10-Q 1 fy15q310qdocument.htm 10-Q FY15 Q3 10Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________
FORM 10-Q
þ
 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the quarterly period ended April 30, 2015
OR
o
 
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the transition period from ____________ to ____________ .

Commission File Number 0-21180
INTUIT INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
 
77-0034661
(IRS employer identification no.)
 
2700 Coast Avenue, Mountain View, CA 94043
(Address of principal executive offices)
 
 
 
 
 
(650) 944-6000
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer 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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 275,668,858 shares of Common Stock, $0.01 par value, were outstanding at May 18, 2015.
 



INTUIT INC.
FORM 10-Q
INDEX

 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-31.01
 EX-31.02
 EX-32.01
 EX-32.02
 EX-101.INS XBRL Instance Document
 EX-101.SCH XBRL Taxonomy Extension Schema
 EX-101.CAL XBRL Taxonomy Extension Calculation Linkbase
 EX-101.LAB XBRL Taxonomy Extension Label Linkbase
 EX-101.PRE XBRL Taxonomy Extension Presentation Linkbase
 EX-101.DEF XBRL Taxonomy Extension Definition Linkbase

Intuit, the Intuit logo, QuickBooks, TurboTax, Lacerte, ProSeries, Quicken, and Mint, among others, are registered trademarks and/or registered service marks of Intuit Inc., or one of its subsidiaries, in the United States and other countries. Other parties’ marks are the property of their respective owners.

2


PART I
ITEM 1
FINANCIAL STATEMENTS

INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
(In millions, except per share amounts)
April 30,
2015
 
April 30,
2014
 
April 30,
2015
 
April 30,
2014
Net revenue:
 
 
 
 
 
 
 
Product
$
447

 
$
735

 
$
878

 
$
1,251

Service and other
1,747

 
1,653

 
2,796

 
2,541

Total net revenue
2,194

 
2,388

 
3,674

 
3,792

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
Cost of product revenue
35

 
34

 
113

 
108

Cost of service and other revenue
173

 
130

 
457

 
363

Amortization of acquired technology
11

 
6

 
30

 
18

Selling and marketing
448

 
412

 
1,105

 
1,022

Research and development
217

 
186

 
617

 
548

General and administrative
135

 
121

 
377

 
348

Amortization of other acquired intangible assets
6

 
5

 
18

 
14

Goodwill impairment charge
263

 

 
263

 

Total costs and expenses
1,288

 
894

 
2,980

 
2,421

Operating income from continuing operations
906

 
1,494

 
694

 
1,371

Interest expense
(7
)
 
(8
)
 
(21
)
 
(24
)
Interest and other income, net
1

 
3

 
3

 
8

Income before income taxes
900

 
1,489

 
676

 
1,355

Income tax provision
399

 
505

 
325

 
465

Net income from continuing operations
501

 
984

 
351

 
890

Net income from discontinued operations

 

 

 
46

Net income
$
501

 
$
984

 
$
351

 
$
936

 
 
 
 
 
 
 
 
Basic net income per share from continuing operations
$
1.81

 
$
3.47

 
$
1.24

 
$
3.12

Basic net income per share from discontinued operations

 

 

 
0.16

Basic net income per share
$
1.81

 
$
3.47

 
$
1.24

 
$
3.28

Shares used in basic per share calculations
277

 
284

 
282

 
285

 
 
 
 
 
 
 
 
Diluted net income per share from continuing operations
$
1.78

 
$
3.39

 
$
1.22

 
$
3.06

Diluted net income per share from discontinued operations

 

 

 
0.16

Diluted net income per share
$
1.78

 
$
3.39

 
$
1.22

 
$
3.22

Shares used in diluted per share calculations
282

 
290

 
288

 
291

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.25

 
$
0.19

 
$
0.75

 
$
0.57

See accompanying notes.

3


INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
(In millions)
April 30,
2015
 
April 30,
2014
 
April 30,
2015
 
April 30,
2014
 
 
 
 
 
 
 
 
Net income
$
501

 
$
984

 
$
351

 
$
936

Other comprehensive income (loss), net of income taxes:
 
 
 
 
 
 
 
Unrealized gains on available-for-sale debt securities

 

 

 
2

Unrealized losses on available-for-sale equity securities

 
(1
)
 

 
(5
)
Foreign currency translation gains (losses)
2

 
3

 
(18
)
 
(5
)
Total other comprehensive income (loss), net
2

 
2

 
(18
)
 
(8
)
Comprehensive income
$
503

 
$
986

 
$
333

 
$
928



See accompanying notes.


4


INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
April 30,
2015
 
July 31,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,193

 
$
849

Investments
891

 
1,065

Accounts receivable, net
210

 
134

Income taxes receivable
8

 
35

Deferred income taxes
135

 
133

Prepaid expenses and other current assets
100

 
116

Current assets before funds held for customers
2,537

 
2,332

Funds held for customers
330

 
289

Total current assets
2,867

 
2,621

Long-term investments
32

 
31

Property and equipment, net
671

 
606

Goodwill
1,432

 
1,635

Acquired intangible assets, net
183

 
199

Other assets
110

 
109

Total assets
$
5,295

 
$
5,201

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
286

 
$
161

Accrued compensation and related liabilities
249

 
278

Deferred revenue
796

 
526

Income taxes payable
230

 
6

Other current liabilities
235

 
161

Current liabilities before customer fund deposits
1,796

 
1,132

Customer fund deposits
330

 
289

Total current liabilities
2,126

 
1,421

Long-term debt
499

 
499

Long-term deferred revenue
145

 
10

Other long-term obligations
204

 
193

Total liabilities
2,974

 
2,123

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock and additional paid-in capital
3,925

 
3,561

Treasury stock, at cost
(7,666
)
 
(6,430
)
Accumulated other comprehensive loss
(20
)
 
(2
)
Retained earnings
6,082

 
5,949

Total stockholders’ equity
2,321

 
3,078

Total liabilities and stockholders’ equity
$
5,295

 
$
5,201


See accompanying notes.

5


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

(In millions, except shares in thousands)
Shares of
Common
Stock
 
Common
Stock and
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Stockholders'
Equity
Balance at July 31, 2014
284,950

 
$
3,561

 
$
(6,430
)
 
$
(2
)
 
$
5,949

 
$
3,078

Comprehensive income

 

 

 
(18
)
 
351

 
333

Issuance of stock under employee stock plans
4,431

 
129

 

 

 

 
129

Stock repurchases under stock repurchase programs
(13,723
)
 

 
(1,236
)
 

 

 
(1,236
)
Dividends and dividend rights declared ($0.75 per share)

 

 

 

 
(218
)
 
(218
)
Tax benefit from share-based compensation plans

 
51

 

 

 

 
51

Share-based compensation expense

 
184

 

 

 

 
184

Balance at April 30, 2015
275,658

 
$
3,925

 
$
(7,666
)
 
$
(20
)
 
$
6,082

 
$
2,321


(In millions, except shares in thousands)
Shares of
Common
Stock
 
Common
Stock and
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
Stockholders'
Equity
Balance at July 31, 2013
299,503

 
$
3,201

 
$
(4,952
)
 
$
20

 
$
5,262

 
$
3,531

Comprehensive income

 

 

 
(8
)
 
936

 
928

Issuance of stock under employee stock plans
5,267

 
70

 
99

 

 

 
169

Stock repurchases under stock repurchase programs
(20,507
)
 

 
(1,425
)
 

 

 
(1,425
)
Dividends and dividend rights declared ($0.57 per share)

 

 

 

 
(165
)
 
(165
)
Tax benefit from share-based compensation plans

 
52

 

 

 

 
52

Share-based compensation expense

 
148

 

 

 

 
148

Balance at April 30, 2014
284,263

 
$
3,471

 
$
(6,278
)
 
$
12

 
$
6,033

 
$
3,238



See accompanying notes.

6


INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
(In millions)
April 30,
2015
 
April 30,
2014
Cash flows from operating activities:
 
 
 
Net income
$
351

 
$
936

 Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
115

 
110

Amortization of acquired intangible assets
55

 
37

Goodwill impairment charge
263

 

Share-based compensation expense
184

 
148

Pre-tax gain on sale of discontinued operations

 
(40
)
Deferred income taxes
(3
)
 
62

Tax benefit from share-based compensation plans
51

 
52

Excess tax benefit from share-based compensation plans
(51
)
 
(52
)
Other
(3
)
 
16

Total adjustments
611

 
333

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(76
)
 
(148
)
Income taxes receivable
27

 
60

Prepaid expenses and other assets
18

 
(18
)
Accounts payable
125

 
56

Accrued compensation and related liabilities
(29
)
 
(18
)
Deferred revenue
407

 
(9
)
Income taxes payable
224

 
275

Other liabilities
64

 
63

Total changes in operating assets and liabilities
760

 
261

Net cash provided by operating activities
1,722

 
1,530

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale debt securities
(785
)
 
(917
)
Sales of available-for-sale debt securities
534

 
218

Maturities of available-for-sale debt securities
406

 
318

Net change in money market funds and other cash equivalents held
 to satisfy customer fund obligations
(41
)
 
(38
)
Net change in customer fund deposits
41

 
38

Purchases of property and equipment
(183
)
 
(121
)
Acquisitions of businesses, net of cash acquired
(95
)
 
(90
)
Proceeds from divestiture of businesses

 
1,025

Other
28

 
(14
)
Net cash provided by (used in) investing activities
(95
)
 
419

Cash flows from financing activities:
 
 
 
Net proceeds from issuance of stock under employee stock plans
129

 
161

Cash paid for purchases of treasury stock
(1,234
)
 
(1,425
)
Dividends and dividend rights paid
(212
)
 
(165
)
Excess tax benefit from share-based compensation plans
51

 
52

Net cash used in financing activities
(1,266
)
 
(1,377
)
Effect of exchange rates on cash and cash equivalents
(17
)
 
(7
)
Net increase in cash and cash equivalents
344

 
565

Cash and cash equivalents at beginning of period
849

 
1,009

Cash and cash equivalents at end of period
$
1,193

 
$
1,574

See accompanying notes.

7


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

1.
Description of Business and Summary of Significant Accounting Policies
Description of Business
Intuit Inc. provides business and financial management solutions for small businesses, consumers, and accounting professionals. With flagship products and services that include QuickBooks, TurboTax, Quicken and Mint, we help customers solve important business and financial management problems such as running a small business, paying bills, filing income tax returns, and managing personal finances. ProSeries and Lacerte are Intuit’s tax preparation offerings for professional accountants. Incorporated in 1984 and headquartered in Mountain View, California, we sell our products and services primarily in the United States.
Basis of Presentation
These condensed consolidated financial statements include the financial statements of Intuit and its wholly owned subsidiaries. We have eliminated all significant intercompany balances and transactions in consolidation. We have included all adjustments, consisting only of normal recurring items, which we considered necessary for a fair presentation of our financial results for the interim periods presented.
On June 16, 2014 we acquired Check Inc. (now known as Mint Bills). We have included the results of operations for this company in our consolidated results of operations from the date of acquisition.
As discussed in Note 4, we sold our Intuit Financial Services (IFS) and Intuit Health businesses in August 2013. We have reclassified our statements of operations for all periods presented to reflect these two businesses as discontinued operations. Because the cash flows of our IFS and Intuit Health discontinued operations were not material for any period presented, we have not segregated the cash flows of those businesses from continuing operations on our statements of cash flows. Unless noted otherwise, discussions in these notes pertain to our continuing operations.
These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2014. Results for the nine months ended April 30, 2015 do not necessarily indicate the results we expect for the fiscal year ending July 31, 2015 or any other future period.
Seasonality
Historically, our QuickBooks, Consumer Tax, and Professional Tax offerings have been highly seasonal. Revenue from our QuickBooks software products has tended 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. These seasonal patterns mean that our total net revenue is usually highest during our second quarter ending January 31 and third quarter ending April 30. We typically report losses in our first quarter ending October 31 and fourth quarter ending July 31. During these quarters, revenue from our tax businesses is minimal while core operating expenses such as research and development continue at relatively consistent levels.
Significant Accounting Policies
We describe our significant accounting policies in Note 1 to the financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2014. See the discussion of changes to our policy for recognizing product revenue below. There have been no other changes to our significant accounting policies during the first nine months of fiscal 2015.
Revenue Recognition - Product Revenue
Prior to fiscal 2015, we recognized revenue from the sale of our packaged software products when legal title transferred. This was generally when our customers downloaded products from the Internet, when we shipped the products or, in the case of certain agreements, when products were delivered to retailers. Beginning in fiscal 2015, we began delivering ongoing releases for our future QuickBooks and Quicken desktop products and for our future Professional Tax solutions. As a result, revenue for these QuickBooks and Quicken offerings will be recognized as services are provided over approximately three years and revenue for our Professional Tax solutions will be recognized as services are provided over the tax year.

8


Use of Estimates

In preparing our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP), we make certain estimates and assumptions that affect the amounts reported in our financial statements and the disclosures made in the accompanying notes. For example, we use estimates in determining the appropriate levels of reserves for product returns and rebates, the collectibility of accounts receivable, the appropriate levels of various accruals including accruals for litigation contingencies, the amount of our worldwide tax provision, and the realizability of deferred tax assets. We also use estimates in determining the remaining economic lives and fair values of acquired intangible assets, property and equipment, and other long-lived assets. In addition, we use assumptions to estimate the fair value of reporting units and share-based compensation. Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates.
Computation of Net Income (Loss) Per Share
We compute basic net income or loss per share using the weighted average number of common shares outstanding during the period. We compute diluted net income per share using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of the shares issuable upon the exercise of stock options and upon the vesting of restricted stock units (RSUs) under the treasury stock method.
We include stock options with combined exercise prices, unrecognized compensation expense and tax benefits that are less than the average market price for our common stock, and RSUs with combined unrecognized compensation expense and tax benefits that are less than the average market price for our common stock, in the calculation of diluted net income per share. We exclude stock options with combined exercise prices, unrecognized compensation expense and tax benefits that are greater than the average market price for our common stock, and RSUs with combined unrecognized compensation expense and tax benefits that are greater than the average market price for our common stock, from the calculation of diluted net income per share because their effect is anti-dilutive. Under the treasury stock method, the amount that must be paid to exercise stock options, the amount of compensation expense for future service that we have not yet recognized for stock options and RSUs, and the amount of tax benefits that will be recorded in additional paid-in capital when the awards become deductible are assumed to be used to repurchase shares.
All of the RSUs we grant have dividend rights. Dividend rights are accumulated and paid when the underlying RSUs vest. Since the dividend rights are subject to the same vesting requirements as the underlying equity awards they are considered a contingent transfer of value. Consequently, the RSUs are not considered participating securities and we do not present them separately in earnings per share.
In loss periods, basic net loss per share and diluted net loss per share are the same since the effect of potential common shares is anti-dilutive and therefore excluded.

9


The following table presents the composition of shares used in the computation of basic and diluted net income per share for the periods indicated.
 
Three Months Ended
 
Nine Months Ended
(In millions, except per share amounts)
April 30,
2015
 
April 30,
2014
 
April 30,
2015
 
April 30,
2014
Numerator:
 
 
 
 
 
 
 
Net income from continuing operations
$
501

 
$
984

 
$
351

 
$
890

Net income from discontinued operations

 

 

 
46

Net income
$
501

 
$
984

 
$
351

 
$
936

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Shares used in basic per share amounts:
 
 
 
 
 
 
 
Weighted average common shares outstanding
277

 
284

 
282

 
285

 
 
 
 
 
 
 
 
Shares used in diluted per share amounts:
 
 
 
 
 
 
 
Weighted average common shares outstanding
277

 
284

 
282

 
285

Dilutive common equivalent shares from stock options
 
 
 
 
 
 
 
and restricted stock awards
5

 
6

 
6

 
6

Dilutive weighted average common shares outstanding
282

 
290

 
288

 
291

 
 
 
 
 
 
 
 
Basic and diluted net income per share:
 
 
 
 
 
 
 
Basic net income per share from continuing operations
$
1.81

 
$
3.47

 
$
1.24

 
$
3.12

Basic net income per share from discontinued operations

 

 

 
0.16

Basic net income per share
$
1.81

 
$
3.47

 
$
1.24

 
$
3.28

 
 
 
 
 
 
 
 
Diluted net income per share from continuing operations
$
1.78

 
$
3.39

 
$
1.22

 
$
3.06

Diluted net income per share from discontinued operations

 

 

 
0.16

Diluted net income per share
$
1.78

 
$
3.39

 
$
1.22

 
$
3.22

 
 
 
 
 
 
 
 
Shares excluded from computation of diluted net income
per share:
 
 
 
 
 
 
 
Weighted average stock options and restricted stock units excluded from computation due to anti-dilutive effect

 

 
2

 
3

Concentration of Credit Risk and Significant Customers
No customer accounted for 10% or more of total net revenue in the three or nine months ended April 30, 2015 or April 30, 2014. No customer accounted for 10% or more of gross accounts receivable at April 30, 2015 or July 31, 2014.
Recent Accounting Pronouncements
ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”
In April 2014 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This update raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures for discontinued operations and disposals that do not meet the definition of a discontinued operation. ASU 2014-08 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2015.



10


ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”
In May 2014 the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This update supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible that more judgment and estimates may be required within the revenue recognition process than is required under present U.S. GAAP. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. The new standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2017. Early adoption is not permitted under U.S. GAAP. ASU 2014-09 allows adoption using either of two methods: (i) retrospective to each prior reporting period presented, with the option to elect certain practical expedients; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.


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

11


Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes financial assets and financial liabilities that we measured at fair value on a recurring basis at the dates indicated, classified in accordance with the fair value hierarchy described above.
 
April 30, 2015
 
July 31, 2014
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents, primarily money market funds
$
770

 
$

 
$

 
$
770

 
$
652

 
$

 
$

 
$
652

Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds

 
495

 

 
495

 

 
701

 

 
701

Corporate notes

 
571

 

 
571

 

 
466

 

 
466

U.S. agency securities

 

 

 

 

 
42

 

 
42

Municipal auction rate securities

 

 
21

 
21

 

 

 
21

 
21

Total available-for-sale securities

 
1,066

 
21

 
1,087

 

 
1,209

 
21

 
1,230

Total assets measured at fair value on a recurring basis
$
770

 
$
1,066

 
$
21

 
$
1,857

 
$
652

 
$
1,209

 
$
21

 
$
1,882

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior notes (1)
$

 
$
542

 
$

 
$
542

 
$

 
$
556

 
$

 
$
556

______________________________
(1)
Carrying value on our balance sheet at April 30, 2015 was $499 million and at July 31, 2014 was $499 million. See Note 6.

The following table summarizes our cash equivalents and available-for-sale debt securities by balance sheet classification and level in the fair value hierarchy at the dates indicated.
 
April 30, 2015
 
July 31, 2014
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In cash and cash equivalents
$
615

 
$

 
$

 
$
615

 
$
507

 
$

 
$

 
$
507

In funds held for customers
155

 

 

 
155

 
145

 

 

 
145

Total cash equivalents
$
770

 
$

 
$

 
$
770

 
$
652

 
$

 
$

 
$
652

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In investments
$

 
$
891

 
$

 
$
891

 
$

 
$
1,065

 
$

 
$
1,065

In funds held for customers

 
175

 

 
175

 

 
144

 

 
144

In long-term investments

 

 
21

 
21

 

 

 
21

 
21

Total available-for-sale securities
$

 
$
1,066

 
$
21

 
$
1,087

 
$

 
$
1,209

 
$
21

 
$
1,230

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

12


Financial liabilities whose fair values we measure using Level 2 inputs consist of debt. See Note 6, “Long-Term Obligations,” for more information. We measure the fair value of our senior notes based on their trading prices and the interest rates we could obtain for other borrowings with similar terms.
Financial assets whose fair values we measure using significant unobservable (Level 3) inputs consist of municipal auction rate securities that are no longer liquid. We estimate the fair values of these auction rate securities using a discounted cash flow model. We continue to classify them as long-term investments based on the maturities of the underlying securities at that date. We do not intend to sell our municipal auction rate securities. In addition, it is more likely than not that we will not be required to sell them before recovery at par, which may be at maturity.
There were no transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the nine months ended April 30, 2015.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Assets measured at fair value on a non-recurring basis include reporting units measured at fair value in a goodwill impairment test. Estimates of fair value for reporting units fall under Level 3 of the fair value hierarchy.
During the third quarter of fiscal 2015 there was a significant decline in the revenue and operating income forecast for our Mint Bills (formerly Check, Inc.) offering due to the performance of Check's existing channels. As a result of this development, we performed an interim impairment test of goodwill and acquired intangible assets for our Consumer Ecosystem reporting unit. We concluded that the carrying value of goodwill associated with that reporting unit was impaired and we recorded an impairment charge of $263 million in the third quarter of fiscal 2015.
The amount of the impairment charge was determined by comparing the carrying value of goodwill assigned to the reporting unit with the implied fair value of the goodwill. We used a weighted combination of a discounted cash flow model (income approach) and comparisons to publicly traded companies engaged in similar businesses (market approach) to estimate the fair value of our Consumer Ecosystem reporting unit. Key assumptions that we used in the income approach included 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 considered the relative risk of achieving the cash flows and the time value of money. For the market approach, we estimated the fair value of the reporting unit based on market multiples of revenue, operating income, and earnings for comparable publicly traded companies engaged in similar businesses. We believe that the assumptions used to determine the impairment amount for the goodwill of this reporting unit are reasonable.


3.
Cash and Cash Equivalents, Investments and Funds Held for Customers
We consider highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist primarily of AAA-rated money market funds in all periods presented. Investments at April 30, 2015 consist of available-for-sale investment-grade debt securities that we carry at fair value. Funds held for customers consist of cash and cash equivalents and investment grade available-for-sale debt securities in all periods presented. Long-term investments at April 30, 2015 consist primarily of municipal auction rate securities. See Note 2, “Fair Value Measurements,” for more information. Except for direct obligations of the United States government, securities issued by agencies of the United States government, and money market funds, we diversify our investments in debt securities by limiting our holdings with any individual issuer.

13


The following table summarizes our cash and cash equivalents, investments, and funds held for customers by balance sheet classification at the dates indicated.
 
April 30, 2015
 
July 31, 2014
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Classification on balance sheets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,193

 
$
1,193

 
$
849

 
$
849

Investments
891

 
891

 
1,064

 
1,065

Funds held for customers
330

 
330

 
289

 
289

Long-term investments
32

 
32

 
31

 
31

Total cash and cash equivalents, investments, and funds
held for customers
$
2,446

 
$
2,446

 
$
2,233

 
$
2,234

The following table summarizes our cash and cash equivalents, investments, and funds held for customers by investment category at the dates indicated. See Note 2, “Fair Value Measurements,” for more information on our municipal auction rate securities.
 
April 30, 2015
 
July 31, 2014
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Type of issue:
 
 
 
 
 
 
 
Total cash and cash equivalents
$
1,347

 
$
1,347

 
$
994

 
$
994

Available-for-sale debt securities:
 
 
 
 
 
 
 
Municipal bonds
495

 
495

 
700

 
701

Corporate notes
571

 
571

 
466

 
466

U.S. agency securities

 

 
42

 
42

Municipal auction rate securities
21

 
21

 
21

 
21

Total available-for-sale debt securities
1,087

 
1,087

 
1,229

 
1,230

Other long-term investments
12

 
12

 
10

 
10

Total cash and cash equivalents, investments, and funds
held for customers
$
2,446

 
$
2,446

 
$
2,233

 
$
2,234

We use the specific identification method to compute gains and losses on investments. We include realized gains and losses on our available-for-sale debt securities in interest and other income, net in our statements of operations. Gross realized gains and losses on our available-for-sale debt securities for the three and nine months ended April 30, 2015 and April 30, 2014 were not significant.
We accumulate unrealized gains and losses on our available-for-sale debt securities, net of tax, in accumulated other comprehensive income or loss in the stockholders’ equity section of our balance sheets. Gross unrealized gains and losses on our available-for-sale debt securities at April 30, 2015 and July 31, 2014 were not significant.
We periodically review our investment portfolios to determine if any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. We believe that the investments we held at April 30, 2015 were not other-than-temporarily impaired. Unrealized losses on available-for-sale debt securities at April 30, 2015 were not significant and were due to changes in interest rates, including market credit spreads, and not due to increased credit risks associated with specific securities. We do not intend to sell these investments. In addition, it is more likely than not that we will not be required to sell them before recovery at par, which may be at maturity.

14


The following table summarizes our available-for-sale debt securities classified by the stated maturity date of the security at the dates indicated.
 
April 30, 2015
 
July 31, 2014
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Due within one year
$
414

 
$
414

 
$
363

 
$
363

Due within two years
462

 
462

 
443

 
443

Due within three years
160

 
160

 
303

 
303

Due after three years
51

 
51

 
120

 
121

Total available-for-sale debt securities
$
1,087

 
$
1,087

 
$
1,229

 
$
1,230

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


4.
Discontinued Operations
Intuit Financial Services
On August 1, 2013 we completed the sale of our Intuit Financial Services (IFS) business for approximately $1.025 billion in cash. We recorded a $44 million pre-tax gain on the disposal of IFS that was partially offset by a related income tax provision of approximately $8 million, resulting in a net gain on disposal of approximately $36 million in the first quarter of fiscal 2014. The IFS business comprised substantially all of our former Financial Services reportable segment.
We classified our IFS business as discontinued operations and have therefore segregated its operating results from continuing operations in our statements of operations for all periods presented. Because operating cash flows from the IFS business were not material for any period presented, we have not segregated them from continuing operations on our statements of cash flows.
Intuit Health
On August 19, 2013 we completed the sale of our Intuit Health business for cash consideration that was not significant. We recorded a $4 million pre-tax loss on the disposal of Intuit Health that was more than offset by a related income tax benefit of approximately $14 million, resulting in a net gain on disposal of approximately $10 million in the first quarter of fiscal 2014. Intuit Health was part of our former Other Businesses reportable segment.
We classified our Intuit Health business as discontinued operations and have therefore segregated its operating results in our statements of operations for all periods presented. Because operating cash flows from the Intuit Health business were not material for any period presented, we have not segregated them from continuing operations on our statements of cash flows.

5.
Current Liabilities
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 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 customary affirmative and negative covenants, including financial covenants that require us to maintain a ratio of total debt to annual earnings before interest, taxes, depreciation and amortization (EBITDA) of not greater than 3.25 to 1.00 as of any date and a ratio of annual EBITDA to interest payable of not less than 3.00 to 1.00 as of the last day of each fiscal quarter. We remained in compliance with these covenants at all times during the quarter ended April 30, 2015. We may use amounts borrowed under this credit facility for general corporate purposes, including future acquisitions. To date we have not borrowed under this credit facility.

15


Other Current Liabilities
Other current liabilities were as follows at the dates indicated:
(In millions)
April 30,
2015
 
July 31,
2014
Reserve for product returns
$
51

 
$
24

Reserve for rebates
29

 
23

Current portion of license fee payable
10

 
10

Current portion of deferred rent
13

 
7

Interest payable
3

 
10

Executive deferred compensation plan liabilities
67

 
63

Other
62

 
24

Total other current liabilities
$
235

 
$
161

The balances of several of our other current liabilities, particularly our reserves for product returns and rebates, are affected by the seasonality of our business. See Note 1, “Description of Business and Summary of Significant Accounting Policies – Seasonality,” for more information.


6.
Long-Term Obligations
Long-Term Debt
On March 12, 2007 we issued $500 million of 5.75% senior unsecured notes due on March 15, 2017 (the Notes). We carried the Notes at face value less the unamortized discount in long-term debt on our balance sheets at April 30, 2015 and July 31, 2014. The Notes are redeemable by Intuit at any time, subject to a make-whole premium, and include covenants that limit our ability to grant liens on our facilities and to enter into sale and leaseback transactions, subject to significant allowances. Interest on the Notes is payable semi-annually on March 15 and September 15. We paid $29 million in cash for interest on the Notes during the nine months ended April 30, 2015 and $29 million in cash for interest on the Notes during the nine months ended April 30, 2014.
Other Long-Term Obligations
Other long-term obligations were as follows at the dates indicated:
(In millions)
April 30,
2015
 
July 31,
2014
Total deferred rent
$
65

 
$
62

Total license fee payable
43

 
41

Long-term income tax liabilities
42

 
32

Long-term deferred income tax liabilities
57

 
61

Other
22

 
14

Total long-term obligations
229

 
210

Less current portion (included in other current liabilities)
(25
)
 
(17
)
Long-term obligations due after one year
$
204

 
$
193

Operating Lease Commitments
We describe our operating lease commitments in Note 9 to the financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2014. There were no significant changes in those commitments during the first nine months of fiscal 2015.


7.
Income Taxes
Effective Tax Rate
We compute our provision for or benefit from income taxes by applying the estimated annual effective tax rate to income or loss from recurring operations and adding the effects of any discrete income tax items specific to the period.
In December 2014 the Tax Increase Prevention Act of 2014 was signed into law. The Act includes a reinstatement of the federal research and experimentation credit through December 31, 2014 that was retroactive to January 1, 2014. We recorded a discrete tax benefit of approximately $11 million for the retroactive effect during the second quarter of fiscal 2015.
Our effective tax rates for the three and nine months ended April 30, 2015 were approximately 44% and 48%. Excluding discrete tax items primarily related to the goodwill impairment charge, our effective tax rate for the three months ended April 30, 2015 was approximately 36% and did not differ significantly from the federal statutory rate of 35%. Excluding discrete tax items primarily related to the goodwill impairment charge and the reinstatement of the federal research and experimentation credit, our effective tax rate for the nine months ended April 30, 2015 was approximately 36% and did not differ significantly from the federal statutory rate of 35%. Tax expense related to share based compensation, state income taxes, and the effects of losses in certain jurisdictions where we do not recognize a tax benefit were partially offset by the benefit we received from the domestic production activities deduction and the federal research and experimentation credit in both periods.
Our effective tax rate for the three and nine months ended April 30, 2014 was approximately 34% and did not differ significantly from the federal statutory rate of 35%. The benefits we received from the domestic production activities deduction and the federal research and experimentation credit were substantially offset by state income taxes in both periods.
Unrecognized Tax Benefits and Other Considerations
The total amount of our unrecognized tax benefits at July 31, 2014 was $40 million. Net of related deferred tax assets, unrecognized tax benefits were $26 million at that date. If we were to recognize these net benefits, our income tax expense would reflect a favorable net impact of $26 million. There were no material changes to these amounts during the nine months ended April 30, 2015. We do not believe that it is reasonably possible that there will be a significant increase or decrease in our unrecognized tax benefits over the next 12 months.


8.
Stockholders’ Equity
Stock Repurchase Programs and Treasury Shares
Intuit’s Board of Directors has authorized a series of common stock repurchase programs. Shares of common stock repurchased under these programs become treasury shares. We repurchased 13.7 million shares for $1.2 billion under these programs during the nine months ended April 30, 2015. Included in this amount were $2 million of repurchases which occurred in late April

16


2015 and were settled in early May 2015. We repurchased 20.5 million shares for $1.4 billion under these programs during the nine months ended April 30, 2014. At April 30, 2015, we had authorization from our Board of Directors to expend up to an additional $634 million for stock repurchases through August 19, 2017. On May 19, 2015 our Board approved a new stock repurchase program under which we are authorized to repurchase up to an additional $2 billion of our common stock from time to time over a four-year period ending on May 19, 2019. 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.
Our treasury shares are repurchased at the market price on the trade date; accordingly, all amounts paid to reacquire these shares have been recorded as treasury stock on our balance sheets. Repurchased shares of our common stock are held as treasury shares until they are reissued or retired. When we reissue treasury stock, if the proceeds from the sale are more than the average price we paid to acquire the shares we record an increase in additional paid-in capital. Conversely, if the proceeds from the sale are less than the average price we paid to acquire the shares, we record a decrease in additional paid-in capital to the extent of increases previously recorded for similar transactions and a decrease in retained earnings for any remaining amount.
In the past we have satisfied option exercises and restricted stock unit vesting under our employee equity incentive plans by reissuing treasury shares, and we may do so again in the future. During the second quarter of fiscal 2014 we began issuing new shares of common stock to satisfy option exercises and RSU vesting under our 2005 Equity Incentive Plan. We have not yet determined the ultimate disposition of the shares that we have repurchased in the past, and consequently we continue to hold them as treasury shares.
Dividends on Common Stock
During the nine months ended April 30, 2015 we declared and paid quarterly cash dividends that totaled $0.75 per share of outstanding common stock or $218 million. In May 2015 our Board of Directors declared a quarterly cash dividend of $0.25 per share of outstanding common stock payable on July 20, 2015 to stockholders of record at the close of business on July 10, 2015. Future declarations of dividends and the establishment of future record dates and payment dates are subject to the final determination of our Board of Directors.
Share-Based Compensation Expense
The following table summarizes the total share-based compensation expense that we recorded in operating income from continuing operations for the periods shown.
 
Three Months Ended
 
Nine Months Ended
(In millions, except per share amounts)
April 30,
2015
 
April 30,
2014
 
April 30,
2015
 
April 30,
2014
Cost of revenue
$
2

 
$
2

 
$
6

 
$
6

Selling and marketing
19

 
13

 
55

 
44

Research and development
20

 
16

 
60

 
46

General and administrative
21

 
18

 
63

 
52

Total share-based compensation expense
62

 
49

 
184

 
148

Income tax benefit
(19
)
 
(16
)
 
(57
)
 
(48
)
Decrease in net income from continuing operations
$
43

 
$
33

 
$
127

 
$
100

Decrease in net income per share:
 
 
 
 

 

Basic
$
0.16

 
$
0.12

 
$
0.45

 
$
0.35

Diluted
$
0.15

 
$
0.11

 
$
0.44

 
$
0.34



17


Share-Based Awards Available for Grant
A summary of share-based awards available for grant under our 2005 Equity Incentive Plan for the nine months ended April 30, 2015 was as follows:
(Shares in thousands)
Shares
Available
for Grant
Balance at July 31, 2014
24,203

Options granted
(60
)
Restricted stock units granted (1)
(1,694
)
Share-based awards canceled/forfeited/expired (1)(2)
2,766

Balance at April 30, 2015
25,215

________________________________
(1)
RSUs granted from the pool of shares available for grant under our 2005 Equity Incentive Plan reduce the pool by 2.3 shares for each share granted. RSUs forfeited and returned to the pool of shares available for grant increase the pool by 2.3 shares for each share forfeited.
(2)
Stock options and restricted stock units canceled, expired or forfeited under our 2005 Equity Incentive Plan are returned to the pool of shares available for grant. Stock options and restricted stock units canceled, expired or forfeited under older expired plans are not returned to the pool of shares available for grant.
Stock Option Activity and Related Share-Based Compensation Expense
A summary of stock option activity for the nine months ended April 30, 2015 was as follows:
 
Options Outstanding
(Shares in thousands)
Number
of Shares
 
Weighted
Average
Exercise
Price
Per Share
Balance at July 31, 2014
10,938

 
$
52.67

Options granted
60

 
96.31

Options exercised
(2,918
)
 
40.89

Options canceled or expired
(447
)
 
65.17

Balance at April 30, 2015
7,633

 
$
56.79

 
 
 
 
Exercisable at April 30, 2015
4,099

 
$
44.64

At April 30, 2015, there was approximately $44 million of unrecognized compensation cost related to non-vested stock options that we expect to recognize as expense in the future. We will adjust unrecognized compensation cost for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average vesting period of 2.0 years.

18


Restricted Stock Unit Activity and Related Share-Based Compensation Expense
A summary of restricted stock unit activity for the nine months ended April 30, 2015 was as follows:
 
Restricted Stock Units
(Shares in thousands)
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Nonvested at July 31, 2014
9,455

 
$
62.46

Granted
737

 
88.38

Restricted stock units assumed or granted in connection with acquisitions
288

 
91.88

Vested
(1,327
)
 
64.53

Forfeited
(994
)
 
60.99

Nonvested at April 30, 2015
8,159

 
$
65.68

At April 30, 2015, there was approximately $307 million of unrecognized compensation cost related to non-vested RSUs that we expect to recognize as expense in the future. We will adjust unrecognized compensation cost for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average vesting period of 1.9 years.


9.
Litigation
Intuit has been contacted by regulatory authorities, including Congress, the Federal Trade Commission, the SEC and the Department of Justice, in connection with the increase during the 2015 tax season in attempts by criminals using stolen identity information to file fraudulent tax returns and claim refunds at the state and federal levels. Intuit is cooperating with all such government inquiries, including formal requests for information. In addition, we are the subject of putative class action lawsuits by individuals who claim to have suffered damages in connection with the foregoing events. We believe that the allegations contained within these lawsuits are without merit, and we intend to vigorously defend against them.
Intuit is subject to certain routine legal proceedings, including class action lawsuits like those described above, as well as demands, claims, government inquiries 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.

10.
Segment Information
We have defined three reportable segments, described below, based on factors such as how we manage our operations and how our chief operating decision maker views results. We define the chief operating decision maker as our Chief Executive Officer and our Chief Financial Officer. Our chief operating decision maker organizes and manages our business primarily on the basis of product and service offerings.
Small Business. Our Small Business segment includes the following offerings, which target small businesses and the accounting professionals who serve them.
QuickBooks financial and business management online services and desktop software; QuickBooks technical support; and financial supplies.
QuickBooks Accountant, QuickBooks Accountant Plus, and QuickBooks Online Accountant as well as the QuickBooks ProAdvisor Program and Cloud ProAdvisor Program, all of which are intended for the accounting professionals who serve small businesses.
Small business payroll products and services, including online payroll offerings such as Quickbooks Online Payroll and Intuit Online Payroll; desktop payroll offerings such as QuickBooks Basic Payroll and QuickBooks Enhanced Payroll; and full service payroll offerings such as Intuit Full Service Payroll and QuickBooks Assisted Payroll.

19


Payment processing services for small businesses, including merchant services such as credit and debit card processing; Web-based transaction processing services for online merchants; secure online payments for small businesses and their customers through the Intuit Commerce Network; GoPayment mobile payment processing services; and QuickBooks Point of Sale solutions.
Demandforce, which provides online marketing and customer communication solutions for small businesses, and QuickBase.
Consumer. Our Consumer segment includes two product lines – Consumer Tax and Consumer Ecosystem – both of which target consumers.
Consumer Tax includes TurboTax income tax preparation products and services and electronic tax filing services.
Consumer Ecosystem includes our personal finance offerings, Quicken, Mint and Mint Bills.
Professional Tax. Our Professional Tax segment targets professional accountants and includes Lacerte, ProSeries, and Intuit Tax Online professional tax preparation products and services, electronic tax filing services, bank product transmission services, and training services.
All of our segments operate primarily in the United States and sell primarily to customers in the United States. International total net revenue was less than 6% of consolidated total net revenue for all periods presented.
We include expenses such as corporate selling and marketing, product development, and general and administrative expenses and share-based compensation expenses that are not allocated to specific segments in unallocated corporate items. Unallocated corporate items also include amortization of acquired technology, amortization of other acquired intangible assets, and goodwill and intangible asset impairment charges.
The accounting policies of our reportable segments are the same as those described in the summary of significant accounting policies in Note 1 to the financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2014 and in Note 1, "Description of Business and Summary of Significant Accounting Policies – Significant Accounting Policies" in this Quarterly Report on Form 10-Q. Except for goodwill and purchased intangible assets, we do not generally track assets by reportable segment and, consequently, we do not disclose total assets by reportable segment.

20


The following table shows our financial results by reportable segment for the periods indicated. Results for all periods presented exclude results for our Intuit Financial Services and Intuit Health businesses. See Note 4, “Discontinued Operations,” for more information.
 
Three Months Ended
 
Nine Months Ended
(In millions)
April 30,
2015
 
April 30,
2014
 
April 30,
2015
 
April 30,
2014
Net revenue:
 
 
 
 
 
 
 
Small Business segment
$
539

 
$
569

 
$
1,640

 
$
1,649

 
 
 
 
 
 
 
 
Consumer segment:
 
 
 
 
 
 
 
Consumer Tax
1,489

 
1,437

 
1,759

 
1,617

Consumer Ecosystem
36

 
48

 
98

 
132

  Total Consumer segment
1,525

 
1,485

 
1,857

 
1,749

 
 
 
 
 
 
 
 
Professional Tax segment
130

 
334

 
177

 
394

Total net revenue
$
2,194

 
$
2,388

 
$
3,674

 
$
3,792

 
 
 
 
 
 
 
 
Operating income from continuing operations:
 
 
 
 
 
 
 
Small Business segment
$
162

 
$
224

 
$
526

 
$
611

Consumer segment
1,192

 
1,199

 
1,184

 
1,172

Professional Tax segment
83

 
294

 
43

 
276

Total segment operating income
1,437

 
1,717

 
1,753

 
2,059

Unallocated corporate items:
 
 
 
 
 
 
 
Share-based compensation expense
(62
)
 
(49
)
 
(184
)
 
(148
)
Other common expenses
(189
)
 
(163
)
 
(564
)
 
(508
)
Amortization of acquired technology
(11
)
 
(6
)
 
(30
)
 
(18
)
Amortization of other acquired intangible assets
(6
)
 
(5
)
 
(18
)
 
(14
)
Goodwill impairment charge
(263
)
 

 
(263
)
 

Total unallocated corporate items
(531
)
 
(223
)
 
(1,059
)
 
(688
)
Total operating income from continuing operations
$
906

 
$
1,494

 
$
694

 
$
1,371



21


ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) includes the following sections:
Executive Overview that discusses at a high level our operating results and some of the trends that affect our business.
Significant changes since our most recent Annual Report on Form 10-K in the Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments underlying our financial statements.
Results of Operations that includes a more detailed discussion of our revenue and expenses.
Liquidity and Capital Resources which discusses key aspects of our statements of cash flows, changes in our balance sheets, and our financial commitments.
You should note that this MD&A discussion contains forward-looking statements that involve risks and uncertainties. Please see Item 1A in Part II of this Quarterly Report on Form 10-Q for important information to consider when evaluating such statements.
You should read this MD&A in conjunction with the financial statements and related notes in Part I, Item 1 of this Quarterly Report and our Annual Report on Form 10-K for the fiscal year ended July 31, 2014. In August 2013 we completed the sales of our Intuit Financial Services (IFS) business and our Intuit Health business. We have reclassified our statements of operations for all periods presented to reflect these two businesses as discontinued operations. Because the operating cash flows of our IFS and Intuit Health discontinued operations were not material for any period presented, we have not segregated them from continuing operations on our statements of cash flows. See “Results of Operations – Discontinued Operations” later in this Item 2 for more information. Unless otherwise noted, the following discussion pertains only to our continuing operations.

Executive Overview
This overview provides a high-level discussion of our business and growth strategy as well as the trends, opportunities, challenges, and risks that affect our performance and operating results. Understanding our growth strategy and the trends that affect our business provides context for the discussion of financial results and future opportunities which follows this overview. This summary is not intended to be exhaustive, nor is it a substitute for the detailed discussion and analysis provided elsewhere in this Quarterly Report on Form 10-Q.
About Intuit
Intuit creates business and financial management solutions that help simplify the business of life for small businesses, consumers, and accounting professionals. We organize our businesses into three reportable segments – Small Business, Consumer, and Professional Tax.

Small Business: This segment includes the following offerings, which target small businesses and the accounting professionals who serve them.
QuickBooks financial and business management online services and desktop software, payroll and employee management solutions, and payment processing solutions.
Demandforce online marketing and customer communication solutions for small businesses.

Consumer: This segment includes two product lines – Consumer Tax and Consumer Ecosystem – both of which target consumers.
Consumer Tax includes TurboTax income tax preparation products and services.
Consumer Ecosystem includes our personal finance offerings, Quicken, Mint, and Mint Bills.

Professional Tax: This segment targets professional accountants and includes Lacerte, ProSeries, and Intuit Tax Online professional tax products and services.



22


Our Growth Strategy
Based on our assessment of key technology and demographic trends – an increasingly borderless world, the prevalence of mobile devices, and the scalability of the cloud – we see significant opportunities to drive future growth by continuing to solve the unmet needs of small businesses, consumers, and accounting professionals. Our evolving growth strategy includes three key elements:

Focus on the product – we call it “Delivering awesome product experiences.” Computing devices are moving to the palm of our hands in the form of tablets and smart phones. Our TurboTax solutions, for example, let customers prepare and file their entire tax returns online, via tablet, mobile phone, or desktop computer. We also believe that a key factor in growing our customer base is delivering an amazing first-use experience so our customers can get the value they expect from our offerings as quickly and easily as possible.

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

Leveraging our data for our customers' benefit – we call it “Using data to create delight.” Our customers generate valuable data that we seek to appropriately use to deliver better products and breakthrough benefits by eliminating the need to enter data, helping them make better decisions and improving transactions and interactions.
Industry Trends and Seasonality
The industry in which we operate is dynamic and highly competitive, and we expect it to remain so in the future. The markets for software and related services, especially highly-available connected services, are characterized by rapid technological change, shifting customer needs, and frequent new product introductions and enhancements. Competitive interest and expertise in many of the markets we serve have grown markedly over the past few years and we expect this trend to continue. There are also large, cloud-based service companies who innovate quickly and serve small businesses and consumers. While today our competition with such companies may be limited, as we and those companies grow, our competition with them may increase. In recent years the widespread availability of the Internet, the emergence of mobile devices, and the explosion of social media have accelerated the pace of change and revolutionized the way that people throughout the world manage important financial tasks. The result is a global market that is shifting from traditional services that are paper-based, human-produced, and brick-and-mortar bound, to one where people understand, demand, and embrace the benefits of connected services. This trend toward connected services is the primary driver of the strategies in all of our businesses.
Historically, our QuickBooks, Consumer Tax, and Professional Tax offerings have been highly seasonal. Revenue from our QuickBooks software products have tended to be highest during our second and third fiscal quarters. Sales of income tax preparation products and services are heavily concentrated from November through April. In our Consumer Tax business, a greater proportion of our revenue has shifted to later in this seasonal period due in part to the growth in sales of TurboTax Online, for which we recognize revenue when tax returns are printed or electronically filed. The seasonality of our Consumer Tax and Professional Tax revenue is also affected by the timing of the availability of tax forms from taxing agencies and the ability of those agencies to receive electronic tax return submissions. Delays in the availability of tax forms or the ability of taxing agencies to receive submissions can cause revenue to shift between our fiscal quarters. These seasonal patterns mean that our total net revenue is usually highest during our second quarter ending January 31 and third quarter ending April 30. We typically report losses in our first quarter ending October 31 and fourth quarter ending July 31. During these quarters, revenue from our tax businesses is minimal while core operating expenses such as research and development continue at relatively consistent levels. In our MD&A we often focus on year-to-date results for our seasonal businesses as they are generally more meaningful than quarterly results.
In August 2014 we announced that we would begin delivering ongoing releases for our future desktop software offerings in order to improve the product experience, accommodate operating system updates, and provide access to connected services. We believe that providing more frequent releases will create a better experience for customers who choose our desktop offerings, as well as a more seamless transition to our online offerings in the future. This decision affects the timing of revenue recognition for future sales of our QuickBooks and Quicken desktop products, where revenue will be recognized as services are provided over approximately three years, and our Professional Tax solutions, where revenue will be recognized as services are provided over the tax year. The seasonality of our Small Business and Professional Tax offerings is partially mitigated by this change.

23


Key Challenges and Risks
Our growth strategy depends upon our ability to initiate and embrace disruptive technology trends, to enter new markets, and to drive broad adoption of the products and services we develop and market. Our future growth also increasingly depends on the strength of our third-party business relationships and our ability to continue to develop, maintain and strengthen new and existing relationships. To remain competitive and continue to grow, we are investing significant resources in our product development, marketing, and sales capabilities, and we expect to continue to do so in the future.
As we continue transitioning to offer more connected services, the ongoing operation and availability of our information technology and communication systems and those of our external service providers is becoming increasingly important. Because we help customers manage their financial lives, we face risks associated with the hosting, collection, use and retention of personal customer information and data. We are investing significant management attention and resources in our information technology infrastructure and in our privacy and security capabilities, and we expect to continue to do so in the future.
During this tax season, state taxing authorities, the IRS, and the tax preparation industry experienced an increase in attempts by criminals using stolen identity information to file fraudulent tax returns and claim refunds at the federal level and expanding into the state level. In the third quarter of fiscal 2015, we and certain states took the precautionary step of suspending the electronic filing of state tax returns for a short period of time to assess this activity and the measures used to combat it. As part of this effort, we implemented additional security measures in our products and began working with state governments to share information regarding suspicious filings while continuing to share such information with the federal government. In addition, as a result of recent events and with the continued focus on the growing industry-wide challenge of cyberfraud during this tax season, Intuit has been contacted by regulatory authorities, including Congress, the Federal Trade Commission, the SEC and the Department of Justice. As previously disclosed, Intuit is cooperating with all such inquiries, including formal requests for information. Going forward, we expect to continue to invest in security and to work with the broader industry and government to protect our customers against this type of fraud. While we have experienced negative publicity associated with this industry-wide issue, we do not believe our recent financial performance has been materially adversely impacted by this fraudulent activity or by the actions we have taken to combat it. However, there can be no assurance that our future financial performance will not be adversely impacted.
For a complete discussion of the most significant risks and uncertainties affecting our business, please see “Forward-Looking Statements and Risk Factors” in Item 1A of this Quarterly Report.
Overview of Financial Results
The most important financial indicators that we use to assess our business are revenue growth for the company as a whole, for each reportable segment, and for product lines within each reportable segment; operating income growth and operating income margins for the company as a whole and for each reportable segment; earnings per share; and cash flow from operations. We also track certain non-financial drivers of revenue growth and, when material, identify them in the applicable discussions of segment results below. These non-financial drivers include, for example, customer growth and retention for all of our businesses and transaction volume for our payment processing business. Total credit and debit card transaction volume correlates strongly with the macroeconomic environment and is one of the key drivers of revenue growth in our payment processing business. Customers for our connected services offerings have generally grown faster than those for our traditional desktop software offerings, reflecting our strategic focus on connected services over the past few years. Connected services (total service and other revenue) generated $3.0 billion or 66% of our total revenue in fiscal 2014, compared with 50% of our total revenue six years ago. We expect connected services revenue as a percentage of our total revenue to continue to grow in the future.
Total net revenue for the first nine months of fiscal 2015 was $3.7 billion, a decrease of 3% compared with the same period of fiscal 2014. Total net revenue growth was affected by the change to our desktop software offerings described in “Industry Trends and Seasonality” above. Revenue in our Small Business segment decreased 1% compared with the same period a year ago due to the impact of this change on our QuickBooks desktop offerings, which more than offset QuickBooks Online revenue growth. The change to our desktop software offerings also impacted our Professional Tax segment, whose revenue decreased 55% compared with the same period a year ago. Revenue in our Consumer segment increased 6% in the first nine months of fiscal 2015 due to 9% growth in U.S. federal TurboTax units, partially offset by lower Quicken desktop revenue.
Operating income from continuing operations for the first nine months of fiscal 2015 decreased 49% compared with the same period of fiscal 2014. Our operating income was lower in fiscal 2015 due to the impact of the change to our desktop software offerings on fiscal 2015 revenue and due to higher expenses for staffing, advertising and other marketing programs, outside services, and share-based compensation. We also recorded a $263 million charge to operating expense for the impairment of goodwill in our Consumer Ecosystem reporting unit in the third quarter of fiscal 2015.

24


Net income from continuing operations for the first nine months of fiscal 2015 decreased 61% compared with the same period of fiscal 2014 due to the decrease in operating income and a higher effective tax rate that related to the goodwill impairment charge in the fiscal 2015 period. Diluted net income per share from continuing operations for the first nine months of fiscal 2015 decreased 60% to $1.22, in line with the decrease in net income.
We ended the first nine months of fiscal 2015 with cash, cash equivalents and investments totaling $2.1 billion. During the first nine months of fiscal 2015 we generated cash from operations, net sales of investments, and 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 payment of cash dividends, and capital expenditures. At April 30, 2015, we had authorization from our Board of Directors to expend up to an additional $634 million for stock repurchases through August 19, 2017. On May 19, 2015 our Board approved a new stock repurchase program under which we are authorized to repurchase up to an additional $2 billion of our common stock from time to time over a four-year period ending on May 19, 2019.

Critical Accounting Policies and Estimates
In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss, and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2014 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. Except for the changes to our policy for recognizing product revenue described in “Executive Overview – Industry Trends and Seasonality” earlier in this Item 2, we believe that there were no significant changes in those critical accounting policies and estimates during the first nine months of fiscal 2015. Senior management has reviewed the development and selection of our critical accounting policies and estimates and their disclosure in this Quarterly Report on Form 10-Q with the Audit and Risk Committee of our Board of Directors.
Goodwill, Intangible Assets, and Other Long-Lived Assets - Impairment Assessments
During the third quarter of fiscal 2015 there was a significant decline in the revenue and operating income forecast for our Mint Bills (formerly Check, Inc.) offering due to the performance of Check's existing channels. As a result of this development, we performed an interim impairment test of goodwill and acquired intangible assets for our Consumer Ecosystem reporting unit. We concluded that the carrying value of goodwill associated with that reporting unit was impaired and we recorded an impairment charge of $263 million in the third quarter of fiscal 2015. See “Fair Value Measurements – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis,” in Note 2 to the financial statements in Part I, Item 1 of this Quarterly Report for more information.
After evaluating the performance of Check's existing channels, we made a strategic decision to increase our focus on integrating the Check bill pay solution into our Mint and Quicken offerings to leverage the strength of Intuit's channels. We also decided to reduce our focus on Check's biller and direct pay channels. The impairment analysis that we performed during the third quarter of fiscal 2015 took these strategic decisions into account. The market for payment solutions is dynamic and competition is intense. If we experience delays in integrating the Check bill pay solution into our Mint and Quicken offerings the fair value of our Consumer Ecosystem reporting unit could decline further and we may be required to record additional goodwill impairment charges in the future.


Results of Operations
Financial Overview
(Dollars in millions, except per share amounts)
Q3
FY15
 
Q3
FY14
 
$
Change
 
%
Change
 
YTD
Q3
FY15
 
YTD
Q3
FY14
 
$
Change
 
%
Change
Total net revenue
$
2,194

 
$
2,388

 
$
(194
)
 
(8
)%
 
$
3,674

 
$
3,792

 
$
(118
)
 
(3
)%
Operating income from continuing operations
906

 
1,494

 
(588
)
 
(39
)%
 
694

 
1,371

 
(677
)
 
(49
)%
Net income from continuing operations
501

 
984

 
(483
)
 
(49
)%
 
351

 
890

 
(539
)
 
(61
)%
Diluted net income per share from continuing operations
$
1.78

 
$
3.39

 
$
(1.61
)
 
(47
)%
 
$
1.22

 
$
3.06

 
$
(1.84
)
 
(60
)%

25


Current Fiscal Quarter
Total net revenue for the third quarter of fiscal 2015 decreased $194 million or 8% compared with the same quarter of fiscal 2014. Total net revenue growth was affected by the change to our desktop software offerings described in “Industry Trends and Seasonality” above. Small Business segment revenue decreased 5% compared with the same period a year ago due to the impact of this change on our QuickBooks desktop offerings, which more than offset QuickBooks Online revenue growth. The change to our desktop software offerings also impacted our Professional Tax segment, whose revenue decreased 61% compared with the same period a year ago. Revenue in our Consumer segment increased 3% in the third quarter of fiscal 2015. U.S. federal TurboTax unit growth of 6% was partially offset by the impact of the earlier start to the fiscal 2015 tax season compared with the previous year. See “Segment Results” later in this Item 2 for more information about the results for all of our reportable segments.
Operating income from continuing operations for the third quarter of fiscal 2015 decreased 39% compared with the same quarter of fiscal 2014. Our operating income was lower in fiscal 2015 due to the impact of the change to our desktop software offerings on fiscal 2015 revenue and due to higher expenses for staffing, advertising and other marketing programs, outside services, and share-based compensation. We also recorded a $263 million charge to operating expense for the impairment of goodwill in our Consumer Ecosystem reporting unit. See “Operating Expenses” later in this Item 2 for more information.
Net income from continuing operations for the third quarter of fiscal 2015 decreased 49% compared with the same quarter of fiscal 2014 due to the decrease in operating income and a higher effective tax rate that related to the goodwill impairment charge in the fiscal 2015 period. See “Non-Operating Income and Expenses – Income Taxes” later in this Item 2 for more information. Diluted net income per share from continuing operations for the third quarter of fiscal 2015 decreased 47% to $1.78, in line with the decrease in net income for that period.
Fiscal Year to Date
Total net revenue for the first nine months of fiscal 2015 decreased $118 million or 3% compared with the same period of fiscal 2014. Total net revenue growth was affected by the change to our desktop software offerings described in “Industry Trends and Seasonality” above. Small Business segment revenue decreased 1% compared with the same period a year ago due to the impact of this change on our QuickBooks desktop offerings, which more than offset QuickBooks Online revenue growth. The change to our desktop software offerings also impacted our Professional Tax segment, whose revenue decreased 55% compared with the same period a year ago. Revenue in our Consumer segment increased 6% in the first nine months of fiscal 2015 due to 9% growth in U.S. federal TurboTax units, partially offset by lower Quicken desktop revenue. See “Segment Results” later in this Item 2 for more information about the results for all of our reportable segments.
Operating income from continuing operations for the first nine months of fiscal 2015 decreased 49% compared with the same period of fiscal 2014. Our operating income was lower in fiscal 2015 due to the impact of the change to our desktop software offerings on fiscal 2015 revenue and due to higher expenses for staffing, advertising and other marketing programs, outside services, and share-based compensation. We also recorded a $263 million charge to operating expense for the impairment of goodwill in our Consumer Ecosystem reporting unit. See “Operating Expenses” later in this Item 2 for more information.
Net income from continuing operations for the first nine months of fiscal 2015 decreased 61% compared with the same period of fiscal 2014 due to the decrease in operating income and a higher effective tax rate that related to the goodwill impairment charge in the fiscal 2015 period. See “Non-Operating Income and Expenses – Income Taxes” later in this Item 2 for more information. Diluted net income per share from continuing operations for the first nine months of fiscal 2015 decreased 60% to $1.22, in line with the decrease in net income for that period.
Segment Results
The information below is organized in accordance with our three reportable segments. See “Executive Overview – About Intuit” earlier in this Item 2 and Note 10 to the financial statements in Part I, Item 1 of this Quarterly Report for more information. All of our segments operate primarily in the United States and sell primarily to customers in the United States. International total net revenue was less than 6% of consolidated total net revenue for all periods presented.
Segment operating income or loss is segment net revenue less segment cost of revenue and operating expenses. See “Executive Overview – Industry Trends and Seasonality” earlier in this Item 2 for a description of the seasonality of our business. Segment expenses do not include certain costs, such as corporate selling and marketing, product development, and general and administrative expenses and share-based compensation expenses, which are not allocated to specific segments. These unallocated costs totaled $748 million in the first nine months of fiscal 2015 and $656 million in the first nine months of fiscal 2014. Unallocated costs increased in the fiscal 2015 period due to increases in corporate product development and selling and marketing expenses in support of the growth of our businesses and to higher share-based compensation expenses. Segment expenses also do not include amortization of acquired technology, amortization of other acquired intangible assets, and

26


goodwill and intangible asset impairment charges. See Note 10 to the financial statements in Part I, Item 1 of this Quarterly Report for reconciliations of total segment operating income or loss to consolidated operating income or loss for each fiscal period presented.
We calculate revenue growth rates and segment operating margin figures using dollars in thousands. Those results may vary slightly from figures calculated using the dollars in millions presented below.
Small Business
(Dollars in millions)
Q3
FY15
 
Q3
FY14
 
%
Change
 
YTD
Q3
FY15
 
YTD
Q3
FY14
 
%
Change
Product revenue
$
162

 
$
218

 
(26
)%
 
$
529

 
$
631

 
(16
)%
Service and other revenue
377

 
351

 
7
 %
 
1,111

 
1,018

 
9
 %
Total segment revenue
$
539

 
$
569

 
(5
)%
 
$
1,640

 
$
1,649

 
(1
)%
% of total revenue
25
%
 
24
%
 
 
 
45
%
 
44
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment operating income
$
162

 
$
224

 
(28
)%
 
$
526

 
$
611

 
(14
)%
% of related revenue
30
%
 
39
%
 
 
 
32
%
 
37
%
 
 
Service and other revenue in our Small Business segment is derived primarily from QuickBooks Online and QuickBooks Online Accountant, our hosted financial and business management offerings; QuickBooks Pro Plus, QuickBooks Premier Plus, and QuickBooks Accountant Plus, our subscription offerings; QuickBooks technical support plans; small business payroll services, including Quickbooks Online Payroll, Intuit Online Payroll, Intuit Full Service Payroll, and QuickBooks Assisted Payroll; payment processing services for small businesses; Demandforce; and QuickBase. Product revenue in our Small Business segment is derived primarily from QuickBooks desktop software products, including QuickBooks Pro, QuickBooks Premier, QuickBooks Accountant, and QuickBooks Enterprise Solutions; QuickBooks Basic Payroll and QuickBooks Enhanced Payroll; QuickBooks Point of Sale solutions; ProAdvisor Program subscriptions for the accounting professionals who serve small businesses; and financial supplies.
As part of our connected services strategy, over the past several quarters we have been focusing Small Business segment resources on the enhancement and marketing of our QuickBooks Online and QuickBooks desktop subscription offerings. As a result, QuickBooks desktop license units and revenue have been declining as more customers choose our hosted and subscription offerings and we expect this trend to continue. In our payments business we are focusing resources on core offerings for QuickBooks merchants in support of our small business ecosystem approach. Over the next few quarters we anticipate declining revenue for certain non-QuickBooks payments offerings that may slow overall revenue growth in our payments business.
Small Business segment total net revenue decreased $30 million or 5% in the third quarter of fiscal 2015 compared with the same quarter of fiscal 2014 due to the impact of the change to our QuickBooks desktop offerings described in “Executive Overview – Industry Trends and Seasonality” above, which more than offset QuickBooks Online revenue growth. Small Business Online Ecosystem revenue grew 20%, driven by customer acquisition. QuickBooks Online customers grew 55% and online payroll customers grew 20%. Active online payments customers grew 6% and online payments charge volume grew 19%. In our Small Business Desktop Ecosystem revenue declined 15%. QuickBooks desktop unit sales were 23% lower as we continued to emphasize QuickBooks Online while QuickBooks Enterprise Solutions revenue grew 20%.
Small Business segment total net revenue decreased $9 million or 1% in the first nine months of fiscal 2015 compared with the same period of fiscal 2014 due to the impact of the change to our QuickBooks desktop offerings described in “Executive Overview – Industry Trends and Seasonality” above, which more than offset QuickBooks Online revenue growth. Small Business Online Ecosystem revenue grew 25%, driven by customer acquisition. QuickBooks Online customers grew 55% and online payroll customers grew 20%. Active online payments customers grew 6% and online payments charge volume grew 21%. In our Small Business Desktop Ecosystem revenue declined 9%. QuickBooks desktop unit sales were 24% lower as we continued to emphasize QuickBooks Online while QuickBooks Enterprise Solutions revenue grew 26%.
Small Business segment operating income as a percentage of related revenue decreased in the third quarter and first nine months of fiscal 2015 compared with the same periods of fiscal 2014. These decreases were due to the impact of the changes to our desktop software offerings on segment revenue and cost of revenue. We expense costs of product revenue as they are incurred for delivered software and we do not defer any of these costs when product revenue is deferred. Small Business segment operating income was affected to a lesser extent by higher segment operating expenses for outside services and advertising and other marketing programs.

27


Consumer
(Dollars in millions)
Q3
FY15
 
Q3
FY14
 
%
Change
 
YTD
Q3
FY15
 
YTD
Q3
FY14
 
%
Change
Product revenue
$
191

 
$
230

 
(17
)%
 
$
216

 
$
282

 
(23
)%
Service and other revenue
1,334

 
1,255

 
6
 %
 
1,641

 
1,467

 
12
 %
Total segment revenue
$
1,525

 
$
1,485

 
3
 %
 
$
1,857

 
$
1,749

 
6
 %
% of total revenue
69
%
 
62
%
 
 
 
50
%
 
46
%