct damages and potential fines that may result from such fraud, which may be substantial, a loss of confidence in our controls may seriously harm our business and damage our brand. As fraud detection and prevention abilities improve across the various industries in which we operate, we may implement risk control mechanisms that could make it more difficult for legitimate customers to obtain and use our products as well as prevent the sale of our products to those parties seeking to facilitate fraudulent activity, which could result in lost revenue and negatively impact our operating results.
Third parties claiming that we infringe their proprietary rights may cause us to incur significant legal expenses and prevent us from selling our products.
As the number of products in the software industry increases and the functionality of these products further overlap, and as we acquire technology through acquisitions or licenses, we may become increasingly subject to infringement claims, including patent, copyright, and trademark infringement claims. Litigation may be necessary to determine the validity and scope of the patent rights of others. We have received an increasing number of allegations of patent infringement claims in the past and expect to receive more claims in the future based on allegations that our offerings infringe upon patents held by third parties.
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Some of these claims are the subject of pending litigation against us and against some of our customers. These claims may involve patent holding companies or other adverse patent owners who have no relevant product revenues of their own, and against whom our own patents may provide little or no deterrence. The ultimate outcome of any allegation is uncertain and, regardless of outcome, any such claim, with or without merit, may be time consuming to defend, result in costly litigation, divert management’s time and attention from our business, require us to stop selling, delay shipping or redesign our products, or require us to pay monetary damages for royalty or licensing fees, or to satisfy indemnification obligations that we have with some of our customers. Our failure to obtain necessary license or other rights, or litigation arising out of intellectual property claims may harm our business.
We rely on third party intellectual property in our products and services.
Many of our products and services include intellectual property of third parties, which we license under agreements that must be renewed or renegotiated from time to time. We may not be able to obtain licenses to these third party technologies or content on reasonable terms, or at all. If we are unable to obtain the rights necessary to use this intellectual property in our products and services, we may not be able to sell the affected offerings and customers who are currently using the affected product may be disrupted, which may in turn harm our future financial results, damage our brand, and result in customer loss. Also, we and our customers have been and may continue to be subject to infringement claims as a result of the third party intellectual property incorporated in to our offerings. Although we try to mitigate this risk and we may not be ultimately liable for any potential infringement, pending claims require us to use significant resources, require management attention and could result in loss of customers.
Some of our offerings include third-party software that is licensed under so-called “open source” licenses, some of which may include a requirement that, under certain circumstances, we make available, or grant licenses to, any modifications or derivative works we create based upon the open source software. Although we have established internal review and approval processes to mitigate these risks, we may not be sure that all open source software is submitted for approval prior to use in our products. Many of the risks associated with usage of open source may not be eliminated, and may, if not properly addressed, harm our business.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services, and brand.
Our patents, trademarks, trade secrets, copyrights and other intellectual property rights are important assets for us. We aggressively protect our intellectual property rights by relying on federal, state and common law rights in the U.S. and internationally, as well as a variety of administrative procedures. We also rely on contractual restrictions to protect our proprietary rights in products and services. The efforts that we take to protect our proprietary rights may not always be sufficient or effective. Protecting our intellectual property rights is costly and time consuming and may not be successful in every location. Any significant impairment of our intellectual property rights could harm our business, our brand and our ability to compete.
Policing unauthorized use and copying of our products is difficult, expensive, and time consuming. Current U.S. laws that prohibit copying give us only limited practical protection from software piracy and the laws of many other countries provide very little protection. We frequently encounter unauthorized copies of our software being sold through online marketplaces. Although we continue to evaluate and put in place technology solutions to attempt to lessen the impact of piracy and engage in efforts to educate consumers and public policy leaders on these issues and cooperate with industry groups in their efforts to combat piracy, we expect piracy to be a persistent problem that results in lost revenues and increased expenses.
Because competition for our key employees is intense, we may not be able to attract, retain and develop the highly skilled employees we need to support our planned growth.
Much of our future success depends on the continued service and availability of skilled personnel, including members of our executive team, and those in technical, marketing and staff positions. Experienced personnel in the software, mobile technologies, data security, and software as a service industries are in high demand and competition for their talents is intense, especially in California and India, where the majority of our employees are located. Also, as we strive to continue to adapt to technological change and introduce new and enhanced products and business models, we must be able to secure, maintain and develop the right quality and quantity of engaged and committed talent. Although we strive to be an employer of choice, we may not be able to continue to successfully attract, retain and develop key personnel which may cause our business to suffer.
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As our product and service offerings become more tightly integrated, we may be required to recognize the related revenue over relatively longer periods of time.
Our expanding range of products and services, and the combinations in which we offer them, generate different revenue streams than our traditional desktop software businesses, and the accounting policies that apply to revenue from these offerings are complex. For example, as we offer more online services bundled with software products, we may be required to defer a higher percentage of our software product revenue into future fiscal periods. In addition, as we offer more services on a subscription basis, we recognize revenue from those services over the periods in which the services are provided. This may result in significant shifts of revenue from quarter to quarter, or from one fiscal year to the next.
The nature of our products and services necessitates timely product launches and if we experience significant product quality problems or delays, it may harm our revenue, earnings and reputation.
All of our tax products and many of our non-tax products have rigid development timetables that increase the risk of errors in our products and the risk of launch delays. Our tax preparation software product development cycle is particularly challenging due to the need to incorporate unpredictable tax law and tax form changes each year and because our customers expect high levels of accuracy and a timely launch of these products to prepare and file their taxes by the tax filing deadline. Due to the complexity of our products and the condensed development cycles under which we operate, our products sometimes contain “bugs” that may unexpectedly interfere with the operation of the software. The complexity of our products may also make it difficult for us to consistently deliver offerings that contain the features, functionality and level of accuracy that our customers expect. When we encounter problems we may be required to modify our code, distribute patches to customers who have already purchased the product and recall or repackage existing product inventory in our distribution channels. If we encounter development challenges or discover errors in our products late in our development cycle it may cause us to delay our product launch date. Any major defects or launch delays may lead to loss of customers and revenue, negative publicity, customer and employee dissatisfaction, reduced retailer shelf space and promotions, and increased operating expenses, such as inventory replacement costs, legal fees or payments resulting from our commitment to reimburse penalties and interest paid by customers due solely to calculation errors in our consumer tax preparation products.
Our businesses are highly seasonal and our quarterly results could fluctuate significantly.
Several of our businesses are highly seasonal which historically has caused significant quarterly fluctuations in our financial results. Revenue and operating results are usually strongest during the second and third fiscal quarters ending January 31 and April 30 due to our tax businesses contributing most of their revenue during those quarters and the timing of the release of our small business software products and upgrades. We typically experience lower revenues, and operating losses, in the first and fourth quarters ending October 31 and July 31. Our financial results may also fluctuate from quarter to quarter and year to year due to a variety of factors, including changes in product sales mix that affect average selling prices; product release dates; the timing of delivery of federal and state tax forms; any delay in our ability to successfully submit electronically filed tax returns with government agencies; changes in consumer behavior; the timing of our discontinuation of support for older product offerings; changes to our bundling strategy, such as the inclusion of upgrades with certain offerings; changes to how we communicate the availability of new functionality in the future (any of which may impact the pattern of revenue recognition); and the timing of acquisitions, divestitures, and goodwill and acquired intangible asset impairment charges. Any fluctuations in our operating results may adversely affect our stock price.
We are frequently a party to litigation and regulatory inquiries which could result in an unfavorable outcome and have an adverse effect on our business, financial condition, results of operation and cash flows.
We are subject to various legal proceedings, claims and regulatory inquiries that have arisen out of the ordinary conduct of our business and are not yet resolved and additional claims and inquiries may arise in the future. The number and significance of these claims and inquiries have increased as our businesses have evolved. Any proceedings, claims or inquiries initiated by or against us, whether successful or not, may be time consuming; result in costly litigation, damage awards, consent decrees, injunctive relief or increased costs of business; require us to change our business practices or products; require significant amounts of management time; result in diversion of significant operations resources; or otherwise harm of business and future financial results.
The continued global economic downturn may harm our business and financial condition.
The continued global economic downturn has caused disruptions and extreme volatility in global financial markets and increased rates of default and bankruptcy, and has impacted consumer and small business spending. These macroeconomic developments have affected and may continue to negatively affect our business and financial condition. In particular, because the majority of our revenue is derived from sales within the U.S., economic conditions in the U.S. have an even greater impact
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on us than companies with a more diverse international presence. Potential new customers may not purchase or delay purchase of our products and services, and many of our existing customers may discontinue purchasing or delay upgrades of our existing products and services, thereby negatively impacting our revenues and future financial results. Decreased consumer spending levels may also reduce credit and debit card transaction processing volumes causing reductions in our payments revenue. Poor economic conditions and high unemployment has caused, and may continue to cause, a significant decrease in the number of tax returns filed, which may have a significant effect on the number of tax returns we prepare and file. In addition, weakness in the end-user consumer and small business markets may negatively affect the cash flow of our distributors and resellers who may, in turn, delay paying their obligations to us, which may increase our credit risk exposure and cause delays in our recognition of revenue or future sales to these customers. Additionally, if macroeconomic or other factors continue to cause banks, credit unions, mortgage lenders and other financial institutions to fail, or result in further cost-cutting efforts or consolidation of these entities, we may lose current or potential customers, achieve less revenue per customer and/or lose valuable relationships with such of these entities that provide critical services to our customers. Any of these events may harm our business and our future financial results.
We regularly invest resources to update and improve our internal information technology systems and software platforms. Should our investments not succeed, or if delays or other issues with new or existing internal technology systems and software platforms disrupt our operations, our business could be harmed.
We rely on our network and data center infrastructure and internal technology systems for many of our development, marketing, operational, support, sales, accounting and financial reporting activities. We are continually investing resources to update and improve these systems and environments in order to meet existing, as well as the growing and changing requirements of our business and customers. If we experience prolonged delays or unforeseen difficulties in updating and upgrading our systems and architecture, we may experience outages and may not be able to deliver certain offerings and develop new offerings and enhancements that we need to remain competitive. Such improvements and upgrades are often complex, costly and time consuming. In addition such improvements can be challenging to integrate with our existing technology systems, or may uncover problems with our existing technology systems. Unsuccessful implementation of hardware or software updates and improvements could result in outages, disruption in our business operations, loss of revenue or damage to our reputation.
Our international operations are subject to increased risks which may harm our business, operating results, and financial condition.
In addition to uncertainty about our ability to generate revenues from our foreign operations and expand into international markets, there are risks inherent in doing business internationally, including:
• | trade barriers and changes in trade regulations; |
• | difficulties in developing, staffing, and simultaneously managing a large number of varying foreign operations as a result of distance, language, and cultural differences; |
• | stringent local labor laws and regulations; |
• | profit repatriation restrictions, and foreign currency exchange restrictions; |
• | political or social unrest, economic instability, repression, or human rights issues; |
• | geopolitical events, including acts of war and terrorism; |
• | import or export regulations; |
• | compliance with U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to government officials; |
• | different and more stringent user protection, data protection, privacy and other laws; and |
• | risks related to other government regulation or required compliance with local laws. |
Violations of the complex foreign and U.S. laws and regulations that apply to our international operations may result in fines, criminal actions or sanctions against us, our officers or our employees, prohibitions on the conduct of our business and damage to our reputation. Although we have implemented policies and procedures designed to promote compliance with these laws, there can be no assurance that our employees, contractors or agents will not violate our policies. These risks inherent in our international operations and expansion increase our costs of doing business internationally and may result in harm to our business, operating results, and financial condition.
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If actual product returns exceed returns reserves our future financial results may be harmed.
We ship more desktop software products to our distributors and retailers than we expect them to sell, in order to reduce the risk that distributors or retailers may run out of products. This is particularly true for our Consumer Tax products, which have a short selling season and for which returns occur primarily in our fiscal third and fourth quarters. Like many software companies that sell their products through distributors and retailers, we have historically accepted significant product returns. We establish reserves against revenue for product returns in our financial statements based on estimated returns and we closely monitor product sales and inventory in the retail channel in an effort to maintain adequate reserves. In the past, returns have not differed significantly from these reserves. However, if we experience actual returns that significantly exceed reserves, it may result in lower net revenue.
Unanticipated changes in our income tax rates may affect our future financial results.
Our future effective income tax rates may be favorably or unfavorably affected by unanticipated changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or their interpretation. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. These continuous examinations may result in unforeseen tax-related liabilities, which may harm our future financial results.
Amortization of acquired intangible assets and impairment charges may cause significant fluctuation in our net income.
Our acquisitions have resulted in significant expenses, including amortization and impairment of acquired technology and other acquired intangible assets, and impairment of goodwill. Total costs and expenses in these categories were approximately $53 million in fiscal 2012, $85 million in fiscal 2011, and $85 million in fiscal 2010. Although under current accounting rules goodwill is not amortized, we may incur impairment charges related to the goodwill already recorded and to goodwill arising out of future acquisitions. We test the impairment of goodwill annually in our fourth fiscal quarter or more frequently if indicators of impairment arise. The timing of the formal annual test may result in charges to our statement of operations in our fourth fiscal quarter that may not have been reasonably foreseen in prior periods. The total costs and expenses for fiscal 2011 included a goodwill and intangible asset impairment charge of $30 million for our Intuit Health reporting unit. We recorded the goodwill and intangible assets for that reporting unit on our balance sheet in May 2010 in connection with our acquisition of Medfusion, Inc. At July 31, 2012, we had $2.2 billion in goodwill and $213 million in net acquired intangible assets on our balance sheet, both of which may be subject to impairment charges in the future. New acquisitions, and any impairment of the value of acquired intangible assets, may have a significant negative impact on our future financial results.
Our acquisition and divestiture activities may disrupt our ongoing business, may involve increased expenses and may present risks not contemplated at the time of the transactions.
We have acquired and may continue to acquire companies, products and technologies that complement our strategic direction. Acquisitions involve significant risks and uncertainties, including:
• | inability to successfully integrate the acquired technology and operations into our business and maintain uniform standards, controls, policies, and procedures; |
• | inability to realize synergies expected to result from an acquisition; |
• | challenges retaining the key employees, customers, resellers and other business partners of the acquired operation; |
• | the internal control environment of an acquired entity may not be consistent with our standards and may require significant time and resources to improve; |
• | unidentified issues not discovered in our due diligence process, including product or service quality issues, intellectual property issues and legal contingencies. |
Because acquisitions and divestitures are inherently risky, our transactions may not be successful and may, in some cases, harm our operating results or financial condition. Although we typically fund our acquisitions through cash available from operations, if we were to use debt to fund acquisitions or for other purposes, our interest expense and leverage would increase significantly, and if we were to issue equity securities as consideration in an acquisition, current shareholders’ percentage ownership and earnings per share would be diluted.
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We have $500 million in debt outstanding and may incur other debt in the future, which may adversely affect our financial condition and future financial results.
In fiscal 2007 we issued $500 million in senior unsecured notes due in March 2012 and $500 million in senior unsecured notes due in March 2017. We repaid the March 2012 notes when they became due using cash from operations. As the March 2017 debt matures, we will have to expend significant resources to either repay or refinance these notes. If we decide to refinance the notes, we may be required to do so on different or less favorable terms or we may be unable to refinance the notes at all, both of which may adversely affect our financial condition.
We have also entered into a $500 million five-year revolving credit facility. Although we have no current plans to request any advances under this credit facility, we may use the proceeds of any future borrowing for general corporate purposes, including future acquisitions.
This debt may adversely affect our financial condition and future financial results by, among other things:
• | increasing our vulnerability to downturns in our business, to competitive pressures and to adverse economic and industry conditions; |
• | requiring the dedication of a portion of our expected cash from operations to service our indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures and acquisitions; and |
• | limiting our flexibility in planning for, or reacting to, changes in our businesses and our industries. |
Our current revolving credit facility imposes restrictions on us, including restrictions on our ability to create liens on our assets and the ability of our subsidiaries to incur indebtedness, and require us to maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control. In addition, our short- and long-term debt includes covenants that may adversely affect our ability to incur certain liens or engage in certain types of sale and leaseback transactions. If we breach any of the covenants under our short- and long-term debt or our revolving credit facility and do not obtain a waiver from the lenders, then, subject to applicable cure periods, any outstanding indebtedness may be declared immediately due and payable.
In addition, changes by any rating agency to our credit rating may negatively impact the value and liquidity of both our debt and equity securities. If our credit ratings are downgraded or other negative action is taken, the interest rate payable by us under our revolving credit facility may increase. In addition, any downgrades in our credit ratings may affect our ability to obtain additional financing in the future and may affect the terms of any such financing.
We are subject to risks associated with information disseminated through our services.
The laws relating to the liability of online services companies for information such as online content disseminated through their services are subject to frequent challenges. In spite of settled law in the U.S., claims are made against online services companies by parties who disagree with the content. Where our online content is accessed on the internet outside of the U.S., challenges may be brought under foreign laws which do not provide the same protections for online services companies as in the U.S. These challenges in either U.S. or foreign jurisdictions may rise to legal claims alleging defamation, libel, invasion of privacy, negligence, copyright or trademark infringement, or other theories based on the nature and content of the materials disseminated through the services. Certain of our services include content generated by users of our online services. Although this content is not generated by us, claims of defamation or other injury may be made against us for that content. Any costs incurred as a result of this potential liability may harm our business.
Our stock price may be volatile and your investment could lose value.
Our stock price is subject to changes in recommendations or earnings estimates by financial analysts, changes in investors' or analysts' valuation measures for our stock, our credit ratings and market trends unrelated to our performance. Furthermore, speculation in the press or investment community about our strategic position, financial condition, results of operations, business or security of our products, can cause changes in our stock price. These factors, as well as general economic and political conditions and the timing of announcements in the public market regarding new products, product enhancements or technological advances by our competitors or us, and any announcements by us of acquisitions, major transactions, or management changes may adversely affect our stock price. Further, any changes in the amounts or frequency of share repurchases or dividends may also adversely affect our stock price. A significant drop in our stock price could expose us to the risk of securities class actions lawsuits, which may result in substantial costs and divert management's attention and resources, which may adversely affect our business.
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Our business depends on our strong reputation and the value of our brands.
Developing and maintaining awareness of our brands is critical to achieving widespread acceptance of our existing and future products and services and is an important element in attracting new customers. Adverse publicity (whether or not justified) relating to events or activities attributed to us, our employees or agents may tarnish our reputation and reduce the value of our brands. Damage to our reputation and loss of brand equity may reduce demand for our products and services and thus have an adverse effect on our future financial results, as well as require additional resources to rebuild our reputation and restore the value of the brands.
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ITEM 1B
UNRESOLVED STAFF COMMENTS
None.
ITEM 2
PROPERTIES
Our principal locations, their purposes and the expiration dates for the leases on facilities at those locations as of July 31, 2012 are shown in the table below. We have renewal options on many of our leases.
Location | Purpose | Approximate Square Feet | Principal Lease Expiration Dates | |||
Mountain View and Menlo Park, California | Principal offices, corporate headquarters and headquarters for Financial Management Solutions and Employee Management Solutions businesses | 811,000 | 2015 - 2026 | |||
San Diego, California | Headquarters for Consumer Tax business and general office space | 466,000 | 2017 | |||
Quincy, Washington | Primary data center | 240,000 | Owned | |||
Woodland Hills and Westlake Village, California | Headquarters for Payment Solutions and Financial Services businesses and data centers | 239,000 | 2013 - 2018 | |||
Plano, Texas | Headquarters for Accounting Professionals business and data center | 166,000 | 2026 | |||
Bangalore, India | Headquarters for Intuit India | 164,000 | 2015 - 2017 | |||
We own buildings comprising approximately 114,000 square feet of the total square feet shown in the table above for our Mountain View and Menlo Park headquarters facility. We also lease or own facilities in a number of smaller domestic locations and internationally in Canada, the United Kingdom, Singapore, and several other locations. We believe our facilities are suitable and adequate for our current and near-term needs, and that we will be able to locate additional facilities as needed. See Note 10 to the financial statements in Item 8 of this Report for more information about our lease commitments.
ITEM 3
LEGAL PROCEEDINGS
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. On July 10, 2012, Intuit filed a motion in state court to stay the Quildon case until the federal court resolves the Smith case, which the state court granted on August 6, 2012. On September 10, 2012, the federal court issued an order granting Intuit's motion to dismiss the plaintiffs' complaint in the Smith matter. The plaintiffs have 30 days from the date of the order to file any amended complaint. We continue to believe we have meritorious defenses to the claims asserted in these actions and intend to defend vigorously
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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 July 31, 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.
ITEM 4
MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Common Stock
Intuit’s common stock is quoted on the NASDAQ Global Select Market under the symbol “INTU.” The following table shows the range of high and low sale prices reported on the NASDAQ Global Select Market for the periods indicated. The closing price of Intuit’s common stock on August 31, 2012 was $58.54.
High | Low | ||
Fiscal year ended July 31, 2011 | |||
First quarter | $48.31 | $38.05 | |
Second quarter | 50.54 | 44.19 | |
Third quarter | 56.40 | 46.98 | |
Fourth quarter | 56.46 | 46.36 | |
Fiscal year ended July 31, 2012 | |||
First quarter | $55.43 | $39.87 | |
Second quarter | 58.06 | 48.91 | |
Third quarter | 62.33 | 55.94 | |
Fourth quarter | 60.21 | 53.38 | |
Stockholders
As of August 31, 2012 we had approximately 700 record holders and approximately 192,000 beneficial holders of our common stock.
Dividends
Prior to fiscal 2012, Intuit paid no cash dividends on its common stock. We declared and paid cash dividends that totaled $0.60 per share of outstanding common stock or $178 million during fiscal 2012. In August 2012 our Board of Directors declared a quarterly cash dividend of $0.17 per share of outstanding common stock payable on October 18, 2012 to stockholders of record at the close of business on October 10, 2012. We currently expect to continue to pay comparable cash dividends on a quarterly
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basis in the future; however, 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.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Stock repurchase activity during the three months ended July 31, 2012 was as follows:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans | ||||||||
May 1, 2012 through May 31, 2012 | 1,241,500 | $56.13 | 1,241,500 | $1,776,737,956 | ||||||||
June 1, 2012 through June 30, 2012 | 649,600 | $56.46 | 649,600 | $1,740,058,878 | ||||||||
July 1, 2012 through July 31, 2012 | — | $— | — | $1,740,058,878 | ||||||||
Total | 1,891,100 | $56.25 | 1,891,100 | |||||||||
Note: All shares purchased as part of publicly announced plans during the three months ended July 31, 2012 were purchased under a plan we announced on August 18, 2011 under which we are authorized to repurchase up to $2 billion of our common stock from time to time over a three-year period ending on August 15, 2014. At July 31, 2012, authorization from our Board of Directors to expend up to $1.7 billion remained available under that plan.
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Company Stock Price Performance
The graph below compares the cumulative total stockholder return on Intuit common stock for the last five full fiscal years with the cumulative total returns on the S&P 500 Index and the Morgan Stanley Technology Index for the same period. The graph assumes that $100 was invested in Intuit common stock and in each of the other indices on July 31, 2007 and that all dividends were reinvested. Intuit did not pay cash dividends prior to fiscal 2012. The comparisons in the graph below are based on historical data – with Intuit common stock prices based on the closing price on the dates indicated – and are not intended to forecast the possible future performance of Intuit’s common stock.
July 31, 2007 | July 31, 2008 | July 31, 2009 | July 31, 2010 | July 31, 2011 | July 31, 2012 | ||||||||||||||||||
Intuit Inc. | $ | 100.00 | $ | 95.43 | $ | 103.70 | $ | 138.79 | $ | 163.06 | $ | 204.84 | |||||||||||
S&P 500 | $ | 100.00 | $ | 88.91 | $ | 71.16 | $ | 81.00 | $ | 96.92 | $ | 105.77 | |||||||||||
Morgan Stanley Technology Index | $ | 100.00 | $ | 96.17 | $ | 85.79 | $ | 95.70 | $ | 114.38 | $ | 125.87 | |||||||||||
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ITEM 6
SELECTED FINANCIAL DATA
The following tables show Intuit’s selected financial information for the past five fiscal years. The comparability of the information is affected by a variety of factors, including acquisitions and divestitures of businesses, issuance and repayment of long-term debt, share-based compensation expense, amortization of acquired technology and other acquired intangible assets, repurchases of common stock under our stock repurchase programs, and the payment of cash dividends.
In fiscal 2007 we issued $1 billion in senior notes and in fiscal 2012 we repaid $500 million of those notes when they became due using cash from operations. In fiscal 2008 through fiscal 2012 we acquired several companies, including Homestead Technologies Inc., Electronic Clearing House, Inc., PayCycle, Inc., Mint Software Inc., Medfusion, Inc. and Demandforce, Inc. We have included the results of operations for each of them in our consolidated results of operations from their respective dates of acquisition.
We sold our Intuit Distribution Management Solutions business in fiscal 2008 and our Intuit Real Estate Solutions business in fiscal 2010. In August 2012 we signed a definitive agreement to sell our Intuit Websites business. We accounted for these three businesses as discontinued operations and have therefore reclassified the selected financial data for all periods presented below to reflect them as such.
To better understand the information in these tables, investors should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Report, and the financial statements and related notes in Item 8 of this Report.
Consolidated Statement of Operations Data | Fiscal | ||||||||||||||||||
(In millions, except per share amounts) | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||
Total net revenue | $ | 4,151 | $ | 3,772 | $ | 3,403 | $ | 3,073 | $ | 2,978 | |||||||||
Total costs and expenses | 2,974 | 2,735 | 2,499 | 2,370 | 2,316 | ||||||||||||||
Operating income from continuing operations | 1,177 | 1,037 | 904 | 703 | 662 | ||||||||||||||
Total share-based compensation expense included in total costs and expenses | 169 | 153 | 134 | 130 | 111 | ||||||||||||||
Net income from continuing operations | 767 | 652 | 564 | 459 | 457 | ||||||||||||||
Net income (loss) from discontinued operations | 25 | (18 | ) | 10 | (12 | ) | 20 | ||||||||||||
Net income | 792 | 634 | 574 | 447 | 477 | ||||||||||||||
Net income per common share: | |||||||||||||||||||
Basic net income per share from continuing operations | $ | 2.59 | $ | 2.12 | $ | 1.79 | $ | 1.43 | $ | 1.39 | |||||||||
Basic net income (loss) per share from discontinued operations | 0.08 | (0.06 | ) | 0.03 | (0.04 | ) | 0.06 | ||||||||||||
Basic net income per share | $ | 2.67 | $ | 2.06 | $ | 1.82 | $ | 1.39 | $ | 1.45 | |||||||||
Diluted net income per share from continuing operations | $ | 2.52 | $ | 2.06 | $ | 1.74 | $ | 1.39 | $ | 1.35 | |||||||||
Diluted net income(loss) per share from discontinued operations | 0.08 | (0.06 | ) | 0.03 | (0.04 | ) | 0.06 | ||||||||||||
Diluted net income per share | $ | 2.60 | $ | 2.00 | $ | 1.77 | $ | 1.35 | $ | 1.41 | |||||||||
Dividends declared per common share | $ | 0.60 | $ | — | $ | — | $ | — | $ | — | |||||||||
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Consolidated Balance Sheet Data | At July 31, | ||||||||||||||||||
(In millions) | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||
Cash, cash equivalents and investments | $ | 744 | $ | 1,421 | $ | 1,622 | $ | 1,347 | $ | 828 | |||||||||
Long-term investments | 75 | 63 | 91 | 97 | 288 | ||||||||||||||
Working capital | 258 | 449 | 1,074 | 884 | 307 | ||||||||||||||
Total assets | 4,684 | 5,110 | 5,198 | 4,826 | 4,667 | ||||||||||||||
Current portion of long-term debt | — | 500 | — | — | — | ||||||||||||||
Long-term debt | 499 | 499 | 998 | 998 | 998 | ||||||||||||||
Other long-term obligations | 176 | 190 | 158 | 187 | 122 | ||||||||||||||
Total stockholders’ equity | 2,744 | 2,616 | 2,821 | 2,557 | 2,080 | ||||||||||||||
ITEM 7
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. |
• | Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments underlying our financial statements. |
• | Results of Operations that includes a more detailed discussion of our revenue and expenses. |
• | Liquidity and Capital Resources which discusses key aspects of our statements of cash flows, changes in our balance sheets and our financial commitments. |
You should note that this MD&A discussion contains forward-looking statements that involve risks and uncertainties. Please see the section entitled “Forward-Looking Statements and Risk Factors” at the beginning of Item 1A for important information to consider when evaluating such statements.
You should read this MD&A in conjunction with the financial statements and related notes in Item 8 of this Report. In fiscal 2010 we acquired Mint Software Inc. and Medfusion, Inc. and in fiscal 2012 we acquired Demandforce, Inc. We have included the results of operations for each of them in our consolidated results of operations from their respective dates of acquisition.
We have reclassified our financial statements for all periods presented to reflect our Intuit Real Estate Solutions and Intuit Websites businesses as discontinued operations. See “Results of Operations — Discontinued Operations” later in this Item 7 for more information. Unless otherwise noted, the following discussion pertains only to our continuing operations.
Executive Overview
This overview provides a high level discussion of our operating results and some of the trends that affect our business. We believe that an understanding of these trends is important in order to understand our financial results for fiscal 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 Annual Report on Form 10-K.
Overview of Financial Results
Total net revenue for fiscal 2012 was $4.2 billion, an increase of 10% compared with fiscal 2011. Our Small Business Group and our Consumer Tax segment were the key drivers of revenue growth. Revenue from our Small Business Group increased 14% compared with fiscal 2011 due to growth in connected services offerings and improved offering mix. Revenue from our Consumer Tax segment increased 11% compared with fiscal 2011 due to 6% growth in paid federal units and favorable offering mix. Operating income from continuing operations increased 14% in fiscal 2012 compared with fiscal 2011 due to higher revenue partially offset by higher costs and expenses. Operating expenses were higher due to increases in staffing expenses and, to a lesser extent, increases in share-based compensation expenses. Net income from continuing operations increased 18%
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in fiscal 2012 compared with fiscal 2011 due to the increase in operating income, lower interest expense and a slightly lower effective tax rate. Diluted net income per share from continuing operations for fiscal 2012 increased 22% to $2.52 as a result of the increase in net income and the decline in weighted average diluted shares compared with fiscal 2011.
We ended fiscal 2012 with cash, cash equivalents and investments totaling $744 million. In fiscal 2012 we generated cash from operations, from net sales of investments, and from the issuance of common stock under employee stock plans. During the same period we used cash for the repurchase of shares of our common stock under our stock repurchase programs, the repayment of debt, the acquisition of Demandforce, Inc., the payment of cash dividends, and capital expenditures. At July 31, 2012, we had authorization from our Board of Directors to expend up to an additional $1.7 billion for stock repurchases through August 15, 2014.
Seasonality
Our QuickBooks, Consumer Tax and Accounting Professionals offerings 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. 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, 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 and profitability is likely to continue in the future.
Critical Accounting Policies and Estimates
In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Senior management has reviewed the development and selection of these critical accounting policies and their disclosure in this Annual Report on Form 10-K with the Audit and Risk Committee of our Board of Directors.
Revenue Recognition
We derive revenue from the sale of packaged software products, software subscriptions, hosted services, technical support plans, financial supplies, implementation services, transaction fees, merchant services hardware, and multiple element arrangements that may include a combination of these items. We follow the appropriate revenue recognition rules for each type of revenue. For additional information, see “Revenue Recognition” in Note 1 to the financial statements in Item 8 of this report. We generally recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collectibility is probable. However, determining whether and when some of these criteria have been satisfied often involves exercising judgment and using estimates that can have a significant impact on the timing and amount of revenue we report. For example, for multiple element arrangements containing only software and software-related elements, we must exercise judgment and use estimates in order to (1) allocate the total price among the various elements we must deliver; (2) determine whether undelivered services are essential to the functionality of the delivered products and services; (3) determine whether vendor-specific evidence of fair value exists for each undelivered element; and (4) determine whether and when each element has been delivered. For multiple element arrangements containing non-software elements, we must exercise judgment and use estimates in order to (1) determine whether and when each element has been delivered; (2) determine the fair value of each element using the selling price hierarchy of vendor-specific evidence of fair value (VSOE) of fair value if available, third-party evidence (TPE) if VSOE is not available, and estimated selling price (ESP) if neither VSOE nor TPE is available; and (3) allocate the total price among the various elements based on the relative selling price method. If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of revenue that we report in a particular period. Amounts for fees collected or invoiced and due relating to arrangements where revenue cannot be recognized are reflected on our balance sheet as deferred revenue and recognized when the applicable revenue recognition criteria are satisfied.
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In connection with the sale of certain products, we provide a limited amount of free technical support assistance to customers. We do not defer the recognition of any revenue associated with sales of these products since the cost of providing this free technical support is insignificant. The technical support is generally provided within one year after the associated revenue is recognized and free product enhancements are minimal and infrequent. We accrue the estimated cost of providing this free support upon product shipment.
Return and Rebate Reserves
As part of our revenue recognition policy, we estimate future product returns and rebate payments and establish reserves against revenue at the time of sale based on these estimates. Our return policy allows distributors and retailers, subject to contractual limitations, to return purchased products. Product returns by distributors and retailers relate primarily to the return of excess and obsolete products. In determining our product returns reserves, we consider the volume and price mix of products in the retail channel, historical return rates for prior releases of the product, trends in retailer inventory and economic trends that might impact customer demand for our products (including the competitive environment and the timing of new releases of our products). We fully reserve for excess and obsolete products in the distribution channels.
Our rebate reserves include distributor and retailer sales incentive rebates and end-user rebates. Our estimated reserves for distributor and retailer incentive rebates are based on distributors’ and retailers’ actual performance against the terms and conditions of rebate programs, which we typically establish annually. Our reserves for end-user rebates are estimated based on the terms and conditions of the specific promotional rebate program, actual sales during the promotion and historical redemption trends by product and by type of promotional program.
In the past, actual returns and rebates have not differed significantly from the reserves that we have established. However, actual returns and rebates in any future period are inherently uncertain. If we were to change our assumptions and estimates, our revenue reserves would change, which would impact the net revenue we report. If actual returns and rebates are significantly greater than the reserves we have established, the actual results would decrease our future reported revenue. Conversely, if actual returns and rebates are significantly less than our reserves, this would increase our future reported revenue. For example, if we had increased our fiscal 2012 returns reserves by 1% of non-consignment sales to retailers for QuickBooks, TurboTax and Quicken, our total net revenue for fiscal 2012 would have been approximately $3 million lower.
Allowance for Doubtful Accounts
We make ongoing assumptions relating to the collectibility of our accounts receivable. The accounts receivable amounts presented on our balance sheets include reserves for accounts that might not be paid. In determining the amount of these reserves, we consider our historical level of credit losses. We also make judgments about the creditworthiness of significant customers based on ongoing credit evaluations, and we assess current economic trends that might impact the level of credit losses in the future. Our reserves have generally been adequate to cover our actual credit losses. However, since we cannot reliably predict future changes in the financial stability of our customers, we cannot guarantee that our reserves will continue to be adequate. If actual credit losses are significantly greater than the reserve we have established, that would increase our general and administrative expenses and reduce our reported net income. Conversely, if actual credit losses are significantly less than our reserve, this would eventually decrease our general and administrative expenses and increase our reported net income. We had a total of $229 million in gross accounts receivable and an allowance for doubtful accounts of $46 million on our balance sheet at July 31, 2012.
Fair Value of Investments and Other-Than-Temporary Impairments
As described in Note 2 to the financial statements in Item 8 of this Report, we estimate the fair value of our available-for-sale debt securities each quarter. These investments consist of cash equivalents, municipal bonds, U.S. treasury securities, U.S. agency securities, corporate notes and municipal auction rate securities. Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. When identical or similar assets are traded in active markets, the level of judgment required to estimate their fair value is relatively low. This is generally true for our cash equivalents, which we consider to be Level 1 assets, and our municipal bonds, U.S. agency securities and corporate notes, which we consider to be Level 2 assets. We measure the fair values of our Level 2 investments with the help of a pricing service that either provides quoted market prices in active markets for identical or similar securities or uses observable inputs for their pricing without applying significant adjustments. Our fair value processes include controls that are designed to ensure that we record appropriate fair values for our Level 2 investments. These controls include comparison to pricing provided by a secondary pricing service or investment manager, validation of pricing sources and models, review of key model inputs, analysis of period-over-period price fluctuations, and independent recalculation of prices where appropriate.
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Significant judgment is required to estimate the fair value of assets and liabilities when observable inputs are not available (Level 3). For example, we use a discounted cash flow model to estimate the fair value of our municipal auction rate securities because we have determined that the market for those securities is inactive. Some of the key inputs to our discounted cash flow model are inherently uncertain. The key inputs include projected future interest rates; the likely timing of principal repayments; the probability of full repayment; publicly available pricing data for recently issued similar securities that are not subject to auctions; and the impact of the reduced liquidity for auction rate securities. At July 31, 2012, we held a total of $41 million in municipal auction rate securities, which was not significant compared with total available-for-sale debt securities of $567 million at that date.
We record unrealized gains and losses on our available-for-sale securities, net of income taxes, in other comprehensive income in the equity section of our balance sheet until the security is sold or we determine that the decrease in fair value is other-than-temporary. We consider a number of factors in determining whether to recognize an impairment charge, including the reason for the decrease in fair value, the severity of the decrease in fair value, the length of time that the fair value has been less than the cost basis of the security, the financial condition and near-term prospects of the issuer, and whether we intend to sell or may be required to sell the security before anticipated recovery of our cost basis. Changes in our estimates of the fair values of our available-for-sale securities may result in material increases or decreases in our net income in the period in which the change occurs.
Business Combinations
As described in “Description of Business and Summary of Significant Accounting Policies — Business Combinations,” in Note 1 to the financial statements in Item 8 of this Report, under the acquisition method of accounting we generally recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree at their fair values as of the date of acquisition. We measure goodwill as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method of accounting requires us to exercise judgment and make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities related to uncertain tax positions, and contingencies. This method also requires us to refine these estimates over a one-year measurement period to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to retroactively adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could materially decrease our operating income and net income and result in lower asset values on our balance sheet.
Significant estimates and assumptions that we must make in estimating the fair value of acquired technology, customer lists, and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.
Goodwill, Acquired Intangible Assets and Other Long-Lived Assets — Impairment Assessments
We estimate the fair value of acquired intangible assets and other long-lived assets that have finite useful lives whenever an event or change in circumstances indicates that the carrying value of the asset may not be recoverable. We test for potential impairment of goodwill and other intangible assets that have indefinite useful lives annually in our fourth fiscal quarter or whenever indicators of impairment arise. The timing of the annual test may result in charges to our statement of operations in our fourth fiscal quarter that could not have been reasonably foreseen in prior periods.
As described in “Description of Business and Summary of Significant Accounting Policies – Goodwill, Acquired Intangible Assets and Other Long-Lived Assets,” in Note 1 to the financial statements in Item 8 of this Report, in order to estimate the fair value of goodwill we use a weighted combination of a discounted cash flow model (known as the income approach) and comparisons to publicly traded companies engaged in similar businesses (known as the market approach). The income approach requires us to use a number of assumptions, including market factors specific to the business, the amount and timing of estimated future cash flows to be generated by the business over an extended period of time, long-term growth rates for the business, and a rate of return that considers the relative risk of achieving the cash flows and the time value of money. We evaluate cash flows at the reporting unit level and the number of reporting units that we have identified may make impairment more probable than it would be at a company with fewer reporting units and more integrated operations following acquisitions. Although the assumptions we use in our discounted cash flow model are consistent with the assumptions we use to generate our
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internal strategic plans and forecasts, significant judgment is required to estimate the amount and timing of future cash flows from each reporting unit and the relative risk of achieving those cash flows. When using the market approach, we make judgments about the comparability of publicly traded companies engaged in similar businesses. We base our judgments on factors such as size, growth rates, profitability, risk, and return on investment. We also make judgments when adjusting market multiples of revenue, operating income, and earnings for these companies to reflect their relative similarity to our own businesses. We had a total of $2.2 billion in goodwill on our balance sheet at July 31, 2012. See Note 5 to the financial statements in Item 8 of this Report for a summary of goodwill by reportable segment.
We estimate the recoverability of acquired intangible assets and other long-lived assets that have finite useful lives by comparing the carrying amount of the asset to the future undiscounted cash flows that we expect the asset to generate. In order to estimate the fair value of those assets, we estimate the present value of future cash flows from those assets. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows and the time value of money. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. We also make judgments about the remaining useful lives of acquired intangible assets and other long-lived assets that have finite lives. We had a total of $213 million in net acquired intangible assets on our balance sheet at July 31, 2012.
Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or more of our reporting units, we may be required to record future impairment charges for goodwill and acquired intangible assets. Impairment charges could materially decrease our future net income and result in lower asset values on our balance sheet.
During the fourth quarter of fiscal 2012 we performed our annual goodwill impairment test. Using the methodology described in “Description of Business and Summary of Significant Accounting Policies – Goodwill, Acquired Intangible Assets and Other Long-Lived Assets,” in Note 1 to the financial statements in Part 8 of this Report, we determined that the estimated fair values of all of our reporting units exceeded their carrying values and that they were not impaired. In addition, during this analysis we concluded that the estimated fair values of all of our reporting units substantially exceeded their carrying values.
During the fourth quarter of fiscal 2011 we performed our annual goodwill impairment test. As described in Note 1, in step one of that test we compared the estimated fair value of each reporting unit to its carrying value. The estimated fair values of all of our reporting units except Intuit Health exceeded their carrying values and we concluded that they were not impaired. During this analysis we also concluded that the estimated fair values of all of our reporting units except Intuit Health substantially exceeded their carrying values. We completed step two of the test for our Intuit Health reporting unit and determined that the goodwill and acquired intangible assets associated with it were impaired. Consequently, we recorded a goodwill and intangible asset impairment charge of approximately $30 million in fiscal 2011. See "Fair Value Measurements - Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis," in Note 2 to the financial statements in Item 8 of this Report for more information.
As discussed above, estimates of fair value for all of our reporting units can be affected by a variety of external and internal factors. The market for online patient-to-provider communication solutions is dynamic and competition is intense. Circumstances that negatively affected our estimate of the fair value of our Intuit Health reporting unit included unforeseen delays in developing high quality, timely offerings and marketing them effectively. If we experience further delays the fair value of our Intuit Health reporting unit could decline further and we may be required to record additional goodwill and intangible asset impairment charges in the future.
Accounting for Share-Based Compensation Plans
At July 31, 2012, there was $347 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all equity compensation plans which we will amortize to expense in the future. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average vesting period of 2.4 years.
We use a lattice binomial model and the assumptions described in Note 12 to the financial statements in Item 8 of this Report to estimate the fair value of stock options granted. We estimate the expected term of options granted based on implied exercise patterns using a binomial model. We estimate the volatility of our common stock at the date of grant based on the implied
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volatility of publicly traded one-year and two-year options on our common stock. Our decision to use implied volatility is based upon the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. We base the risk-free interest rate that we use in our option valuation model on the implied yield in effect at the time of option grant on constant maturity U.S. Treasury issues with equivalent remaining terms. In fiscal 2012 we began paying quarterly cash dividends and as a result we began using an annualized expected dividend yield in our option valuation model. We estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. We amortize the fair value of options on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. We may elect to use different assumptions under our option valuation model in the future, which could materially affect our net income or loss and net income or loss per share.
Restricted stock units (RSUs) granted typically vest based on continued service. We value these time-based RSUs at the date of grant using the intrinsic value method, adjusted for estimated forfeitures. We amortize the fair value of time-based RSUs on a straight-line basis adjusted for estimated forfeitures over the service period. Certain RSUs granted to senior management vest based on the achievement of pre-established performance or market goals. We estimate the fair value of performance-based RSUs at the date of grant using the intrinsic value method and the probability that the specified performance criteria will be met, adjusted for estimated forfeitures. Each quarter we update our assessment of the probability that the specified performance criteria will be achieved and adjust our estimate of the fair value of the performance-based RSUs if necessary. We amortize the fair values of performance-based RSUs over the requisite service period adjusted for estimated forfeitures for each separately vesting tranche of the award. We estimate the fair value of market-based RSUs at the date of grant using a Monte Carlo valuation methodology and amortize those fair values over the requisite service period adjusted for estimated forfeitures for each separately vesting tranche of the award. The Monte Carlo methodology that we use to estimate the fair value of market-based RSUs at the date of grant incorporates into the valuation the possibility that the market condition may not be satisfied. Provided that the requisite service is rendered, the total fair value of the market-based RSUs at the date of grant must be recognized as compensation expense even if the market condition is not achieved. However, the number of shares that ultimately vest can vary significantly with the performance of the specified market criteria. Beginning in July 2012, all of the RSUs we grant have dividend rights that are subject to the same vesting requirements as the underlying equity awards, so we do not adjust the intrinsic (market) value of our RSUs for dividends. See Note 12 to the financial statements in Item 8 of this Report for more information.
Legal Contingencies
We are subject to certain legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business. We review the status of each significant matter quarterly and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we record a liability and an expense for the estimated loss. If we determine that a loss is possible and the range of the loss can be reasonably determined, then we disclose the range of the possible loss. Significant judgment is required in both the determination of probability and the determination of whether an exposure is reasonably estimable. Our accruals are based on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Potential legal liabilities and the revision of estimates of potential legal liabilities could have a material impact on our financial position and results of operations.
Income Taxes — Estimates of Deferred Taxes, Valuation Allowances and Uncertain Tax Positions
We estimate our income taxes based on the various jurisdictions where we conduct business. Significant judgment is required in determining our worldwide income tax provision. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax rules and the potential for future adjustment of our uncertain tax positions by the United States Internal Revenue Service or other taxing jurisdictions. We estimate our current tax liability and assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we show on our balance sheet. We must then assess the likelihood that our deferred tax assets will be realized. To the extent we believe that realization is not likely, we establish a valuation allowance. When we establish a valuation allowance or increase this allowance in an accounting period, we record a corresponding tax expense in our statement of operations.
At July 31, 2012, we had net deferred tax assets of $190 million which included a valuation allowance of $8 million for certain state net operating loss and state tax credit carryforwards. We recorded the valuation allowance to reflect uncertainties about whether we will be able to utilize some of our deferred tax assets before they expire. The valuation allowance is based on our estimates of taxable income for the jurisdictions in which we operate and the period over which our deferred tax assets will be
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realizable. While we have considered future taxable income in assessing the need for a valuation allowance, we could in the future be required to increase the valuation allowance to take into account additional deferred tax assets that we may be unable to realize. An increase in the valuation allowance would have an adverse impact, which could be material, on our income tax provision and net income in the period in which we record the increase.
We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not of being sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. We evaluate our uncertain tax positions on a quarterly basis. Our evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in our income tax expense in the period in which we make the change, which could have a material impact on our effective tax rate and operating results.
Results of Operations
Financial Overview
(Dollars in millions, except per share amounts) | Fiscal 2012 | Fiscal 2011 | Fiscal 2010 | 2012-2011 % Change | 2011-2010 % Change | ||||||||||||
Total net revenue | $4,151 | $3,772 | $3,403 | 10 | % | 11 | % | ||||||||||
Operating income from continuing operations | 1,177 | 1,037 | 904 | 14 | % | 15 | % | ||||||||||
Net income from continuing operations | 767 | 652 | 564 | 18 | % | 16 | % | ||||||||||
Diluted net income per share from continuing operations | $2.52 | $2.06 | $1.74 | 22 | % | 18 | % | ||||||||||
Fiscal 2012 Compared with Fiscal 2011
Total net revenue increased $379 million or 10% in fiscal 2012 compared with fiscal 2011, driven by revenue growth in our Small Business Group and our Consumer Tax segment. In our Small Business Group, revenue was up 14%. Financial Management Solutions segment revenue increased 11% due to growth in QuickBooks Online and QuickBooks Enterprise Solutions 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 20% due to fee structure changes, higher total card transaction volume, and growth in the merchant customer base. In our Tax businesses, Consumer Tax segment revenue increased 11% due to 6% growth in paid federal units and favorable offering mix. Accounting Professionals segment revenue increased 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 5%, or 9% when adjusted for the March 2012 sale of that segment's corporate banking business, due to higher mobile banking and bill-pay revenue. Other Businesses segment revenue increased 1% due to 7% growth in global revenue offset by lower Quicken revenue.
Operating income from continuing operations increased 14% in fiscal 2012 compared with fiscal 2011 due to the increase in revenue described above partially offset by higher costs and operating expenses. Excluding the $30 million fiscal 2011 goodwill and intangible asset impairment charge, total operating expenses were $159 million higher in the fiscal 2012 period, including about $144 million for higher staffing expenses and about $16 million for higher share-based compensation expenses. See “Cost of Revenue” and “Operating Expenses” later in this Item 7 for more information.
Net income from continuing operations increased 18% in fiscal 2012 compared with fiscal 2011 due to the increase in operating income, lower interest expense due to the repayment of debt during the year, and a slightly lower effective tax rate. Diluted net income per share from continuing operations for fiscal 2012 increased 22% to $2.52 as a result of the increase in net income and the decline in weighted average diluted shares compared with fiscal 2011.
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Fiscal 2011 Compared with Fiscal 2010
Total net revenue increased $369 million or 11% in fiscal 2011 compared with fiscal 2010, driven by revenue growth in our Small Business Group and our Consumer Tax segment. In our Small Business Group, revenue was up 11%. Financial Management Solutions segment revenue increased 11% due to growth in QuickBooks Online and QuickBooks Enterprise Solutions revenue and, to a lesser extent, to higher QuickBooks desktop revenue. Employee Management Solutions segment revenue increased 10% 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 11% due to growth in the merchant customer base and slightly higher transaction volume per merchant. In our Tax businesses, Consumer Tax segment revenue increased 13% due to 12% growth in total TurboTax federal units that was driven by 20% higher TurboTax Online federal units. Accounting Professionals segment revenue increased 7% due to price increases, increased pay-per-return usage, and new offerings. Financial Services segment revenue increased 4% due to growth in bill-pay revenue partially offset by the effect of the sale of that segment's lending business in the fourth quarter of fiscal 2010. Other Businesses segment revenue increased 15% due to strong performance in our Canadian and United Kingdom small business offerings and our fiscal 2010 acquisitions of Mint and Medfusion.
Operating income from continuing operations increased 15% in fiscal 2011 compared with fiscal 2010. Total cost of revenue as a percent of revenue decreased slightly due to growth in TurboTax Online units and $31 million lower expense for amortization of acquired intangible assets. Total operating expenses were $220 million higher in the fiscal 2011 period, including about $64 million for higher staffing expenses, about $47 million for higher marketing program expenses in our Small Business Group and our Consumer Tax segment, about $70 million due to operating expenses for Mint and Medfusion, and about $20 million for higher share-based compensation expenses. We also recorded a $30 million goodwill and intangible asset impairment charge for our Intuit Health reporting unit during fiscal 2011. See “Cost of Revenue” and “Operating Expenses” later in this Item 7 for more information.
Net income from continuing operations increased 16% in fiscal 2011 compared with fiscal 2010, in line with the increase in operating income for that period. Diluted net income per share from continuing operations for fiscal 2011 increased 18% to $2.06 as a result of the increase in net income and the decline in weighted average diluted shares compared with fiscal 2010.
Business Segment Results
The information below is organized in accordance with our seven reportable business segments. Results for our Financial Management Solutions segment have been adjusted for all periods presented to exclude results for our Intuit Websites business, which we classified as discontinued operations in the fourth quarter of fiscal 2012. Fiscal 2010 results for our Other Businesses segment have been adjusted to exclude results for our Intuit Real Estate Solutions business, which we classified as discontinued operations in the second quarter of fiscal 2010. See Note 8 to the financial statements in Item 8 of this Report for more information.
Segment operating income is segment net revenue less segment cost of revenue and operating expenses. Segment expenses do not include certain costs, such as corporate selling and marketing, product development, and general and administrative expenses and share-based compensation expenses, which are not allocated to specific segments. These unallocated costs totaled $745 million in fiscal 2012, $684 million in fiscal 2011 and $610 million in fiscal 2010. Unallocated costs increased in fiscal 2012 compared with fiscal 2011 and in fiscal 2011 compared with fiscal 2010 due to increases in corporate 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 15 to the financial statements in Item 8 of this Report for reconciliations of total segment operating income to consolidated operating income from continuing operations for each fiscal year presented.
We calculate revenue growth rates and segment operating margin figures using dollars in thousands. Those results may vary slightly from figures calculated using the dollars in millions presented.
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Financial Management Solutions
(Dollars in millions) | Fiscal 2012 | Fiscal 2011 | Fiscal 2010 | 2012-2011 % Change | 2011-2010 % Change | ||||||||||||
Product revenue | $ | 418 | $ | 405 | $ | 382 | |||||||||||
Service and other revenue | 273 | 217 | 177 | ||||||||||||||
Total segment revenue | $ | 691 | $ | 622 | $ | 559 | 11 | % | 11 | % | |||||||
% of total revenue | 17 | % | 17 | % | 16 | % | |||||||||||
Segment operating income | $ | 265 | $ | 243 | $ | 188 | 9 | % | 30 | % | |||||||
% of related revenue | 38 | % | 39 | % | 34 | % | |||||||||||
Financial Management Solutions (FMS) product revenue is derived primarily from QuickBooks desktop software products, including QuickBooks Pro, QuickBooks Premier, and QuickBooks Enterprise Solutions, and from 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.
Fiscal 2012 Compared with Fiscal 2011
FMS total net revenue increased $69 million or 11% in fiscal 2012 compared with fiscal 2011. Total QuickBooks units, including desktop and online units, were flat in fiscal 2012. Overall FMS revenue growth was driven by strong unit growth in our higher-priced QuickBooks Online and QuickBooks Enterprise Solutions offerings. Higher revenue from financial supplies also contributed to the increase in FMS revenue, fueled by sales of our new Secure Plus checks with ChecklockTM fraud protection.
FMS segment operating income as a percentage of related revenue decreased slightly to 38% in fiscal 2012 from 39% in fiscal 2011. Segment operating income declined in fiscal 2012 due to about $38 million in higher staffing expenses associated with higher headcount, partially offset by about $11 million in lower expenses for advertising and other marketing programs.
Fiscal 2011 Compared with Fiscal 2010
FMS total net revenue increased $63 million or 11% in fiscal 2011 compared with fiscal 2010. Higher FMS revenue in fiscal 2011 was driven by strong growth in QuickBooks Online and QuickBooks Enterprise Solutions revenue and, to a lesser extent, by growth in QuickBooks desktop revenue. Higher average selling prices for QuickBooks offerings more than offset flat total QuickBooks software units for fiscal 2011.
FMS segment operating income as a percentage of related revenue increased to 39% in fiscal 2011 from 34% in fiscal 2010. Segment operating income improved in fiscal 2011 due to the increase in revenue described above, about $23 million in lower staffing expenses, and cost of product revenue efficiencies, partially offset by about $11 million in higher expenses for advertising and other marketing programs.
Employee Management Solutions
(Dollars in millions) | Fiscal 2012 | Fiscal 2011 | Fiscal 2010 | 2012-2011 % Change | 2011-2010 % Change | ||||||||||||
Product revenue | $ | 280 | $ | 261 | $ | 249 | |||||||||||
Service and other revenue | 232 | 196 | 169 | ||||||||||||||
Total segment revenue | $ | 512 | $ | 457 | $ | 418 | 12 | % | 10 | % | |||||||
% of total revenue | 12 | % | 12 | % | 12 | % | |||||||||||
Segment operating income | $ | 314 | $ | 271 | $ | 253 | 16 | % | 7 | % | |||||||
% of related revenue | 61 | % | 59 | % | 60 | % | |||||||||||
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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 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.
Fiscal 2012 Compared with Fiscal 2011
EMS total net revenue increased $55 million or 12% in fiscal 2012 compared with fiscal 2011. Revenue was higher in fiscal 2012 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 July 31, 2012 total payroll customers were up 2% while online payroll customers were up 19% compared with July 31, 2011.
EMS segment operating income as a percentage of related revenue increased to 61% in fiscal 2012 from 59% in fiscal 2011. Segment operating income was higher in fiscal 2012 due to the increases in revenue described above, partially offset by higher staffing expenses associated with growing our online payroll business.
Fiscal 2011 Compared with Fiscal 2010
EMS total net revenue increased $39 million or 10% in fiscal 2011 compared with fiscal 2010. Revenue was higher in fiscal 2011 due to more customers choosing our Enhanced desktop payroll and online payroll solutions, improved customer adoption of payroll direct deposit services, and price increases for desktop payroll customers. At July 31, 2011 total payroll customers were up 2% while online payroll customers were up 13% compared with July 31, 2010.
EMS segment operating income as a percentage of related revenue decreased slightly to 59% in fiscal 2011 from 60% in fiscal 2010. Revenue growth as described above was partially offset by higher cost of revenue associated with offering mix.
Payment Solutions
(Dollars in millions) | Fiscal 2012 | Fiscal 2011 | Fiscal 2010 | 2012-2011 % Change | 2011-2010 % Change | ||||||||||||
Product revenue | $ | 26 | $ | 31 | $ | 31 | |||||||||||
Service and other revenue | 391 | 317 | 282 | ||||||||||||||
Total segment revenue | $ | 417 | $ | 348 | $ | 313 | 20 | % | 11 | % | |||||||
% of total revenue | 10 | % | 9 | % | 9 | % | |||||||||||
Segment operating income | $ | 107 | $ | 64 | $ | 67 | 66 | % | (3 | %) | |||||||
% of related revenue | 26 | % | 19 | % | 21 | % | |||||||||||
Payment Solutions product revenue is derived primarily from QuickBooks Point of Sale solutions. Payment Solutions service 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 Check 21 capabilities; from Web-based transaction processing services for online merchants; and from GoPayment mobile payment processing services.
Fiscal 2012 Compared with Fiscal 2011
Payment Solutions total net revenue increased $69 million or 20% in fiscal 2012 compared with fiscal 2011, driven by fee structure changes, higher total card transaction volume, and 13% growth in the merchant customer base.
Payment Solutions segment operating income as a percentage of related revenue increased to 26% in fiscal 2012 from 19% in fiscal 2011 due to the increases in revenue described above and lower agent fees in cost of revenue, partially offset by higher data center hosting expenses.
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Fiscal 2011 Compared with Fiscal 2010
Payment Solutions total net revenue increased $35 million or 11% in fiscal 2011 compared with fiscal 2010, driven by 11% growth in the merchant customer base. Transaction volume per merchant increased 1% in fiscal 2011 compared with fiscal 2010.
Payment Solutions segment operating income as a percentage of related revenue decreased to 19% in fiscal 2011 from 21% in fiscal 2010 due to higher interchange fees in cost of revenue and higher expenses for staffing and advertising and other marketing programs, which more than offset the increase in revenue described above.
Consumer Tax
(Dollars in millions) | Fiscal 2012 | Fiscal 2011 | Fiscal 2010 | 2012-2011 % Change | 2011-2010 % Change | ||||||||||||
Product revenue | $ | 218 | $ | 261 | $ | 275 | |||||||||||
Service and other revenue | 1,223 | 1,037 | 871 | ||||||||||||||
Total segment revenue | $ | 1,441 | $ | 1,298 | $ | 1,146 | 11 | % | 13 | % | |||||||
% of total revenue | 35 | % | 34 | % | 34 | % | |||||||||||
Segment operating income | $ | 886 | $ | 850 | $ | 746 | 4 | % | 14 | % | |||||||
% of related revenue | 61 | % | 65 | % | 65 | % | |||||||||||
Consumer Tax product revenue is derived primarily from TurboTax federal and state consumer and small business desktop tax return preparation software. Consumer Tax service and other revenue is derived primarily from TurboTax Online tax return preparation services and electronic tax filing services.
Fiscal 2012 Compared with Fiscal 2011
Consumer Tax total net revenue increased $143 million or 11% in fiscal 2012 compared with fiscal 2011 due to 6% growth in paid federal units and favorable offering mix, including improved conversion from free to paid offerings. Revenue from our debit card program was higher in fiscal 2012 because customer card usage was higher and because we managed the program internally rather than offering it through a partner and sharing the revenue, as we did in fiscal 2011. Total online federal units grew 9% and represented approximately 77% of total federal TurboTax units for the 2011 consumer tax season, up from approximately 75% for the 2010 tax season.
Consumer Tax segment operating income as a percentage of related revenue decreased to 61% in fiscal 2012 from 65% in fiscal 2011. Segment cost of service revenue as a percentage of service revenue was higher in fiscal 2012 due to costs associated with our new Free Tax Advice and debit card programs and to higher data center hosting costs. Segment operating expenses also increased about $43 million for staffing expenses and about $15 million for advertising and other marketing programs compared with the fiscal 2011 period.
Fiscal 2011 Compared with Fiscal 2010
Consumer Tax total net revenue increased $152 million or 13% in fiscal 2011 compared with fiscal 2010. Total TurboTax federal units were up 12% in that period, driven by TurboTax Online federal unit growth of 20%. Online federal units represented approximately 75% of total federal TurboTax units for the 2010 consumer tax season, up from approximately 70% for the 2009 tax season.
Consumer Tax segment operating income as a percentage of related revenue was flat at 65% in fiscal 2011 and fiscal 2010. The revenue increase described above was partially offset by higher costs and expenses, including about $29 million in higher expenses for advertising and other marketing programs.
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Accounting Professionals
(Dollars in millions) | Fiscal 2012 | Fiscal 2011 | Fiscal 2010 | 2012-2011 % Change | 2011-2010 % Change | ||||||||||||
Product revenue | $ | 370 | $ | 340 | $ | 303 | |||||||||||
Service and other revenue | 53 | 59 | 70 | ||||||||||||||
Total segment revenue | $ | 423 | $ | 399 | $ | 373 | 6 | % | 7 | % | |||||||
% of total revenue | 10 | % | 11 | % | 11 | % | |||||||||||
Segment operating income | $ | 249 | $ | 228 | $ | 210 | 9 | % | 9 | % | |||||||
% of related revenue | 59 | % | 57 | % | 56 | % | |||||||||||
Accounting Professionals product revenue is derived primarily from ProSeries and Lacerte professional tax preparation software products and from QuickBooks Premier Accountant Edition and ProAdvisor Program subscriptions for professional accountants. Accounting Professionals service and other revenue is derived primarily from Intuit Tax Online tax return preparation services, electronic tax filing services, bank product transmission services, and training services.
Fiscal 2012 Compared with Fiscal 2011
Accounting Professionals total net revenue increased $24 million or 6% in fiscal 2012 compared with fiscal 2011 due to price increases in our professional tax business and higher QuickBooks Premier Accountant Edition and ProAdvisor Program revenue.
Accounting Professionals segment operating income as a percentage of related revenue increased to 59% in fiscal 2012 from 57% in fiscal 2011 due to the increases in revenue described above and relatively stable operating expenses.
Fiscal 2011 Compared with Fiscal 2010
Accounting Professionals total net revenue increased $26 million or 7% in fiscal 2011 compared with fiscal 2010 due to price increases, increased pay-per-return usage, and new offerings such as Intuit Tax Online.
Accounting Professionals segment operating income as a percentage of related revenue increased slightly to 57% in fiscal 2011 from 56% in fiscal 2010. Higher revenue for the fiscal 2011 period was partially offset by modestly higher staffing and other operating expenses.
Financial Services
(Dollars in millions) | Fiscal 2012 | Fiscal 2011 | Fiscal 2010 | 2012-2011 % Change | 2011-2010 % Change | ||||||||||||
Product revenue | $ | — | $ | — | $ | — | |||||||||||
Service and other revenue | 362 | 346 | 332 | ||||||||||||||
Total segment revenue | $ | 362 | $ | 346 | $ | 332 | 5 | % | 4 | % | |||||||
% of total revenue | 9 | % | 9 | % | 10 | % | |||||||||||
Segment operating income | $ | 86 | $ | 83 | $ | 71 | 4 | % | 17 | % | |||||||
% of related revenue | 24 | % | 24 | % | 21 | % | |||||||||||
Financial Services service and other revenue is derived primarily from online and mobile banking solutions that are hosted in our data centers and delivered as software as a service to financial institutions. Financial Services service and other revenue also includes fees for implementation services.
Fiscal 2012 Compared with Fiscal 2011
Financial Services total net revenue increased $16 million or 5% in fiscal 2012 compared with fiscal 2011. Revenue for fiscal 2012 grew 9% when adjusted for the March 2012 sale of our corporate banking business. Revenue growth for fiscal 2012 was
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primarily due to higher mobile banking revenue and, to a lesser extent, to higher bill-pay revenue. Mobile banking revenue grew due to an increase in mobile banking end users and usage. Bill-pay revenue grew due to a 12% increase in bill-pay end users and higher transaction volumes during fiscal 2012.
Financial Services segment operating income as a percentage of related revenue was flat at 24% in fiscal 2012 and fiscal 2011. Higher revenue as described above and slightly lower staffing expenses associated with lower headcount was partially offset by higher data center hosting expenses.
Fiscal 2011 Compared with Fiscal 2010
Financial Services total net revenue increased $14 million or 4% in fiscal 2011 compared with fiscal 2010. Revenue growth in fiscal 2011 was driven by higher bill-pay revenue, partially offset by the effect of the sale of this segment's lending business in the fourth quarter of fiscal 2010. Revenue from the lending business was less than $10 million for all of fiscal 2010. Bill-pay revenue grew due to a 15% increase in bill-pay end users and higher transaction volumes for fiscal 2011 compared with fiscal 2010. Continuing downward price pressure that resulted in lower revenue per user partially offset the effect of growth in the bill-pay end user customer base.
Financial Services segment operating income as a percentage of related revenue increased to 24% in fiscal 2011 from 21% in fiscal 2010 due to higher revenue partially offset by higher staffing expenses.
Other Businesses
(Dollars in millions) | Fiscal 2012 | Fiscal 2011 | Fiscal 2010 | 2012-2011 % Change | 2011-2010 % Change | ||||||||||||
Product revenue | $ | 167 | $ | 183 | $ | 172 | |||||||||||
Service and other revenue | 138 | 119 | 90 | ||||||||||||||
Total segment revenue | $ | 305 | $ | 302 | $ | 262 | 1 | % | 15 | % | |||||||
% of total revenue | 7 | % | 8 | % | 8 | % | |||||||||||
Segment operating income | $ | 68 | $ | 67 | $ | 64 | 1 | % | 4 | % | |||||||
% of related revenue | 22 | % | 22 | % | 25 | % | |||||||||||
Other Businesses consist primarily of our personal finance offerings, Quicken and Mint; Intuit Health; and our global businesses, primarily in Canada, the United Kingdom, and Singapore. Quicken product revenue is derived primarily from Quicken desktop software products. Quicken service and other revenue is derived primarily from fees from consumer online transactions and Quicken Loans trademark royalties. Mint service and other revenue consists primarily of online lead generation fees. Intuit Health service and other revenue consists primarily of online patient-to-provider communication services and fees for implementation services. In Canada, product revenue is derived primarily from localized versions of QuickBooks and Quicken as well as consumer desktop tax return preparation software and professional tax preparation products. Service and other revenue in Canada consists primarily of revenue from QuickBooks support plans, payroll services, and merchant payment processing services. In the United Kingdom, product revenue is derived primarily from localized versions of QuickBooks and QuickBooks Payroll. In Singapore and other international locations, service and other revenue is derived from QuickBooks Online.
Fiscal 2012 Compared with Fiscal 2011
Other Businesses total net revenue increased $3 million or 1% in fiscal 2012 compared with fiscal 2011. Global revenue grew 7% in fiscal 2012, or 9% when adjusted for unfavorable currency impacts, while Quicken revenue was lower due to lower Quicken unit sales.
Other Businesses segment operating income as a percentage of related revenue was flat at 22% in fiscal 2012 and fiscal 2011. Higher fiscal 2012 revenue as described above was partially offset by higher costs and expenses associated with continued investment in our healthcare business and global market opportunities.
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Fiscal 2011 Compared with Fiscal 2010
Other Businesses total net revenue increased $40 million or 15% in fiscal 2011 compared with fiscal 2010 due to strong performance in our Canadian and United Kingdom small business offerings and our fiscal 2010 acquisitions of Mint and Medfusion, which became our Intuit Health business. In addition, favorable currency impacts in our Canadian and United Kingdom businesses accounted for approximately three percentage points of Other Businesses revenue growth in fiscal 2011.
Other Businesses segment operating income as a percentage of related revenue decreased to 22% in fiscal 2011 from 25% in fiscal 2010. Higher fiscal 2011 revenue as described above was offset by higher costs and expenses associated with our fiscal 2010 acquisitions of Mint and Medfusion and by our continued investment in emerging market opportunities.
Cost of Revenue
(Dollars in millions) | Fiscal 2012 | % of Related Revenue | Fiscal 2011 | % of Related Revenue | Fiscal 2010 | % of Related Revenue | ||||||||||||||
Cost of product revenue | $ | 145 | 10 | % | $ | 143 | 10 | % | $ | 144 | 10 | % | ||||||||
Cost of service and other revenue | 601 | 22 | % | 495 | 22 | % | 447 | 22 | % | |||||||||||
Amortization of acquired technology | 14 | n/a | 12 | n/a | 43 | n/a | ||||||||||||||
Total cost of revenue | $ | 760 | 18 | % | $ | 650 | 17 | % | $ | 634 | 19 | % | ||||||||
Our cost of revenue has three components: (1) cost of product revenue, which includes the direct costs of manufacturing and shipping or electronically downloading our desktop software products; (2) cost of service and other revenue, which reflects direct costs associated with providing services, including data center costs related to delivering online services; and (3) amortization of acquired technology, which represents the cost of amortizing developed technologies that we have obtained through acquisitions over their useful lives.
Fiscal 2012 Compared with Fiscal 2011
Cost of service and other revenue as a percentage of service and other revenue was stable in fiscal 2012 compared with fiscal 2011. In fiscal 2012 we incurred higher costs associated with the new Free Tax Advice and debit card programs in our Consumer Tax segment. Partially offsetting the impact of these higher costs, agent fees in our Payment Solutions business were lower and online tax return preparation and electronic filing service revenue grew slightly faster than total service revenue. Online tax revenues have relatively lower costs of revenue compared with our other service offerings.
Fiscal 2011 Compared with Fiscal 2010
Cost of service and other revenue as a percentage of service and other revenue was stable in fiscal 2011 compared with fiscal 2010. In fiscal 2011 interchange fees in our Payment Solutions business were higher. Unit growth in TurboTax Online, which has relatively lower costs of revenue compared with our other service offering, partially offset the impact of these higher costs.
Amortization of acquired technology decreased in fiscal 2011 compared with fiscal 2010 due to the completion of the amortization for certain Intuit Financial Services intangible assets that we acquired in fiscal 2007.
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Operating Expenses
(Dollars in millions) | Fiscal 2012 | % of Total Net Revenue | Fiscal 2011 | % of Total Net Revenue | Fiscal 2010 | % of Total Net Revenue | ||||||||||||||
Selling and marketing | $ | 1,118 | 27 | % | $ | 1,040 | 28 | % | $ | 913 | 27 | % | ||||||||
Research and development | 669 | 16 | % | 620 | 16 | % | 564 | 17 | % | |||||||||||
General and administrative | 388 | 9 | % | 352 | 9 | % | 346 | 10 | % | |||||||||||
Amortization of other purchased intangible assets | 39 | 1 | % | 43 | 1 | % | 42 | 1 | % | |||||||||||
Goodwill and intangible asset impairment charge | — | — | % | 30 | 1 | % | — | — | % | |||||||||||
Total operating expenses | $ | 2,214 | 53 | % | $ | 2,085 | 55 | % | $ | 1,865 | 55 | % | ||||||||
Fiscal 2012 Compared with Fiscal 2011
Total operating expenses as a percentage of total net revenue decreased to 53% in fiscal 2012 from 55% in fiscal 2011. Revenue grew $379 million while total operating expenses excluding the $30 million fiscal 2011 impairment charge increased $159 million in fiscal 2012. Total operating expenses increased about $144 million for higher staffing expenses due to higher headcount and about $16 million for higher share-based compensation expenses. Share-based compensation expenses increased because the market price of our common stock was higher at the time of our broad-based July 2011 grants of stock options and restricted stock units compared with the prior fiscal year. This increased the total fair value of these awards at the time of grant, which is being recognized as expense over the related service periods.
Fiscal 2011 Compared with Fiscal 2010
Total operating expenses as a percentage of total net revenue were flat at 55% in fiscal 2011 and in fiscal 2010. Revenue grew $369 million while total operating expenses increased $220 million in fiscal 2011. Total operating expenses increased about $64 million for staffing expenses, about $47 million for higher marketing program expenses in our Small Business Group and in our Consumer Tax segment, about $70 million for the operating expenses of acquired businesses, and about $20 million for higher share-based compensation expenses. Share-based compensation expenses increased because the market price of our common stock was higher at the time of our broad-based July 2010 grants of stock options and restricted stock units compared with the prior fiscal year. This increased the total fair value of these awards at the time of grant, which is being recognized as expense over the related service periods.
In fiscal 2011 we also recorded a $30 million goodwill and intangible asset impairment charge for our Intuit Health reporting unit. See "Fair Value Measurements - Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis," in Note 2 to the financial statements in Item 8 of this Report for more information.
Non-Operating Income and Expenses
Interest Expense
In March 2007 we issued five-year and ten-year senior unsecured notes totaling $1 billion. In March 2012 we repaid $500 million of those senior notes when they became due using cash from operations. Interest expense of $50 million in fiscal 2012, $60 million in fiscal 2011, and $61 million in fiscal 2010 consisted primarily of interest on these senior notes. See Note 10 to the financial statements in Item 8 of this Report for more information.
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Interest and Other Income
(In millions) | Fiscal 2012 | Fiscal 2011 | Fiscal 2010 | ||||||||
Interest income | $ | 9 | $ | 10 | $ | 9 | |||||
Net gains on executive deferred compensation plan assets | — | 6 | 4 | ||||||||
Gain on disposition of stock warrants | 10 | — | — | ||||||||
Net foreign exchange (loss) gain | — | (1 | ) | 1 | |||||||
Other | 5 | 4 | (1 | ) | |||||||
Total interest and other income | $ | 24 | $ | 19 | $ | 13 | |||||
Interest and other income consists primarily of interest income and net gains and losses on executive deferred compensation plan assets. Lower average invested balances and lower interest rates resulted in slightly lower interest income in fiscal 2012 compared with fiscal 2011. Higher average invested balances and higher interest rates resulted in slightly higher interest income in fiscal 2011 compared with fiscal 2010. In accordance with authoritative guidance, we record gains and losses associated with executive deferred compensation plan assets in interest and other income and gains and losses associated with the related liabilities in operating expenses. The total amounts recorded in operating expenses generally offset the total amounts recorded in interest and other income.
In connection with our acquisition of Digital Insight Corporation in fiscal 2007, we acquired stock warrants for a privately held company. During fiscal 2012 that company was acquired and we recorded a gain of approximately $10 million on the disposition of the warrants in interest and other income.
In fiscal 2012 we sold our Financial Services segment's corporate banking business for approximately $20 million and recorded a pretax gain of approximately $4 million in interest and other income.
Income Taxes
Effective Tax Rate
Our effective tax rate for fiscal 2012 was approximately 33% and did not differ significantly from the federal statutory rate of 35%. The tax benefit we received from the domestic production activities deduction was partially offset by state income taxes.
Our effective tax rate for fiscal 2011 was approximately 35%. In that year we recorded a tax benefit of approximately $9 million related to the reinstatement of the federal research and experimentation credit through December 31, 2011 that was retroactive to January 1, 2010. That benefit was offset almost entirely by the impact of a non-deductible charge related to the impairment of goodwill. Excluding those discrete items, our effective tax rate for that period was approximately 35% and did not differ significantly from the federal statutory rate of 35%. State income taxes were substantially offset by the tax benefit we received from the domestic production activities deduction and the federal research and experimentation credit.
Our effective tax rate for fiscal 2010 was approximately 34%. In that year we recorded discrete tax benefits of approximately $20 million that were related to foreign tax credit benefits associated with the distribution of profits from certain of our non-U.S. subsidiaries and our plans to indefinitely reinvest substantially all remaining non-U.S. earnings in support of our international expansion plans. Excluding those discrete tax benefits, our effective tax rate for fiscal 2010 was approximately 36% and did not differ significantly from the federal statutory rate of 35%. State income taxes were substantially offset by the tax benefit we received from the domestic production activities deduction and the federal research and experimentation credit.
See Note 11 to the financial statements in Item 8 of this Report for more information about our effective tax rates.
Net Deferred Tax Assets
At July 31, 2012, we had net deferred tax assets of $190 million which included a valuation allowance of $8 million for certain state net operating loss and state tax credit carryforwards. We recorded the valuation allowance to reflect uncertainties about whether we will be able to utilize some of our deferred tax assets before they expire. While we believe our current valuation allowance is sufficient, we could in the future be required to increase the valuation allowance to take into account additional deferred tax assets that we may be unable to realize. We assess the need for an adjustment to the valuation allowance on a
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quarterly basis. The assessment is based on our estimates of future sources of taxable income for the jurisdictions in which we operate and the periods over which our deferred tax assets will be realizable. See Note 11 to the financial statements in Item 8 of this Report for more information.
We provide U.S. federal income taxes on the earnings of foreign subsidiaries unless the subsidiaries' earnings are intended to be indefinitely reinvested in our international operations. To the extent that foreign earnings previously treated as indefinitely reinvested are repatriated, the related U.S. tax liability may, subject to certain limitations, be reduced by any foreign income taxes paid on these earnings. At July 31, 2012, the cumulative amount of earnings upon which U.S. income taxes had not been provided was approximately $43 million. The unrecognized deferred tax liability for these earnings was approximately $12 million.
Discontinued Operations
During fiscal 2012 and fiscal 2010 we sold or decided to sell the businesses described below. See Note 8 to the financial statements in Item 8 of this Report for a more complete description of these discontinued operations and the impact that they have had on our statements of operations for the fiscal periods presented.
Intuit Websites
In July 2012 management approved a plan to sell our Intuit Websites business, which was a component of our Financial Management Solutions reporting segment. On August 10, 2012 we signed a definitive agreement to sell our Intuit Websites business, subject to closing conditions. We expect the sale to be completed in the first quarter of fiscal 2013 and we do not expect to record a loss on the transaction.
We determined that our Intuit Websites business became a long-lived asset held for sale in the fourth quarter of fiscal 2012. A long-lived asset classified as held for sale is measured at the lower of its carrying amount or fair value less cost to sell. Since the carrying value of Intuit Websites at July 31, 2012 was less than the estimated fair value less cost to sell, no adjustment to the carrying value of this long-lived asset was necessary at that date.
We also classified our Intuit Websites business as discontinued operations in the fourth quarter of fiscal 2012 and have segregated its operating results in our statements of operations for all periods presented. Net revenue from Intuit Websites was $76 million for the twelve months ended July 31, 2012; $79 million for the twelve months ended July 31, 2011; and $52 million for the twelve months ended July 31, 2010. Net income from discontinued operations for the twelve months ended July 31, 2012 included a net loss from Intuit Websites discontinued operations of $11 million and $36 million in tax benefits from the anticipated sale of this business. We recorded net losses from Intuit Websites discontinued operations of $18 million for the twelve months ended July 31, 2011 and $25 million for the twelve months ended July 31, 2010.
Intuit Real Estate Solutions
In January 2010 we sold our Intuit Real Estate Solutions (IRES) business for $128 million in cash and recorded a net gain on disposal of $35 million. IRES was part of our Other Businesses segment. We have accounted for IRES as discontinued operations and segregated its operating results from continuing operations in our statements of operations for all periods prior to the sale. Net revenue from IRES was $33 million and net income excluding the net gain on disposal was less than $1 million for fiscal 2010.
Liquidity and Capital Resources
Overview
At July 31, 2012, our cash, cash equivalents and investments totaled $744 million, a decrease of $677 million from July 31, 2011 due to the factors described in “Statements of Cash Flows” below. Our primary source of liquidity has been cash from operations, which entails the collection of accounts receivable for products and services. Our primary uses of cash have been for research and development programs, selling and marketing activities, capital projects, acquisitions of businesses, debt service costs, repurchases of our common stock under our stock repurchase programs, and the payment of cash dividends.
In March 2007 we issued five-year and ten-year senior unsecured notes totaling $1 billion. We repaid the five-year notes when they became due in March 2012 using cash from operations. We also have a $500 million unsecured revolving line of credit
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facility. To date we have not borrowed under the facility. The senior notes and the revolving line of credit are described later in this Item 7.
The following table summarizes selected measures of our liquidity and capital resources at the dates indicated:
(Dollars in millions) | July 31, 2012 | July 31, 2011 | $ Change | % Change | ||||||||||
Cash, cash equivalents and investments | $ | 744 | $ | 1,421 | $ | (677 | ) | (48 | )% | |||||
Long-term investments | 75 | 63 | 12 | 19 | % | |||||||||
Current portion of long-term debt | — | 500 | (500 | ) | N/A | |||||||||
Long-term debt | 499 | 499 | — | — | % | |||||||||
Working capital | 258 | 449 | (191 | ) | (43 | )% | ||||||||
Ratio of current assets to current liabilities | 1.2 : 1 | 1.2 : 1 | ||||||||||||
Auction Rate Securities
At July 31, 2012, we held a total of $41 million in municipal auction rate securities which we classified as long-term investments on our balance sheet based on the maturities of the underlying securities. All of these securities are rated A or better by the major credit rating agencies. Due to a decrease in liquidity in the global credit markets, in February 2008 auctions began failing for the municipal auction rate securities we held and in accordance with authoritative guidance we began estimating their fair value based on a discounted cash flow model that we prepare. See Note 2 to the financial statements in Item 8 of this Report for more information. Based on our expected operating cash flows and our other sources of cash, we do not believe that the reduction in liquidity of the municipal auction rate securities we held at July 31, 2012 will have a material impact on our overall ability to meet our liquidity needs.
Statements of Cash Flows
The following table summarizes selected items from our statements of cash flows for fiscal 2012, 2011 and 2010. See the financial statements in Item 8 of this Report for complete statements of cash flows for those periods.
Fiscal | Fiscal | Fiscal | |||||||||
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||||
Net cash provided by (used in): | |||||||||||
Operating activities | $ | 1,246 | $ | 1,013 | $ | 998 | |||||
Investing activities | (225 | ) | 497 | (997 | ) | ||||||
Financing activities | (1,344 | ) | (1,006 | ) | (467 | ) | |||||
Effect of exchange rate changes on cash | (6 | ) | 4 | 1 | |||||||
Increase (decrease) in cash and cash equivalents | $ | (329 | ) | $ | 508 | $ | (465 | ) | |||
Operating Activities
During fiscal 2012 we generated $1.2 billion in cash from our continuing operations. This included net income from continuing operations of $767 million, and adjustments for depreciation and amortization of $242 million and share-based compensation expense of $169 million. Share-based compensation increased in fiscal 2012 compared with fiscal 2011 because the market price of our common stock was higher at the time of our broad-based July 2011 grants of stock options and restricted stock units compared with the prior fiscal year.
During fiscal 2011 we generated $1.0 billion in cash from our continuing operations. This included net income from continuing operations of $652 million, and adjustments for depreciation and amortization of $241 million and share-based compensation of $153 million. Amortization expense was lower in fiscal 2011 compared with 2010 due to the completion of the amortization for certain Intuit Financial Services intangible assets that we acquired in fiscal 2007. Share-based compensation increased in fiscal 2011 compared with fiscal 2010 because the market price of our common stock was higher at the time of our broad-based July 2010 grants of stock options and restricted stock units compared with the prior fiscal year.
During fiscal 2010 we generated $998 million in cash from our continuing operations. This included net income from continuing operations of $564 million, and adjustments for depreciation and amortization of $256 million and share-based
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compensation of $135 million. Amortization expense was lower in fiscal 2010 compared with 2009 due to the completion of the amortization for certain Intuit Financial Services intangible assets that we acquired in fiscal 2007.
Investing Activities
We used $225 million in cash for investing activities during fiscal 2012. We received $349 million in cash from net sales of investments and we used $392 million in cash for acquisitions of businesses (primarily Demandforce) and $186 million in cash for capital expenditures.
We generated $497 million in cash from investing activities during fiscal 2011. We received $697 million in cash from net sales of investments and we used $213 million in cash for capital expenditures.
We used $997 million in cash for investing activities during fiscal 2010. We received a net $122 million in cash from the sale of our Intuit Real Estate Solutions business. We used $895 million in cash for net purchases of investments, $218 million in cash for acquisitions of businesses (primarily Mint and Medfusion), and $130 million in cash for capital expenditures.
Financing Activities
We used $1.3 billion in cash for financing activities during fiscal 2012. We used $500 million in cash to repay senior notes when they became due in March 2012. We also used $900 million for the repurchase of common stock under our stock repurchase programs and $178 million for the payment of cash dividends on our common stock, partially offset by the receipt of $164 million in cash from the issuance of common stock under employee stock plans.
We used $1.0 billion in cash for financing activities during fiscal 2011, including $1.4 billion for the repurchase of common stock under our stock repurchase programs partially offset by the receipt of $283 million from the issuance of common stock under employee stock plans.
We used $467 million in cash for financing activities during fiscal 2010, including $900 million for the repurchase of common stock under our stock repurchase programs partially offset by receipt of $416 million from the issuance of common stock under employee stock plans.
Stock Repurchase Programs
Our Board of Directors has authorized a series of common stock repurchase programs. Shares of common stock repurchased under these programs become treasury shares. During fiscal 2012 we repurchased 16.9 million shares of our common stock under these programs for $900 million; during fiscal 2011 we repurchased 28.2 million shares for $1.4 billion; and during fiscal 2010 we repurchased 28.7 million shares for $900 million. At July 31, 2012, we had authorization from our Board of Directors to expend up to an additional $1.7 billion for stock repurchases through August 15, 2014. We currently expect to continue repurchasing our common stock on a quarterly basis; however, 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.
Dividends on Common Stock
During fiscal 2012 we declared and paid cash dividends that totaled $0.60 per share of outstanding common stock or approximately $178 million. In August 2012 our Board of Directors declared a quarterly cash dividend of $0.17 per share of outstanding common stock payable on October 18, 2012 to stockholders of records at the close of business on October 10, 2012. We currently expect to continue paying comparable cash dividends on a quarterly basis; however, 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.
Business Combinations
We completed the business combinations described below during the three fiscal years ended July 31, 2012. We have included the results of operations for each of them in our consolidated results of operations from their respective dates of acquisition. Their results of operations for periods prior to the dates of acquisition were not material, individually or in the aggregate, when compared with our consolidated results of operations.
On May 18, 2012 we acquired all of the outstanding equity interests of Demandforce, Inc. for total cash and other consideration of approximately $449 million. The $449 million included approximately $44 million for the fair value of assumed equity
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awards that is being charged to expense over service periods of up to four years. Demandforce is a provider of online marketing and customer communication solutions for small businesses and became part of our Financial Management Solutions segment.
On May 21, 2010 we acquired privately held Medfusion, Inc. for total consideration of approximately $89 million. The total consideration included approximately $10 million for the fair value of cash retention bonuses that is being charged to expense over a three year service period. Medfusion is a provider of online patient-to-provider communication solutions and became part of our Other Businesses segment.
On November 2, 2009 we acquired all of the outstanding equity interests of Mint Software Inc. for total consideration of approximately $170 million. The total consideration included approximately $24 million for cash retention bonuses and the fair value of assumed equity awards and Intuit common stock issued to the holder of Mint Series D Preferred Stock. The total of $24 million is being charged to expense over a three year service period. Mint is a provider of online personal finance services and became part of our Other Businesses segment.
Commitments for Senior Unsecured Notes
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). We repaid the 2012 Notes when they became due using cash from operations. The 2017 Notes are redeemable by Intuit at any time, subject to a make-whole premium. Interest is payable semiannually on March 15 and September 15. At July 31, 2012, our maximum commitment for interest payments under the 2017 Notes was $144 million.
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 the London InterBank Offered Rate (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 customer 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 July 31, 2012. We may use amounts borrowed under this credit facility for general corporate purposes, including future acquisitions. To date we have not borrowed under the credit facility. We monitor counterparty risk associated with the institutional lenders that are providing the credit facility. We currently believe that the credit facility will be available to us should we choose to borrow under it.
Liquidity and Capital Resource Requirements
Our cash, cash equivalents and investments totaled $744 million at July 31, 2012. Of this amount, less than 20% was held by our foreign subsidiaries and subject to repatriation tax considerations. We intend to permanently reinvest a significant portion of our earnings from foreign operations, and we currently do not anticipate that we will need funds generated from foreign operations to fund our domestic operations. In the event that funds from foreign operations are needed to fund operations in the United States, if U.S. taxes have not been previously provided on the related earnings we would provide for and pay additional U.S. taxes at the time we change our intention with regard to the reinvestment of those earnings.
We evaluate, on an ongoing basis, the merits of acquiring technology or businesses, or establishing strategic relationships with and investing in other companies. We may decide to use cash and cash equivalents, investments, and our revolving line of credit facility to fund such activities in the future.
Based on past performance and current expectations, we believe that our cash and cash equivalents, investments and cash generated from operations will be sufficient to meet anticipated seasonal working capital needs, capital expenditure requirements, contractual obligations, commitments, debt service requirements and other liquidity requirements associated with our operations for at least the next 12 months. We expect to return excess cash generated by operations to our stockholders through repurchases of our common stock and payment of cash dividends, after taking into account these operating and strategic cash needs.
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Off-Balance Sheet Arrangements
At July 31, 2012, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
Contractual Obligations
The following table summarizes our known contractual obligations to make future payments at July 31, 2012:
Payments Due by Period | |||||||||||||||||||
Less than | 1-3 | 3-5 | More than | ||||||||||||||||
(In millions) | 1 year | years | years | 5 years | Total | ||||||||||||||
Amounts due under executive deferred compensation plan | $ | 56 | $ | — | $ | — | $ | — | $ | 56 | |||||||||
Senior unsecured notes | — | — | 500 | — | 500 | ||||||||||||||
Interest and fees due on long-term obligations | 29 | 59 | 59 | — | 147 | ||||||||||||||
License fee payable (1) | 10 | 20 | 20 | 20 | 70 | ||||||||||||||
Operating leases | 57 | 109 | 87 | 174 | 427 | ||||||||||||||
Purchase obligations (2) | 89 | 130 | 78 | — | 297 | ||||||||||||||
Total contractual obligations (3) | $ | 241 | $ | 318 | $ | 744 | |||||||||||||