10-Q 1 fy16q110qdocument.htm 10-Q 10-Q

 
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 October 31, 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. 264,004,330 shares of Common Stock, $0.01 par value, were outstanding at November 16, 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, 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
(In millions, except per share amounts)
October 31,
2015
 
October 31,
2014
Net revenue:
 
 
 
Product
$
271

 
$
228

Service and other
442

 
384

Total net revenue
713

 
612

Costs and expenses:
 
 
 
Cost of revenue:
 
 
 
Cost of product revenue
29

 
33

Cost of service and other revenue
131

 
119

Amortization of acquired technology
6

 
7

Selling and marketing
244

 
251

Research and development
213

 
189

General and administrative
117

 
119

Amortization of other acquired intangible assets
2

 
3

Total costs and expenses
742

 
721

Operating loss from continuing operations
(29
)
 
(109
)
Interest expense
(7
)
 
(7
)
Interest and other income (expense), net
(4
)
 

Loss before income taxes
(40
)
 
(116
)
Income tax benefit
(9
)
 
(35
)
Net loss from continuing operations
(31
)
 
(81
)
Net loss from discontinued operations

 
(3
)
Net loss
$
(31
)
 
$
(84
)
 
 
 
 
Basic net loss per share from continuing operations
$
(0.11
)
 
$
(0.28
)
Basic net loss per share from discontinued operations

 
(0.01
)
Basic net loss per share
$
(0.11
)
 
$
(0.29
)
Shares used in basic per share calculations
272

 
286

 
 
 
 
Diluted net loss per share from continuing operations
$
(0.11
)
 
$
(0.28
)
Diluted net loss per share from discontinued operations

 
(0.01
)
Diluted net loss per share
$
(0.11
)
 
$
(0.29
)
Shares used in diluted per share calculations
272

 
286

 
 
 
 
Cash dividends declared per common share
$
0.30

 
$
0.25

See accompanying notes.

3


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

 
Three Months Ended
(In millions)
October 31,
2015
 
October 31,
2014
 
 
 
 
Net loss
$
(31
)
 
$
(84
)
Other comprehensive loss, net of income taxes:
 
 
 
Foreign currency translation losses
(2
)
 
(5
)
Total other comprehensive loss, net
(2
)
 
(5
)
Comprehensive loss
$
(33
)
 
$
(89
)


See accompanying notes.


4


INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
October 31,
2015
 
July 31,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
474

 
$
808

Investments

 
889

Accounts receivable, net
124

 
91

Income taxes receivable
100

 
84

Deferred income taxes
244

 
231

Prepaid expenses and other current assets
121

 
94

Current assets of discontinued operations
17

 
26

Current assets before funds held for customers
1,080

 
2,223

Funds held for customers
347

 
337

Total current assets
1,427

 
2,560

Long-term investments
28

 
27

Property and equipment, net
701

 
682

Goodwill
1,274

 
1,266

Acquired intangible assets, net
77

 
87

Other assets
107

 
111

Long-term assets of discontinued operations
219

 
235

Total assets
$
3,833

 
$
4,968

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Borrowings under credit facility
$
350

 
$

Accounts payable
178

 
190

Accrued compensation and related liabilities
139

 
283

Deferred revenue
635

 
691

Other current liabilities
165

 
150

Current liabilities of discontinued operations
73

 
93

Current liabilities before customer fund deposits
1,540

 
1,407

Customer fund deposits
347

 
337

Total current liabilities
1,887

 
1,744

Long-term debt
500

 
500

Long-term deferred revenue
157

 
152

Other long-term obligations
184

 
172

Long-term obligations of discontinued operations
54

 
68

Total liabilities
2,782

 
2,636

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock and additional paid-in capital
4,114

 
4,010

Treasury stock, at cost
(8,945
)
 
(7,675
)
Accumulated other comprehensive loss
(32
)
 
(30
)
Retained earnings
5,914

 
6,027

Total stockholders’ equity
1,051

 
2,332

Total liabilities and stockholders’ equity
$
3,833

 
$
4,968

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, 2015
277,706

 
$
4,010

 
$
(7,675
)
 
$
(30
)
 
$
6,027

 
$
2,332

Comprehensive loss

 

 

 
(2
)
 
(31
)
 
(33
)
Issuance of stock under employee stock plans
998

 
24

 

 

 

 
24

Stock repurchases under stock repurchase programs
(14,359
)
 

 
(1,270
)
 

 

 
(1,270
)
Dividends and dividend rights declared ($0.30 per share)

 

 

 

 
(82
)
 
(82
)
Tax benefit from share-based compensation plans

 
9

 

 

 

 
9

Share-based compensation expense

 
71

 

 

 

 
71

Balance at October 31, 2015
264,345

 
$
4,114

 
$
(8,945
)
 
$
(32
)
 
$
5,914

 
$
1,051


(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 loss

 

 

 
(5
)
 
(84
)
 
(89
)
Issuance of stock under employee stock plans
1,787

 
47

 

 

 

 
47

Stock repurchases under stock repurchase programs
(1,318
)
 

 
(114
)
 

 

 
(114
)
Dividends and dividend rights declared ($0.25 per share)

 

 

 

 
(74
)
 
(74
)
Tax benefit from share-based compensation plans

 
18

 

 

 

 
18

Share-based compensation expense

 
61

 

 

 

 
61

Balance at October 31, 2014
285,419

 
$
3,687

 
$
(6,544
)
 
$
(7
)
 
$
5,791

 
$
2,927



See accompanying notes.

6


INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
(In millions)
October 31,
2015
 
October 31,
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(31
)
 
$
(84
)
 Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation
45

 
36

Amortization of acquired intangible assets
10

 
18

Share-based compensation expense
69

 
61

Deferred income taxes
(2
)
 
(6
)
Tax benefit from share-based compensation plans
9

 
18

Excess tax benefit from share-based compensation plans
(9
)
 
(18
)
Other
10

 
12

Total adjustments
132

 
121

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(28
)
 
(4
)
Income taxes receivable
(17
)
 
(56
)
Prepaid expenses and other assets
(29
)
 
(3
)
Accounts payable
(6
)
 
32

Accrued compensation and related liabilities
(145
)
 
(139
)
Deferred revenue
(54
)
 
28

Other liabilities
(19
)
 
(13
)
Total changes in operating assets and liabilities
(298
)
 
(155
)
Net cash used in operating activities
(197
)
 
(118
)
Cash flows from investing activities:
 
 
 
Purchases of available-for-sale debt securities
(117
)
 
(365
)
Sales of available-for-sale debt securities
940

 
147

Maturities of available-for-sale debt securities
64

 
229

Net change in money market funds and other cash equivalents held
 to satisfy customer fund obligations
(10
)
 
(69
)
Net change in customer fund deposits
10

 
69

Purchases of property and equipment
(70
)
 
(55
)
Acquisitions of businesses, net of cash acquired

 
(9
)
Other
(1
)
 
(8
)
Net cash provided by (used in) investing activities
816

 
(61
)
Cash flows from financing activities:
 
 
 
Proceeds from borrowings under credit facility
350

 

Net proceeds from issuance of stock under employee stock plans
24

 
47

Cash paid for purchases of treasury stock
(1,253
)
 
(114
)
Dividends and dividend rights paid
(82
)
 
(74
)
Excess tax benefit from share-based compensation plans
9

 
18

Net cash used in financing activities
(952
)
 
(123
)
Effect of exchange rates on cash and cash equivalents
(1
)
 
(5
)
Net decrease in cash and cash equivalents
(334
)
 
(307
)
Cash and cash equivalents at beginning of period
808

 
849

Cash and cash equivalents at end of period
$
474

 
$
542

_________________________
Because the cash flows of our discontinued operations were not material for any period presented, we have not segregated the cash flows of those businesses on these statements of cash flows. See Note 4, “Discontinued Operations,” for more information.
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 and TurboTax, we help customers solve important business and financial management problems such as running a small business, paying bills, and filing income taxes. 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. We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation, including amounts related to discontinued operations and reportable segments. See Note 4, “Discontinued Operations,” and Note 10, “Segment Information,” for more information.
As discussed in Note 4, we classified our Demandforce, QuickBase, and Quicken businesses as discontinued operations in the fourth quarter of fiscal 2015. We have reclassified our statements of operations and balance sheets for all periods presented to reflect these businesses as discontinued operations. Because the cash flows of these businesses were not material for any period presented, we have not segregated them 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, 2015. Results for the three months ended October 31, 2015 do not necessarily indicate the results we expect for the fiscal year ending July 31, 2016 or any other future period.
Seasonality
Our Consumer Tax offerings have significant seasonal patterns and revenue from those income tax preparation products and services is heavily concentrated in our third fiscal quarter ending April 30.
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, 2015. There have been no changes to our significant accounting policies during the first three months of fiscal 2016.
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.

8


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 loss per share for the periods indicated.
 
Three Months Ended
(In millions, except per share amounts)
October 31,
2015
 
October 31,
2014
Numerator:
 
 
 
Net loss from continuing operations
$
(31
)
 
$
(81
)
Net loss from discontinued operations

 
(3
)
Net loss
$
(31
)
 
$
(84
)
 
 
 
 
Denominator:
 
 
 
Shares used in basic per share amounts:
 
 
 
Weighted average common shares outstanding
272

 
286

 
 
 
 
Shares used in diluted per share amounts:
 
 
 
Weighted average common shares outstanding
272

 
286

Dilutive common equivalent shares from stock options
 
 
 
and restricted stock awards

 

Dilutive weighted average common shares outstanding
272

 
286

 
 
 
 
Basic and diluted net loss per share:
 
 
 
Basic net loss per share from continuing operations
$
(0.11
)
 
$
(0.28
)
Basic net loss per share from discontinued operations

 
(0.01
)
Basic net loss per share
$
(0.11
)
 
$
(0.29
)
 
 
 
 
Diluted net loss per share from continuing operations
$
(0.11
)
 
$
(0.28
)
Diluted net loss per share from discontinued operations

 
(0.01
)
Diluted net loss per share
$
(0.11
)
 
$
(0.29
)
 
 
 
 
Shares excluded from computation of diluted net income
per share:
 
 
 
Weighted average stock options and restricted stock units that would have been included in the computation of dilutive common equivalent shares outstanding if net income had been reported in the period
12

 
16

 
 
 
 
Weighted average stock options and restricted stock units excluded from computation due to anti-dilutive effect
4

 
2

Concentration of Credit Risk and Significant Customers
No customer accounted for 10% or more of total net revenue in the three months ended October 31, 2015 or October 31, 2014. No customer accounted for 10% or more of gross accounts receivable at October 31, 2015 or July 31, 2015.
Accounting Pronouncements Not Yet Adopted
ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.”
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” ASU 2015-16 eliminates the requirement for an acquirer to retrospectively adjust provisional amounts recorded in a business combination to reflect new information about the facts and circumstances that existed as of the acquisition date and that, if known, would have affected measurement or recognition of amounts initially recognized. As an alternative, the amendment requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The

10


amendments require that the acquirer record, in the financial statements of the period in which adjustments to provisional amounts are determined, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 is effective prospectively for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2017. Early adoption is permitted under U.S. GAAP. We are currently evaluating the impact of our pending adoption of ASU 2015-16 on our consolidated financial statements.
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),” and in August 2015 the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 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, 2017, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2018. Early adoption of one year prior to the required effective date is permitted. 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.
Accounting Pronouncements Recently Adopted
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 became effective for our fiscal year that began August 1, 2015. Our adoption of ASU 2014-08 did not have an impact 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

11


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 unobservable 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 values are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.
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.
 
October 31, 2015
 
July 31, 2015
(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
$
262

 
$

 
$

 
$
262

 
$
695

 
$

 
$

 
$
695

Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds

 
6

 

 
6

 

 
506

 

 
506

Corporate notes

 
169

 

 
169

 

 
546

 

 
546

U.S. agency securities

 

 

 

 

 
12

 

 
12

Municipal auction rate securities

 

 
15

 
15

 

 

 
15

 
15

Total available-for-sale securities

 
175

 
15

 
190

 

 
1,064

 
15

 
1,079

Total assets measured at fair value on a recurring basis
$
262

 
$
175

 
$
15

 
$
452

 
$
695

 
$
1,064

 
$
15

 
$
1,774

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior notes (1)
$

 
$
530

 
$

 
$
530

 
$

 
$
531

 
$

 
$
531

______________________________
(1)
Carrying value on our balance sheets at October 31, 2015 was $500 million and at July 31, 2015 was $500 million. See Note 6.

12



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.
 
October 31, 2015
 
July 31, 2015
(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
$
90

 
$

 
$

 
$
90

 
$
533

 
$

 
$

 
$
533

In funds held for customers
172

 

 

 
172

 
162

 

 

 
162

Total cash equivalents
$
262

 
$

 
$

 
$
262

 
$
695

 
$

 
$

 
$
695

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In investments
$

 
$

 
$

 
$

 
$

 
$
889

 
$

 
$
889

In funds held for customers

 
175

 

 
175

 

 
175

 

 
175

In long-term investments

 

 
15

 
15

 

 

 
15

 
15

Total available-for-sale securities
$

 
$
175

 
$
15

 
$
190

 
$

 
$
1,064

 
$
15

 
$
1,079

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.
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 three months ended October 31, 2015.


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 October 31, 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. 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.
 
October 31, 2015
 
July 31, 2015
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Classification on balance sheets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
474

 
$
474

 
$
808

 
$
808

Investments

 

 
890

 
889

Funds held for customers
347

 
347

 
337

 
337

Long-term investments
28

 
28

 
27

 
27

Total cash and cash equivalents, investments, and funds
held for customers
$
849

 
$
849

 
$
2,062

 
$
2,061

The following table summarizes our cash and cash equivalents, investments, and funds held for customers by investment category at the dates indicated.
 
October 31, 2015
 
July 31, 2015
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Type of issue:
 
 
 
 
 
 
 
Total cash and cash equivalents
$
646

 
$
646

 
$
970

 
$
970

Available-for-sale debt securities:
 
 
 
 
 
 
 
Municipal bonds
6

 
6

 
507

 
506

Corporate notes
169

 
169

 
546

 
546

U.S. agency securities

 

 
12

 
12

Municipal auction rate securities
15

 
15

 
15

 
15

Total available-for-sale debt securities
190

 
190

 
1,080

 
1,079

Other long-term investments
13

 
13

 
12

 
12

Total cash and cash equivalents, investments, and funds
held for customers
$
849

 
$
849

 
$
2,062

 
$
2,061

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 months ended October 31, 2015 and October 31, 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 October 31, 2015 and July 31, 2015 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 October 31, 2015 were not other-than-temporarily impaired. Unrealized losses on available-for-sale debt securities at October 31, 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.
 
October 31, 2015
 
July 31, 2015
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Due within one year
$
99

 
$
99

 
$
434

 
$
435

Due within two years
31

 
31

 
443

 
442

Due within three years
45

 
45

 
156

 
156

Due after three years
15

 
15

 
47

 
46

Total available-for-sale debt securities
$
190

 
$
190

 
$
1,080

 
$
1,079

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
In the fourth quarter of fiscal 2015 management having the authority to do so formally approved a plan to sell our Demandforce, QuickBase, and Quicken businesses. The decision was a result of management’s desire to focus resources on our core small business and tax strategies. We determined that these businesses became long-lived assets held for sale in the fourth quarter of fiscal 2015. 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 values of these three businesses at October 31, 2015 and July 31, 2015 were less than the estimated fair values less cost to sell, no adjustments to the carrying values of these long-lived assets were necessary at those dates.
We also classified our Demandforce, QuickBase, and Quicken businesses as discontinued operations in the fourth quarter of fiscal 2015 and have therefore segregated their operating results from continuing operations in our statements of operations and on our balance sheets for all periods presented. Because the cash flows of these businesses were not material for any period presented, we have not segregated them from continuing operations on our statements of cash flows. Demandforce and QuickBase were part of our Small Business segment and Quicken was part of our former Consumer segment.

15


The carrying amounts of the major classes of assets and liabilities of Demandforce, QuickBase, and Quicken at October 31, 2015 and July 31, 2015 were as shown in the following table.
(In millions)
October 31,
2015
 
July 31,
2015
Accounts receivable
$
14

 
$
19

Deferred income taxes

 
5

Prepaid and other current assets
3

 
2

Property and equipment, net
18

 
25

Goodwill
156

 
165

Purchased intangible assets, net
43

 
43

Other assets
2

 
2

Total assets
236

 
261

 
 
 
 
Accounts payable
7

 
7

Accrued compensation
13

 
21

Deferred revenue
45

 
48

Other current liabilities
8

 
17

Long-term deferred revenue
38

 
39

Long-term obligations
16

 
29

Total liabilities
127

 
161

Net assets
$
109

 
$
100

Net revenue from discontinued operations, income or loss from discontinued operations before income taxes, and the components of net income (loss) from discontinued operations were as follows for the periods indicated:
 
Three Months Ended
(In millions)
October 31,
2015
 
October 31,
2014
Net revenue from discontinued operations:
 
 
 
Demandforce
$
25

 
$
31

QuickBase
20

 
17

Quicken
14

 
13

Total net revenue from discontinued operations
$
59

 
$
61

 
 
 
 
Income (loss) from discontinued operations before income taxes:
 
 
 
Demandforce
$
(4
)
 
$
(14
)
QuickBase
4

 
3

Quicken
4

 
6

Total income (loss) from discontinued operations before income taxes
$
4

 
$
(5
)
 
 
 
 
Net income (loss) from discontinued operations:
 
 
 
Net loss from Demandforce operations
$
(3
)
 
$
(9
)
Net income from QuickBase operations
3

 
2

Net income from Quicken operations
3

 
4

Tax expense from discontinued operations
(3
)
 

Total net loss from discontinued operations
$

 
$
(3
)



16


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 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 are 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 October 31, 2015. As of October 31, 2015, there was $350 million in outstanding borrowings on this credit facility, and we had $150 million of borrowings available.
Other Current Liabilities
Other current liabilities were as follows at the dates indicated:
(In millions)
October 31,
2015
 
July 31,
2015
Reserve for product returns
$
9

 
$
12

Reserve for rebates
13

 
12

Current portion of license fee payable
10

 
10

Current portion of deferred rent
11

 
8

Interest payable
3

 
10

Amounts due for share repurchases
17

 

Executive deferred compensation plan liabilities
69

 
63

Other
33

 
35

Total other current liabilities
$
165

 
$
150

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 and Commitments
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 October 31, 2015 and July 31, 2015. 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 $14 million in cash for interest on the Notes during the three months ended October 31, 2015 and $14 million in cash for interest on the Notes during the three months ended October 31, 2014.

17


Other Long-Term Obligations
Other long-term obligations were as follows at the dates indicated:
(In millions)
October 31,
2015
 
July 31,
2015
Total deferred rent
$
63

 
$
49

Total license fee payable
35

 
34

Long-term income tax liabilities
45

 
45

Long-term deferred income tax liabilities
51

 
50

Other
12

 
13

Total long-term obligations
206

 
191

Less current portion (included in other current liabilities)
(22
)
 
(19
)
Long-term obligations due after one year
$
184

 
$
172

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, 2015. On September 9, 2015 we entered into an agreement to purchase certain leased facilities for $262 million in cash and on November 9, 2015 we notified the seller of our unconditional acceptance of those facilities. Escrow is expected to close in January 2016.


7.
Income Taxes
Effective Tax Rate
We compute our provision for or benefit from income taxes by applying the estimated annual effective tax rate to income or loss from recurring operations and adding the effects of any discrete income tax items specific to the period.
Our effective tax rate for the three months ended October 31, 2015 was approximately 22%. Excluding discrete tax items primarily related to share-based compensation as well as including the effects of losses in certain jurisdictions where we do not recognize a tax benefit, our effective tax rate for the three months ended October 31, 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.
Our effective tax rate for the three months ended October 31, 2014 was approximately 31%. Excluding discrete tax items primarily related to share-based compensation and a state tax law change as well as including the effects of losses in certain jurisdictions where we do not recognize a tax benefit, our effective tax rate for the period was approximately 37% 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.
Unrecognized Tax Benefits and Other Considerations
The total amount of our unrecognized tax benefits at July 31, 2015 was $56 million. Net of related deferred tax assets, unrecognized tax benefits were $37 million at that date. If we were to recognize these net benefits, our income tax expense would reflect a favorable net impact of $37 million. There were no material changes to these amounts during the three months ended October 31, 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 14.4 million shares for $1.3 billion under these programs during the three months ended October 31, 2015. Included in this amount were $17 million of repurchases which occurred in late October 2015 and were settled in early November 2015. We repurchased 1.3 million shares for $114 million under these programs during the three months ended October 31, 2014. At October 31, 2015, we had authorization from our Board of

18


Directors to expend up to an additional $1.4 billion for stock repurchases through 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 three months ended October 31, 2015 we declared and paid quarterly cash dividends that totaled $0.30 per share of outstanding common stock or $82 million. In November 2015 our Board of Directors declared a quarterly cash dividend of $0.30 per share of outstanding common stock payable on January 19, 2016 to stockholders of record at the close of business on January 11, 2016. 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
(In millions, except per share amounts)
October 31,
2015
 
October 31,
2014
Cost of revenue
$
2

 
$
1

Selling and marketing
19

 
16

Research and development
21

 
19

General and administrative
25

 
21

Total share-based compensation expense
67

 
57

Income tax benefit
(20
)
 
(18
)
Increase in net loss from continuing operations
$
47

 
$
39

Increase in net loss per share:
 
 
 
Basic
$
0.17

 
$
0.14

Diluted
$
0.17

 
$
0.14

We capitalized $2 million in share-based compensation related to internal use software projects during the three months ended October 31, 2015. The table above also excludes share-based compensation expense for our discontinued operations, which totaled $2 million during the three months ended October 31, 2015 and $4 million during the three months ended October 31, 2014. Because we have not reclassified our statements of cash flows to segregate discontinued operations, these amounts are included in share-based compensation expense on our statements of cash flows for those periods.

19


Share-Based Awards Available for Grant
A summary of share-based awards available for grant under our 2005 Equity Incentive Plan for the three months ended October 31, 2015 was as follows:
(Shares in thousands)
Shares
Available
for Grant
Balance at July 31, 2015
17,183

Options granted
(3
)
Restricted stock units granted (1)
(433
)
Share-based awards canceled/forfeited/expired (1)(2)
2,244

Balance at October 31, 2015
18,991

________________________________
(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 three months ended October 31, 2015 was as follows:
 
Options Outstanding
(Shares in thousands)
Number
of Shares
 
Weighted
Average
Exercise
Price
Per Share
Balance at July 31, 2015
8,713

 
$
69.13

Granted
3

 
88.30

Exercised
(357
)
 
53.17

Canceled or expired
(210
)
 
70.78

Balance at October 31, 2015
8,149

 
$
69.79

 
 
 
 
Exercisable at October 31, 2015
4,367

 
$
52.27

At October 31, 2015, there was approximately $56 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 2.2 years.

20


Restricted Stock Unit Activity and Related Share-Based Compensation Expense
A summary of restricted stock unit activity for the three months ended October 31, 2015 was as follows:
 
Restricted Stock Units
(Shares in thousands)
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Nonvested at July 31, 2015
8,916

 
$
76.64

Granted
188

 
96.08

Vested
(407
)
 
66.43

Forfeited
(947
)
 
65.70

Nonvested at October 31, 2015
7,750

 
$
78.99

At October 31, 2015, there was approximately $392 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 2.1 years.


9.
Litigation
In fiscal 2015 Intuit was contacted by regulatory authorities, including Congress, the Federal Trade Commission, the SEC, the Department of Justice and certain state Attorneys General, which are conducting inquiries 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 certain actions, including a consolidated putative class action lawsuit 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, 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.
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

21


businesses and their customers through the Intuit Commerce Network; GoPayment mobile payment processing services; and QuickBooks Point of Sale solutions.
Consumer Tax. Consumer Tax targets consumers and includes TurboTax income tax preparation products and services and electronic tax filing services.
Professional Tax. Our Professional Tax segment targets professional accountants in the U.S. and Canada and includes Lacerte, ProSeries, ProFile, 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 approximately 5% of consolidated total net revenue for all periods presented.
We include expenses such as corporate selling and marketing, product development, and general and administrative expenses and share-based compensation expenses, which 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, 2015 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.
The following table shows our financial results by reportable segment for the periods indicated. Results for all periods presented have been adjusted to exclude results for our Demandforce, QuickBase, and Quicken businesses, which we classified as discontinued operations in the fourth quarter of fiscal 2015. See Note 4, “Discontinued Operations,” for more information.
 
Three Months Ended
(In millions)
October 31,
2015
 
October 31,
2014
Net revenue:
 
 
 
Small Business segment
$
546

 
$
519

Consumer Tax segment
57

 
57

Professional Tax segment
110

 
36

Total net revenue
$
713

 
$
612

 
 
 
 
Operating loss from continuing operations:
 
 
 
Small Business segment
$
211

 
$
188

Consumer Tax segment
(28
)
 
(36
)
Professional Tax segment
72

 
(3
)
Total segment operating income
255

 
149

Unallocated corporate items:
 
 
 
Share-based compensation expense
(67
)
 
(57
)
Other common expenses
(209
)
 
(191
)
Amortization of acquired technology
(6
)
 
(7
)
Amortization of other acquired intangible assets
(2
)
 
(3
)
Total unallocated corporate items
(284
)
 
(258
)
Total operating loss from continuing operations
$
(29
)
 
$
(109
)



22


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, 2015. In the fourth quarter fiscal 2015 we determined that our Demandforce, QuickBase, and Quicken businesses became long-lived assets held for sale. We accounted for these businesses as discontinued operations and have therefore reclassified our statements of operations and balance sheets for all periods presented to reflect them as such. Because the cash flows of these 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. 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 Tax, and Professional Tax.

Small Business: This segment targets small businesses and the accounting professionals who serve them and includes QuickBooks financial and business management online services and desktop software, payroll solutions, and payment processing solutions.

Consumer Tax: This segment targets consumers and includes TurboTax income tax preparation products and services.

Professional Tax: This segment targets professional accountants in the U.S. and Canada and includes Lacerte, ProSeries, ProFile, and Intuit Tax Online professional tax products and services.
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

23


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
Industry Trends
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.
Seasonality
Our Consumer Tax offerings have significant seasonal patterns. As a result, during each of the last three fiscal years the total revenue for our third quarter ended April 30 has represented nearly half of our total revenue for those years. We expect the seasonality of our Consumer Tax business to continue to have a significant impact on our quarterly financial results in the future.
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 the beginning of the 2015 calendar year, 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. 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 the upcoming tax season, we expect continued efforts by criminals to attempt to access our customers’ accounts and to try to use stolen identities to obtain customer information and file fraudulent federal and state tax returns. We will continue to invest in security and to work with the broader industry and government to protect our customers against this type of fraud.
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.

24


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 73% of our total revenue in fiscal 2015, compared with about 50% of our total revenue seven 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 three months of fiscal 2016 was $713 million, an increase of 17% compared with the same period of fiscal 2015. Total net revenue growth was affected by the changes that we made to our desktop software offerings in fiscal 2015. Starting with the release of Quickbooks 2015 in our first quarter of fiscal 2015, and for all subsequent versions, we began delivering ongoing enhancements and certain connected services for our QuickBooks desktop software products. We plan to continue to provide ongoing enhancements and certain connected services for all future versions. As a result of these changes, we recognize revenue for these QuickBooks desktop software products as services are provided over approximately three years. Revenue in our Small Business segment grew 5% in the first three months of fiscal 2016 compared with the same period of fiscal 2015 due to growth in connected services offerings such as QuickBooks Online, online payment processing services, and online payroll services, partially offset by the impact of the changes to our QuickBooks desktop software products. In fiscal 2015 we also began delivering ongoing enhancements and certain connected services for our Professional Tax desktop software products and we plan to continue to provide them for all future versions of those products. Due to these changes, we recognize revenue for these offerings as services are provided through the end of each calendar year. As a result, revenue in our Professional Tax segment increased 203% in the first three months of fiscal 2016 compared with the same period of fiscal 2015.
Operating loss from continuing operations for the first three months of fiscal 2016 was $29 million, a decrease of 73% compared with the same period of fiscal 2015. Higher revenue was partially offset by higher costs and expenses, including higher spending for staffing and share-based compensation.
Net loss from continuing operations decreased 62% for the first three months of fiscal 2016 compared with the same period of fiscal 2015 due to the decrease in the operating loss and a lower effective tax rate in the fiscal 2016 period. Diluted net loss per share from continuing operations for the first three months of fiscal 2016 decreased 61% to $0.11 due to the lower net loss and the decline in weighted average basic and diluted common shares compared with the same period of fiscal 2015.
We ended the first three months of fiscal 2016 with cash, cash equivalents and investments totaling $474 million. During the first three months of fiscal 2016 we generated cash from net sales of investments, borrowings under our revolving credit facility, and the issuance of common stock under employee stock plans. During the same period we used cash for operations, the repurchase of shares of our common stock under our stock repurchase programs, the payment of cash dividends, and capital expenditures. At October 31, 2015, we had authorization from our Board of Directors to expend up to an additional $1.4 billion for stock repurchases through 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, 2015 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. We believe that there were no significant changes in those critical accounting policies and estimates during the first three months of fiscal 2016. 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.



25


Results of Operations
Financial Overview
(Dollars in millions, except per share amounts)
Q1
FY16
 
Q1
FY15
 
$
Change
 
%
Change
Total net revenue
$
713

 
$
612

 
$
101

 
17
 %
Operating loss from continuing operations
(29
)
 
(109
)
 
80

 
(73
)%
Net loss from continuing operations
(31
)
 
(81
)
 
50

 
(62
)%
Basic and diluted net loss per share from continuing operations
$
(0.11
)
 
$
(0.28
)
 
$
0.17

 
(61
)%
Total net revenue for the first quarter of fiscal 2016 increased $101 million or 17% compared with the same quarter of fiscal 2015. Total net revenue growth was affected by the changes to our desktop software offerings described in “Executive Overview - Overview of Financial Results” above. Revenue in our Small Business segment grew 5% compared with the first quarter of fiscal 2015 due to growth in connected services offerings such as QuickBooks Online, online payment processing services, and online payroll services, partially offset by the impact of the changes to our QuickBooks desktop software products. The changes to our desktop software offerings also impacted our Professional Tax segment. In fiscal 2015 we began delivering ongoing enhancements and certain connected services for our Professional Tax desktop software products and we plan to continue to provide them for all future versions of those products. Due to these changes, we recognize revenue for these offerings as services are provided through the end of each calendar year. As a result, revenue in our Professional Tax segment increased increased 203% compared with the first quarter of fiscal 2015. See “Segment Results” later in this Item 2 for more information about the results for all of our reportable segments.
Operating loss from continuing operations for the first quarter of fiscal 2016 decreased 73% compared with the same quarter of fiscal 2015. Higher revenue was partially offset by higher costs and expenses, including higher spending for staffing and share-based compensation. See “Operating Expenses” later in this Item 2 for more information.
Net loss from continuing operations for the first quarter of fiscal 2016 decreased 62% compared with the same quarter of fiscal 2015 due to the decrease in the operating loss and a lower effective tax rate in the fiscal 2016 period. See “Non-Operating Income and Expenses” later in this Item 2 for more information. Diluted net loss per share from continuing operations for the first quarter of fiscal 2016 decreased 61% to $0.11 due to the lower net loss and the decline in weighted average basic and diluted common shares compared with the same quarter of fiscal 2015.
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 approximately 5% of consolidated total net revenue for all periods presented.
Segment operating income or loss is segment net revenue less segment cost of revenue and operating expenses. See “Executive Overview – 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 $276 million in the first three months of fiscal 2016 and $248 million in the first three months of fiscal 2015. Unallocated costs increased in the fiscal 2016 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 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.

26


Small Business
(Dollars in millions)
Q1
FY16
 
Q1
FY15
 
%
Change
Product revenue
$
166

 
$
187

 
(11
)%
Service and other revenue
380

 
332

 
14
 %
Total segment revenue
$
546

 
$
519

 
5
 %
% of total revenue
77
%
 
85
%
 
 
 
 
 
 
 
 
Segment operating income
$
211

 
$
188

 
12
 %
% of related revenue
39
%
 
36
%
 
 
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. Service and other revenue in our Small Business segment is derived primarily from QuickBooks Online, 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; and payment processing services for small businesses.
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.
Small Business segment total net revenue increased $27 million or 5% in the first quarter of fiscal 2016 compared with the same quarter of fiscal 2015. Small Business segment revenue growth was affected by the changes to our QuickBooks desktop offerings described in “Executive Overview – Overview of Financial Results” above. Small Business Online Ecosystem revenue grew 28%, driven by customer acquisition. QuickBooks Online subscribers grew 57% and online payroll customers grew 17%. Active online payments customers grew 4% and online payments charge volume grew 14%. In our Small Business Desktop Ecosystem revenue declined 1%. QuickBooks desktop revenue declined 10% on flat unit sales as we continued to emphasize QuickBooks Online while QuickBooks Enterprise Solutions revenue grew 29%.
Small Business segment operating income as a percentage of related revenue increased in the first quarter of fiscal 2016 compared with the same period of fiscal 2015. The increase was due to the higher revenue described above partially offset by higher staffing expenses.
Consumer Tax
(Dollars in millions)
Q1
FY16
 
Q1
FY15
 
%
Change
Product revenue
$
10

 
$
11

 
(8
)%
Service and other revenue
47

 
46

 
2
 %
Total segment revenue
$
57

 
$
57

 
 %
% of total revenue
8
 %
 
9
 %
 
 
 
 
 
 
 
 
Segment operating loss
$
(28
)
 
$
(36
)
 
(23
)%
% of related revenue
(50
)%
 
(64
)%
 
 
Consumer Tax segment product revenue is derived primarily from TurboTax desktop tax return preparation software. Consumer Tax segment service and other revenue is derived primarily from TurboTax Online tax return preparation services and electronic tax filing services.
Due to the seasonal nature of our Consumer Tax offerings, we typically generate nominal revenue from consumer tax products
and services in our first fiscal quarter compared with our second and third fiscal quarters. The majority of Consumer Tax segment revenue for the first quarter of each fiscal year is for the filing of extended returns for the previous tax year. Consumer Tax segment total net revenue was flat in the first quarter of fiscal 2016 compared with the same quarter of fiscal 2015.

27


Because of the seasonality of our Consumer Tax revenue, we do not believe that first fiscal quarter revenue in our Consumer Tax segment is indicative of revenue trends for the current fiscal year. We will not have substantially complete results for the 2015 tax season until the third quarter of fiscal 2016.
In our first fiscal quarter our Consumer Tax segment typically generates operating losses because Consumer Tax revenue is nominal while segment operating expenses for functions such as research and development continue at relatively consistent levels. We do not believe that Consumer Tax segment operating results for the first quarter of fiscal 2016 compared with the same quarter of fiscal 2015 are indicative of trends for the full fiscal year.
Professional Tax
(Dollars in millions)
Q1
FY16
 
Q1
FY15
 
%
Change
Product revenue
$
95

 
$
30

 
213
%
Service and other revenue
15

 
6

 
151
%
Total segment revenue
$
110

 
$
36

 
203
%
% of total revenue
15
%
 
6
 %
 
 
 
 
 
 
 
 
Segment operating income (loss)
$
72

 
$
(3
)
 
NM

% of related revenue
65
%
 
(8
)%
 
 
NM = Not meaningful.
Professional Tax segment product revenue is derived primarily from Lacerte, ProSeries, and ProFile desktop tax preparation software products. Professional Tax segment service and other revenue is derived primarily from Intuit Tax Online tax return preparation, bank products, and related services that complement the tax return preparation process.
Prior to fiscal 2015, we typically generated nominal revenue from professional tax products and services in our first fiscal quarter compared with our second and third fiscal quarters. The majority of Professional Tax revenue for the first quarter of each fiscal year was for the filing of extended returns for the previous tax year. In fiscal 2015 we began delivering ongoing enhancements and certain connected services for our Professional Tax desktop software products. As a result of these changes, we recognize revenue for these offerings as services are provided through the end of each calendar year. Professional Tax total net revenue increased $74 million or 203% in the first quarter of fiscal 2016 compared with the same quarter of fiscal 2015 due to the changes to our desktop software products. We do not believe that first fiscal quarter revenue in this segment is indicative of revenue trends for the current fiscal year. We will not have substantially complete results for the 2015 tax season until the third quarter of fiscal 2016.
Professional Tax segment operating income increased in the first three months of fiscal 2016 compared with the same period of fiscal 2015 due to the increase in revenue described above. We do not believe that Professional Tax operating results for the first quarter of fiscal 2016 compared with the same quarter of fiscal 2015 are indicative of trends for the full fiscal year.
Cost of Revenue
(Dollars in millions)
Q1
FY16
 
% of
Related
Revenue
 
Q1
FY15
 
% of
Related
Revenue
Cost of product revenue
$
29

 
11
%
 
$
33

 
14
%
Cost of service and other revenue
131

 
30
%
 
119

 
31
%
Amortization of acquired technology
6

 
n/a

 
7

 
n/a

Total cost of revenue
$
166

 
23
%
 
$
159

 
26
%
Cost of product revenue as a percentage of product revenue decreased in the first three months of fiscal 2016 compared with the same period of fiscal 2015 due to the changes to our Professional Tax and QuickBooks desktop software products described in “Executive Overview – Overview of Financial Results” earlier in this Item 2. 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. Cost of service and other revenue as a percentage of service and other revenue decreased slightly in the first three months of fiscal 2016 compared with the same period of fiscal 2015 due to growth in connected service offerings such as QuickBooks Online, online

28


payment processing services, and online payroll services. Online revenues have relatively lower costs of revenue compared with our other service offerings.
Operating Expenses
(Dollars in millions)
Q1
FY16
 
% of
Total
Net
Revenue
 
Q1
FY15
 
% of
Total
Net
Revenue
Selling and marketing
$
244

 
34
%
 
$
251

 
41
%
Research and development
213

 
30
%
 
189

 
32
%
General and administrative
117

 
17
%
 
119

 
19
%
Amortization of other acquired intangible assets
2

 
%
 
3

 
%
Total operating expenses
$
576

 
81
%
 
$
562

 
92
%
Total operating expenses as a percentage of total net revenue decreased to 81% in the first quarter of fiscal 2016 from 92% in the same quarter of fiscal 2015. Total net revenue for the first quarter of fiscal 2016 increased $101 million or 17% and total operating expenses for that quarter increased $14 million. Total net revenue growth was affected by the change to our desktop software offerings described in “Executive Overview – Overview of Financial Results” earlier in this Item 2. Staffing expenses increased about $25 million due to higher headcount while expenses for marketing programs were about $7 million lower. Operating expenses also increased about $9 million for share-based compensation expenses. Share-based compensation expenses were higher in the fiscal 2016 quarter due to our assumption of certain equity awards in connection with business combinations. Share-based compensation expenses have also been increasing over time because the market price of our common stock has generally been increasing.
Non-Operating Income and Expenses
Interest Expense
Interest expense of $7 million for the first three months of fiscal 2016 and $7 million for the first three months of fiscal 2015 consisted primarily of interest on senior notes that we issued in March 2007. See Note 6 to the financial statements in Part I, Item 1 of this Quarterly Report for more information.
Interest and Other Income, Net
 
Three Months Ended
(In millions)
October 31,
2015
 
October 31,
2014
Interest income
$

 
$
2

Net gain (loss) on executive deferred compensation plan assets
(2
)
 
1

Other
(2
)
 
(3
)
Total interest and other income (expense), net
$
(4
)
 
$

Interest income in the first quarter of fiscal 2016 was lower compared with the same period of fiscal 2015 due to lower average invested balances and lower average interest rates. 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 for each period are approximately equal to the total amounts recorded in interest and other income in those periods.
Income Taxes
We compute our provision for or benefit from income taxes by applying the estimated annual effective tax rate to income or loss from recurring operations and adding the effects of any discrete income tax items specific to the period.
Our effective tax rate for the first quarter of fiscal 2016 was approximately 22%. Excluding discrete tax items primarily related to share-based compensation as well as including the effects of losses in certain jurisdictions where we do not recognize a tax

29


benefit, our effective tax rate for the period was approximately 36% and did not differ significantly from the federal statutory rate of 35%.
Our effective tax rate for the first quarter of fiscal 2015 was approximately 31%. Excluding discrete tax items primarily related to share-based compensation and a state tax law change as well as including the effects of losses in certain jurisdictions where we do not recognize a tax benefit, our effective tax rate for the period was approximately 37% and did not differ significantly from the federal statutory rate of 35%. See Note 7 to the financial statements in Part I, Item 1 of this Quarterly Report for more information.
Discontinued Operations
In the fourth quarter of fiscal 2015 we determined that our Demandforce, QuickBase, and Quicken businesses became long-lived assets held for sale and we classified them as discontinued operations. See Note 4 to the financial statements in Part I, Item 1 of this Quarterly Report for more information.

Liquidity and Capital Resources
Overview
At October 31, 2015, our cash, cash equivalents and investments totaled $474 million, a decrease of $1.2 billion from July 31, 2015 due to the factors discussed under “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. As discussed in “Executive Overview – Industry Trends and Seasonality” earlier in this Item 2, our business is subject to significant seasonality. The balance of our cash, cash equivalents, and investments generally fluctuates with that seasonal pattern. We believe the seasonality of our business is likely to continue in the future.
The following table summarizes selected measures of our liquidity and capital resources at the dates indicated:
(Dollars in millions)
October 31,
2015
 
July 31,
2015
 
$
Change
 
%
Change
Cash, cash equivalents, and investments
$
474

 
$
1,697

 
$
(1,223
)
 
(72
)%
Long-term investments
28

 
27

 
1

 
4
 %
Borrowings under credit facility
350

 

 
350

 
NM

Long-term debt
500

 
500

 

 
 %
Working capital
(460
)
 
816

 
(1,276
)
 
(156
)%
Ratio of current assets to current liabilities
0.8 : 1

 
1.5 : 1

 
 
 
 
NM = Not meaningful.
We have historically generated significant cash from operations and we expect to continue to do so during the balance of fiscal 2016. Since our operations are primarily domestic, approximately 65% of our cash, cash equivalents and investments at October 31, 2015 were located in the U.S. and none of those funds were restricted. Our only long-term debt consists of $500 million in senior unsecured notes due in March 2017. We also have a $500 million unsecured revolving line of credit facility available to us for general corporate purposes, including future acquisitions and stock repurchases. As of October 31, 2015, there was $350 million in outstanding borrowings on this credit facility, and we had $150 million of borrowings available.
We evaluate, on an ongoing basis, the merits of acquiring technology or businesses, or establishing strategic relationships with and investing in other companies. Our strong liquidity profile enables us to respond nimbly to these types of opportunities.
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 our operating and strategic cash needs.

30


Statements of Cash Flows
The following table summarizes selected items from our statements of cash flows for the first three months of fiscal 2016 and fiscal 2015. See the financial statements in Part I, Item 1 of this Quarterly Report for complete statements of cash flows for those periods.
 
Three Months Ended
(Dollars in millions)
October 31,
2015
 
October 31,
2014
 
$
Change
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
(197
)
 
$
(118
)
 
$
(79
)
Investing activities
816

 
(61
)
 
877

Financing activities
(952
)
 
(123
)
 
(829
)
Effect of exchange rate changes on cash
(1
)
 
(5
)
 
4

Total decrease in cash and cash equivalents
$
(334
)
 
$
(307
)
 
$
(27
)
During the first three months of fiscal 2016 we generated cash from net sales of investments, borrowings under our revolving credit facility, and the issuance of common stock under employee stock plans. During the same period we used cash for operations, including the payment of accrued bonuses for fiscal 2015, the repurchase of shares of our common stock under our stock repurchase programs, the payment of cash dividends, and capital expenditures.
During the first three months of fiscal 2015 we generated cash from the issuance of common stock under employee stock plans.
During the same period we used cash for operations, including the payment of accrued bonuses for fiscal 2014, the repurchase of shares of our common stock under our stock repurchase programs, the payment of cash dividends, and capital expenditures.
Stock Repurchase Programs, Treasury Shares, and Dividends on Common Stock
As described in Note 8 to the financial statements in Part I, Item 1 of this Quarterly Report, during the first three months of fiscal 2016 we continued to repurchase shares of our common stock under repurchase programs that our Board of Directors has authorized. At October 31, 2015, we had authorization from our Board of Directors to expend up to an additional $1.4 billion for stock repurchases through May 19, 2019. 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.
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.
During the first three months of fiscal 2016 we also continued to pay quarterly cash dividends on shares of our outstanding common stock. In November 2015 our Board of Directors declared a quarterly cash dividend of $0.30 per share of outstanding common stock payable on January 19, 2016 to stockholders of record at the close of business on January 11, 2016. 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.
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. See Note 5 to the financial statements in Part I, Item 1 of this Quarterly Report for a description of the key terms of this agreement, including the covenants. We remained in compliance with those covenants at all times during the quarter ended October 31, 2015. We may use amounts borrowed under this credit facility for general corporate purposes, including future acquisitions. We monitor counterparty risk associated with the institutional lenders that are providing the credit facility. As of October 31, 2015, there was $350 million in outstanding borrowings on this credit facility, and we had $150 million of borrowings available.
Cash Held by Foreign Subsidiaries
Our cash, cash equivalents, and investments totaled $474 million at October 31, 2015. Of this amount, approximately 35% was held by our foreign subsidiaries and subject to repatriation tax considerations. These foreign funds were located primarily in

31


Canada, India, and the United Kingdom. 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.


Off-Balance Sheet Arrangements
At October 31, 2015, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.


Contractual Obligations
We presented our contractual obligations at July 31, 2015 in our Annual Report on Form 10-K for the fiscal year then ended. On September 9, 2015 we entered into an agreement to purchase certain leased facilities for $262 million in cash and on November 9, 2015 we notified the seller of our unconditional acceptance of those facilities. Escrow is expected to close in January 2016.

 
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, if any, and the potential impact of these pronouncements on our consolidated financial statements, see Note 1 to the financial statements in Part I, Item 1 of this Quarterly Report.

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ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment Risk
We actively monitor market conditions and developments specific to the securities in which we invest. We believe that we take a conservative approach to investing our funds in that we invest only in highly-rated securities and diversify our portfolio of investments. While we believe we take prudent measures to mitigate investment related risks, such risks cannot be fully eliminated because of market circumstances that are outside our control.
Our investments consist of instruments that meet quality standards that are consistent with our investment policy. This policy specifies that, except for direct obligations of the United States government, securities issued by agencies of the United States government, and money market funds, we diversify our investments by limiting our holdings with any individual issuer. We do not hold derivative financial instruments or European sovereign debt in our portfolio of investments. See Note 3 to the financial statements in Part I, Item 1 of this Quarterly Report for a summary of the cost and fair value of our investments by type of issue.
Interest Rate Risk
Our cash equivalents and investments are subject to market risk due to changes in interest rates. Interest rate movements affect the interest income we earn on cash equivalents and investments and the fair value of those investments. If the Federal Reserve Target Rate had increased by 25 basis points from the level of October 31, 2015, the value of our investments at that date would have decreased by approximately $0.4 million. If the Federal Reserve Target Rate had increased by 100 basis points from the level of October 31, 2015, the value of our investments at that date would have decreased by approximately $1.6 million.
We are also exposed to the impact of changes in interest rates as they affect our $500 million revolving credit facility. Advances under the credit facility accrue interest at rates that are equal to 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%, in both cases based on our senior debt credit ratings. Consequently, our interest expense fluctuates with changes in the general level of these interest rates. At October 31, 2015, $350 million was outstanding under the credit facility.
On March 12, 2007 we issued $500 million of 5.75% senior unsecured notes due on March 15, 2017. We carry these senior notes at face value less unamortized discount on our balance sheets. Since these senior notes bear interest at fixed rates, we have no financial statement risk associated with changes in interest rates. However, the fair value of these notes fluctuates when interest rates change. See Note 2 and Note 6 to the financial statements in Part I, Item 1 of this Quarterly Report for more information.
Impact of Foreign Currency Rate Changes
The functional currencies of our international operating subsidiaries are generally the local currencies. We translate the assets and liabilities of our foreign subsidiaries at the exchange rates in effect on the balance sheet date. We translate their revenue, costs and expenses at the average rates of exchange in effect during the period. We include translation gains and losses in the stockholders’ equity section of our balance sheets. We include net gains and losses resulting from foreign exchange transactions in interest and other income in our statements of operations.
Since we translate foreign currencies (primarily Canadian dollars, Indian rupees, and British pounds) into U.S. dollars for financial reporting purposes, currency fluctuations can have an impact on our financial results. The historical impact of currency fluctuations on our financial results has generally been immaterial. We believe that our exposure to currency exchange fluctuation risk is not significant primarily because our global subsidiaries invoice customers and satisfy their financial obligations almost exclusively in their local currencies. Although the impact of currency fluctuations on our financial results has generally been immaterial in the past and we believe that for the reasons cited above currency fluctuations will not be significant in the future, the impact of currency fluctuations could be material in the future. As of October 31, 2015, we did not engage in foreign currency hedging activities.


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ITEM 4
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based upon an evaluation of the effectiveness of disclosure controls and procedures, Intuit’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures as defined under Exchange Act Rules 13a-15(e) and 15d-15(e) were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During our most recent fiscal quarter, there has not occurred any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and that they are effective at the reasonable assurance level. However, no matter how well conceived and executed, a control system can provide only reasonable and not absolute assurance that the objectives of the control system are met. The design of any control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. There are also limitations that are inherent in any control system. These limitations include the realities that breakdowns can occur because of errors in judgment or mistakes, and that controls can be circumvented by individual persons, by collusion of two or more people, or by management override of the controls. Because of these inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.


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PART II
ITEM 1
LEGAL PROCEEDINGS
None.


ITEM 1A
RISK FACTORS

Forward-Looking Statements and Risk Factors
This Quarterly Report on Form 10-Q 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 beliefs and expectations regarding seasonality, competition and other trends that affect our business;
our expectation that we will 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;
our expectation that we will expand our third party technology relationships and strategic partnerships as we continue to pursue our connected services strategy and expand our mobile and global offerings;
our expectation that we will continue to invest significant resources in our product development, marketing and sales capabilities;
our expectation that we will continue to invest significant management attention and resources in our information technology infrastructure and in our privacy and security capabilities;
our expectation that we will work with the broader industry and government to protect our customers from fraud;
our expectation that we will be able to protect our customers’ data and prevent third parties from using stolen customer information to perpetrate fraud in our tax and other offerings;
our belief that our recent financial performance has not been materially adversely affected by fraudulent activity or the actions we have taken to combat it;
our expectation that we will generate significant cash from operations;
our expectation that connected services revenue as a percentage of our total revenue will continue to grow;
our expectations regarding the development of future products, services, business models and technology platforms and our research and development efforts;
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 we take prudent measures to mitigate investment related risks;
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 it is not reasonably possible that there will be a significant increase or decrease in our unrecognized tax benefits over the next 12 months;
our intent to permanently reinvest a significant portion of our earnings from foreign operations, and our belief that we will not need funds generated from foreign operations to fund our domestic operations;

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our belief that our cash and cash equivalents, investments and cash generated from operations will be sufficient to meet our seasonal working capital