INTUIT INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide readers of our condensed consolidated financial statements with the perspectives of management. This should allow the readers of this report to obtain a comprehensive understanding of our businesses, strategies, current trends, and future prospects. Our MD&A includes the following sections: • Executive Overview: High level discussion of our operating results and some of the trends that affect our business. • Critical Accounting Policies and Estimates: Significant changes since our most recent Annual Report on Form 10-K that we believe are important to understanding the assumptions and judgments underlying our financial statements.
• Results of Operations: A more detailed discussion of our revenue and expenses.
• Liquidity and Capital Resources: Discussion of key aspects of our condensed consolidated statements of cash flows, changes in our condensed consolidated balance sheets, and our financial commitments. You should note that this MD&A contains forward-looking statements that involve risks and uncertainties. Please see the section entitled "Forward-Looking Statements" immediately preceding Part I 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 endedJuly 31, 2019 . We adopted the new lease standard effectiveAugust 1, 2019 under the modified retrospective approach applied at the beginning of the period of adoption. See Note 1 to the financial statements in Part I, Item 1 of this Quarterly Report for more information. InMarch 2020 theWorld Health Organization declared the COVID-19 outbreak as a pandemic. The COVID-19 pandemic has had significant adverse impacts on theU.S. and global economies. We are conducting business with substantial modifications to employee work locations and employee travel, among other modifications. While we have not experienced significant disruptions to our operations thus far from the COVID-19 pandemic, we are unable to predict the full impact that the COVID-19 pandemic will have on our operations and financial performance, including demand for our offerings, impact to our customers and partners, actions that may be taken by governmental authorities, and other factors identified in "Risk Factors" in Item 1A of Part II of this Quarterly Report. In mid-March we began to see the COVID-19 pandemic negatively impact our small business results as many small businesses are closed or have scaled back their offerings. Additionally, due to the extension of the Internal Revenue Service (IRS) tax filing deadline fromApril 15th, 2020 toJuly 15th, 2020 , and all states with a personal income tax extending their due dates predominantly to July, it is difficult to anticipate the tax filing behavior for the 2019 tax year. We will continue to actively monitor the situation and evaluate the nature and extent of the impact to our business and financial performance. InApril 2020 , Intuit was approved as a non-bankSmall Business Administration lender for the Paycheck Protection Program (PPP). The PPP was authorized under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to provide small businesses loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt which is designed to provide assistance to small businesses during the COVID-19 pandemic. During the third quarter of our fiscal 2020 activity under the PPP program was insignificant. EXECUTIVE OVERVIEW This overview provides a high-level discussion of our operating results and some of the trends that affect our business. We believe that an understanding of these trends is important in order to understand our financial results as well as our future prospects. 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.
Intuit Q3 Fiscal 2020 Form 10-Q 25
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About Intuit
Intuit helps consumers, small businesses, and the self-employed prosper by
delivering financial management and compliance products and services. We also
provide specialized tax products to accounting professionals, who are key
partners that help us serve small business customers. We organize our businesses
into three reportable segments - Small Business & Self-Employed, Consumer, and
Strategic Partner.
[[Image Removed: chart-2ef5f603b0925650bc7.jpg]]
Small Business & Self-Employed: This segment serves small businesses and the
self-employed around the world, and the accounting professionals who serve and
advise them. Our offerings include QuickBooks financial and business management
online services and desktop software, payroll solutions, merchant payment
processing solutions, and financing for small businesses.
Consumer: This segment serves consumers and includes do-it-yourself and assisted
TurboTax income tax preparation products and services sold in the U.S. and
Canada . Our Mint and Turbo offerings serve consumers and help them understand
and improve their financial lives by offering a view of their financial health.
Strategic Partner: This segment serves professional accountants in the U.S. and
Canada , who are essential to both small business success and tax preparation and
filing. Our professional tax offerings include Lacerte, ProSeries, ProFile, and
ProConnect Tax Online.
Our Growth Strategy
At Intuit, our strategy starts with customer obsession. We listen to and observe
our customers, understand their challenges, and then use advanced technology,
including artificial intelligence (A.I.), to develop innovative solutions
designed to solve their problems and help them grow and prosper. For more than
three decades, our values have inspired us to innovate and reimagine ways to
save people time and money, eliminate drudgery and inspire confidence. We have
reinvented and disrupted ourselves to better serve our customers, as we continue
to transform into an A.I.-driven expert platform company. Our assessment of
external trends - the expectation of more personalized experiences, the
digitization of services, as well as the growth in the self-employed workforce -
reveals significant opportunities to drive future growth. The result is a shift
from traditional services and point solutions to interconnected capabilities
that work on platforms and increasingly rely on A.I. and data-driven solutions.
As we build those interconnected capabilities that rely on an A.I.-driven expert
platform we are focused on three core elements:
• Building an open, trusted platform: We are creating a technology platform
where we and our partners can seamlessly integrate together to solve the most
pressing customer problems and deliver awesome experiences. Our open platform
allows our customers to use and confidently share their data, with their
consent, with us and third-party partners to help improve their financial lives.
• Accelerating the application of A.I.: We are actively accelerating our
application of A.I., which continuously learns from data across the platform,
and revolutionizes the experience for our customers. For example, our TurboTax
solutions use machine learning to create a customized interview, asking
questions uniquely tailored to each individual situation.
• Connecting people with experts: Across the platform, we are digitizing
services by building connections among customers, partners, and experts to
inspire confidence in our customers. For example, our TurboTax Live offering
seamlessly connects our TurboTax customers with tax experts via a live one-way
video. We will continue to develop new means to connect customers with experts
so our customers can have confidence that they are making the right decisions
about their financial lives, and the personalized experiences they expect.
As part of our strategy, we also develop relationships with key partners that
enable us to scale our service to consumers, small businesses and the
self-employed globally, including financial institutions, enterprise platforms,
educational institutions and accountants. These partnerships allow us to
co-create indispensable connections by sharing expertise, product integrations,
and new solutions to solve more customer problems.
Intuit Q3 Fiscal 2020 Form 10-Q 26
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Industry Trends and Seasonality
Industry Trends A.I. is transforming multiple industries, including financial technology. Disruptive start-ups, emerging ecosystems and mega-platforms are harnessing new technology to create personalized experiences, deliver data-driven insights and increase speed of service. These shifts are creating a more dynamic and highly competitive environment where customer expectations are shifting around the world as more services become digitized and the array of choices continues to increase. Seasonality Historically, our Consumer and Strategic Partner offerings have had a significant and distinct seasonal pattern as sales and revenue from our income tax preparation products and services are heavily concentrated in the period from November through April. This seasonal pattern has historically resulted in higher net revenues during our second and third quarters endingJanuary 31 andApril 30 , respectively. InMarch 2020 , as a relief measure in response to the COVID-19 pandemic, theIRS extended the filing deadline for the 2019 tax year fromApril 15, 2020 toJuly 15, 2020 . Additionally, all states with a personal income tax have also extended their due dates, predominantly to July. As a result, we expect a shift in sales and revenue from our third fiscal quarter to our fourth fiscal quarter during fiscal 2020. We expect the seasonality of our Consumer and Strategic Partner businesses 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 offer more online services, the ongoing operation and availability of our platforms and systems and those of our external service providers is becoming increasingly important. Because we help customers manage their financial lives, we face risks associated with the hosting, collection, use, and retention of personal customer information and data. We are investing significant management attention and resources in our information technology infrastructure and in our privacy and security capabilities, and we expect to continue to do so in the future. For our consumer and professional tax offerings, we have implemented additional security measures and are continuing to work with state and federal governments to share information regarding suspicious filings. We continue to invest in security measures 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" immediately preceding Part I and "Risk Factors" in Item 1A of Part II of this Quarterly Report. Overview of Financial Results The most important financial indicators that we use to assess our business are revenue growth for the company as a whole and for each reportable segment; operating income growth for the company as a whole; 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. Service offerings are a significant part of our business. Our total service and other revenue was$5.2 billion or 76% of our total revenue in fiscal 2019 and we expect our total service and other revenue to continue to grow in the future. Intuit Q3 Fiscal 2020 Form 10-Q 27
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Key highlights for the first nine months of fiscal 2020 include the following:
Small Business &
Revenue of Consumer revenue of Self-Employed revenue of
$5.9 B $2.4 B $3.0 B
up 1% from the same down 10% from same period up 14% from the same
period of fiscal 2019 of fiscal 2019 period of fiscal 2019
Diluted net income per
Operating income of Net income of share of
$1.7 B $1.4 B $5.24
down 16% from the same down 14% from the same down 14% from the same
period of fiscal 2019 period of fiscal 2019 period of fiscal 2019
We ended the first nine months of fiscal 2020 with cash, cash equivalents and
investments totaling $4.0 billion .
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 condensed consolidated balance sheets. 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 Part II, Item 7 of our Annual Report on
Form 10-K for the fiscal year ended July 31, 2019 have the greatest potential
impact on our financial statements, so we consider them to be our critical
accounting policies and estimates. We believe that there were no significant
changes in those critical accounting policies and estimates during the first
nine months of fiscal 2020. 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.
Intuit Q3 Fiscal 2020 Form 10-Q 28
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Table of Contents RESULTS OF OPERATIONS Financial Overview (Dollars in millions, except per YTD YTD share Q3 Q3 $ % Q3 Q3 $ % amounts) FY20 FY19 Change Change FY20 FY19 Change Change Total net revenue$ 3,002 $ 3,272 $ (270 ) (8 )%$ 5,863 $ 5,790 $ 73 1 % Operating income 1,413 1,784 (371 ) (21 )% 1,693 2,007 (314 ) (16 )% Net income 1,084 1,378 (294 ) (21 )% 1,381 1,601 (220 ) (14 )% Diluted net income per share$ 4.11 $ 5.22 $ (1.11 ) (21 )%$ 5.24 $ 6.06 $ (0.82 ) (14 )% Current Fiscal Quarter Total net revenue for the third quarter of fiscal 2020 decreased$270 million or 8% compared with the same quarter of fiscal 2019. As a relief measure in response to the COVID-19 pandemic, theIRS extended the filing deadline for the 2019 tax year fromApril 15, 2020 toJuly 15, 2020 and all states with a personal income tax have also extended their due dates, predominantly to July. As a result of the extension of the tax filing deadline revenue for our Consumer and Strategic Partner segments also decreased as compared to the same quarter of fiscal 2019. Our Small Business & Self-Employed segment revenue increased during the quarter due to growth in our Online Ecosystem revenue. See "Segment Results" later in this Item 2 for more information about the results for all of our reportable segments. Operating income for the third quarter of fiscal 2020 decreased$371 million or 21% compared with the same quarter of fiscal 2019. The decrease was due to the decrease in revenue described above and higher expenses for staffing and professional fees for the close of a pending business combination, which were partially offset by a decrease in expenses for sales and marketing. See "Operating Expenses" later in this Item 2 for more information. Net income for the third quarter of fiscal 2020 decreased$294 million or 21% due to the decrease in operating income described above. Diluted net income per share decreased 21% to$4.11 for the third quarter of fiscal 2020, in line with the decrease in net income. Fiscal Year to Date Total net revenue for the first nine months of fiscal 2020 increased$73 million or 1% compared with the same period of fiscal 2019. As a relief measure in response to the COVID-19 pandemic, theIRS extended the filing deadline for the 2019 tax year fromApril 15, 2020 toJuly 15, 2020 and all states with a personal income tax have also extended their due dates, predominantly to July. As a result of the extension of the tax filing deadline revenue for our Consumer and Strategic Partner segments decreased as compared to the same period of fiscal 2019. Our Small Business & Self-Employed segment revenue increased during the period due to growth in our Online Ecosystem revenue. See "Segment Results" later in this Item 2 for more information about the results for all of our reportable segments. Operating income for the first nine months of fiscal 2020 decreased$314 million or 16% compared with the same period of fiscal 2019. The decrease was primarily due to the decrease in Consumer and Strategic Partner segment revenues described above and higher expenses for staffing, outside services, corporate related expenses, and professional fees for the close of a pending business combination. See "Operating Expenses" later in this Item 2 for more information. Net income for the first nine months of fiscal 2020 decreased$220 million or 14% compared with the same period of fiscal 2019 primarily due to the decrease in operating income described above. Diluted net income per share decreased 14% to$5.24 for the first nine months of fiscal 2020, in line with the decrease in net income.
Intuit Q3 Fiscal 2020 Form 10-Q 29
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Table of Contents 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 11 to the financial statements in Part I, Item 1 of this Quarterly Report for more information. All of our segments operate and sell to customers primarily inthe United States . International total net revenue was less than 5% of consolidated total net revenue for all periods presented. Segment operating income or loss is segment net revenue less segment cost of revenue and operating expenses. See "Executive Overview - 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, general and administrative expenses, and share-based compensation expenses, which are not allocated to specific segments. These unallocated costs totaled$1.4 billion in the first nine months of fiscal 2020 and$1.3 billion in the first nine months of fiscal 2019. Unallocated costs increased in the fiscal 2020 period due to increased corporate product development, selling and marketing, and general and administrative expenses in support of the growth of our businesses and higher share-based compensation expenses. Segment expenses also do not include amortization of acquired technology and amortization of other acquired intangible assets which totaled$22 million in the first nine months of fiscal 2020 and$19 million in the first nine months of fiscal 2019. See Note 11 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.
Intuit Q3 Fiscal 2020 Form 10-Q 30
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Small Business & Self-Employed [[Image Removed: logoquickbooksa23.jpg]]
[[Image Removed: chart-a3637daacf6f5fc688e.jpg]]
Small Business & Self-Employed segment includes both Online Ecosystem and
Desktop Ecosystem revenue.
Our Online Ecosystem includes revenue from QuickBooks Online, QuickBooks Live,
QuickBooks Online Advanced and QuickBooks Self-Employed financial and business
management offerings; small business payroll services, including QuickBooks
Online Payroll, Intuit Online Payroll, Intuit Full Service Payroll; merchant
payment processing services for small businesses who use online offerings; and
financing for small businesses.
Our Desktop Ecosystem includes revenue from our QuickBooks Desktop packaged
software products (Desktop Pro, Desktop for Mac, Desktop Premier, and QuickBooks
Point of Sale); QuickBooks Desktop software subscriptions (QuickBooks Desktop
Pro Plus, QuickBooks Desktop Premier Plus, and QuickBooks Enterprise, and
ProAdvisor Program memberships for the accounting professionals who serve small
businesses); desktop payroll products (QuickBooks Basic Payroll, QuickBooks
Assisted Payroll and QuickBooks Enhanced Payroll); merchant payment processing
services for small businesses who use desktop offerings; and financial supplies.
Segment product revenue is derived from revenue related to software license and
version protection for our QuickBooks Desktop products and subscriptions,
license and related updates for our desktop payroll products and financial
supplies, which are all part of our Desktop Ecosystem. Segment service and other
revenue is derived from our Online Ecosystem revenue; and Desktop Ecosystem
revenue related to support and connected services for our QuickBooks Desktop and
desktop payroll products and subscriptions and merchant payment processing
services.
YTD YTD
Q3 Q3 % Q3 Q3 %
(Dollars in millions) FY20 FY19 Change FY20 FY19 Change
Product revenue $ 226 $ 243 (7 )% $ 797 $ 803 (1 )%
Service and other revenue 756 644 17 % 2,204 1,825 21 %
Total segment revenue $ 982 $ 887 11 % $ 3,001 $ 2,628 14 %
% of total revenue 33 % 27 % 51 % 45 %
Segment operating income
18 %
% of related revenue 42 % 42 % 45 % 44 %
Intuit Q3 Fiscal 2020 Form 10-Q 31
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Revenue classified by significant product and service offerings was as follows:
YTD YTD
Q3 Q3 % Q3 Q3 %
(Dollars in millions) FY20 FY19 Change FY20 FY19 Change
Net revenue:
QuickBooks Online Accounting $ 353 $ 260 36 % $ 989 $ 708 40 %
Online Services 207 179 16 % 602 496 21 %
Total Online Ecosystem 560 439 28 % 1,591 1,204 32 %
QuickBooks Desktop Accounting 173 181 (4 )% 577 563 2 %
Desktop Services and Supplies 249 267 (7 )% 833 861 (3 )%
Total Desktop Ecosystem 422 448 (6 )% 1,410
1,424 (1 )%
Total Small Business & Self-Employed
Revenue for our Small Business & Self-Employed segment increased$95 million or 11% in the third quarter of fiscal 2020 and$373 million or 14% in the first nine months of fiscal 2020 compared with the same periods of fiscal 2019. The increase in both periods was primarily due to growth in Online Ecosystem revenue. Online Ecosystem Online Ecosystem revenue increased 28% in the third quarter of fiscal 2020 and 32% in the first nine months of fiscal 2020 compared with the same periods of fiscal 2019. QuickBooks Online Accounting revenue increased 36% in the third quarter of fiscal 2020 and 40% in the first nine months of fiscal 2020 primarily due to an increase in customers as well as higher effective prices and a shift in mix to our higher priced offerings. Online Services revenue increased 16% in the third quarter of fiscal 2020 and 21% in the first nine months of fiscal 2020 primarily due to an increase in revenue from our payroll and payments offerings. Online payroll revenue increased due to a shift in mix to our full service offering and an increase in customers. Online payments revenue increased due to an increase in customers and an increase in charge volume per customer. Desktop Ecosystem Desktop Ecosystem revenue decreased 6% in the third quarter of fiscal 2020 and decreased 1% in the first nine months of fiscal 2020 compared with the same periods of fiscal 2019. The decrease was due to a decline in Desktop units, which was partially offset by growth in our QuickBooks Desktop Enterprise subscription offering due to an increase in customers. Desktop Payroll and Desktop Payments revenues both decreased due to fewer customers. Small Business & Self-Employed segment operating income increased 10% in the third quarter of fiscal 2020 and 18% in the first nine months of fiscal 2020 compared with the same periods of fiscal 2019, primarily due to the increase in revenue described above partially offset by higher expenses for staffing and outside services.
Intuit Q3 Fiscal 2020 Form 10-Q 32
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Consumer [[Image Removed: logoturbotaxa23.jpg]]
[[Image Removed: chart-11f6f0a48c0b5f88a32.jpg]]
Consumer segment product revenue is derived primarily from TurboTax desktop tax
return preparation software and related form updates.
Consumer segment service and other revenue is derived primarily from TurboTax
Online and TurboTax Live offerings, electronic tax filing services and connected
services, and also from our Mint and Turbo offerings.
YTD YTD
Q3 Q3 % Q3 Q3 %
(Dollars in millions) FY20 FY19 Change FY20 FY19 Change
Product revenue $ 83 $ 94 (12 )% $ 179 $ 198 (10 )%
Service and other revenue 1,744 2,056 (15 )% 2,247 2,503 (10 )%
Total segment revenue $ 1,827 $ 2,150 (15 )% $ 2,426 $ 2,701 (10 )%
% of total revenue 61 % 66 % 41 % 47 %
Segment operating income
72 % 78 % 59 % 67 %
In March 2020 , as a relief measure in response to the COVID-19 pandemic, the IRS
extended the filing deadline for the 2019 tax year from April 15, 2020 to July
15, 2020 . Additionally, all states with a personal income tax have also extended
their due dates, predominantly to July. As a result, Consumer segment revenue
decreased $275 million or 10% in the first nine months of fiscal 2020 compared
with the same period of fiscal 2019 due to the extension of the tax filing
deadline.
Segment operating income decreased 20% in the first nine months of fiscal 2020
compared with the same period of fiscal 2019 due to the decrease in revenue
described above as well as higher expenses for staffing, corporate related
expenses, and advertising and marketing.
Due to the extension of the tax filing deadline from April 15, 2020 to July 15,
2020 , we expect a shift in sales and revenue from our third fiscal quarter to
our fourth fiscal quarter during fiscal 2020. As a result, we will not have
substantially complete results for the 2019 tax season until the fourth quarter
of fiscal 2020.
Intuit Q3 Fiscal 2020 Form 10-Q 33
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Strategic Partner [[Image Removed: logoproconnecta23.jpg]]
[[Image Removed: chart-1c8d1bec1fd2573da5b.jpg]]
Strategic Partner segment product revenue is derived primarily from Lacerte,
ProSeries, and ProFile desktop tax preparation software products and related
form updates.
Strategic Partner segment service and other revenue is derived primarily from
ProConnect Tax Online tax products, electronic tax filing service, connected
services and, bank products.
YTD YTD
Q3 Q3 % Q3 Q3 %
(Dollars in millions) FY20 FY19 Change FY20 FY19 Change
Product revenue $ 134 $ 161 (17 )% $ 365 $ 377 (3 )%
Service and other revenue 59 74 (20 )% 71 84 (15 )%
Total segment revenue $ 193 $ 235 (18 )% $ 436 $ 461 (5 )%
% of total revenue 6 % 7 % 8 % 8 %
Segment operating income
(8 )% % of related revenue 79 % 83 % 72 % 74 % InMarch 2020 , as a relief measure in response to the COVID-19 pandemic, theIRS extended the filing deadline for the 2019 tax year fromApril 15, 2020 toJuly 15, 2020 . Additionally, all states with a personal income tax have also extended their due dates, predominantly to July. As a result, total Strategic Partner segment revenue decreased$25 million or 5% the first nine months of fiscal 2020 compared with the same period of fiscal 2019 due to the extension of the tax filing deadline. Segment operating income decreased 8% in the first nine months of fiscal 2020 compared with the same period of fiscal 2019 primarily due to the decrease in revenue described above. Due to the extension of the tax filing deadline fromApril 15, 2020 toJuly 15, 2020 , we expect a shift in sales and revenue from our third fiscal quarter to our fourth fiscal quarter during fiscal 2020. As a result, we will not have substantially complete results for the 2019 tax season until the fourth quarter of fiscal 2020.
Intuit Q3 Fiscal 2020 Form 10-Q 34
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Cost of Revenue
% of % of YTD % of YTD % of
(Dollars in Q3 Related Q3 Related Q3 Related Q3 Related
millions) FY20 Revenue FY19 Revenue FY20 Revenue FY19 Revenue
Cost of product
revenue $ 16 4 % $ 19 4 % $ 57 4 % $ 60 4 %
Cost of service
and other revenue 405 16 % 330 12 % 982 22 % 811 18 %
Amortization of
acquired
technology 5 n/a 5 n/a 17 n/a 15 n/a
Total cost of
revenue $ 426 14 % $ 354 11 % $ 1,056 18 % $ 886 15 %
Our cost of revenue has three components: (1) cost of product revenue, which
includes the direct costs of manufacturing and shipping or electronically
downloading our desktop software products; (2) cost of service and other
revenue, which includes the direct costs associated with our online and service
offerings, such as data center and customer support costs as well as the costs
for the tax and bookkeeping professionals that support our TurboTax Live and
QuickBooks Live offerings; and (3) amortization of acquired technology, which
represents the cost of amortizing developed technologies that we have obtained
through acquisitions over their useful lives.
Cost of product revenue as a percentage of product revenue was relatively
consistent in the third quarter and first nine months of fiscal 2020 compared
with the same periods of fiscal 2019. 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
increased in the third quarter and first nine months of fiscal 2020 compared
with the same periods of fiscal 2019 due to the decrease in revenue resulting
from extension of the tax filing deadline for the 2019 tax year and an increase
in costs to support our TurboTax and QuickBooks Live offerings.
Operating Expenses
% of % of % of % of
Total Total YTD Total YTD Total
Q3 Net Q3 Net Q3 Net Q3 Net
(Dollars in millions) FY20 Revenue FY19 Revenue FY20 Revenue FY19 Revenue
Selling and marketing $ 648 22 % $ 652 20 % $ 1,624 28 % $ 1,546 27 %
Research and
development 332 11 % 311 10 % 999 17 % 900 15 %
General and
administrative 181 6 % 170 5 % 486 8 % 447 8 %
Amortization of other
acquired intangible
assets 2 - % 1 - % 5 - % 4 - %
Total operating
expenses $ 1,163 39 % $ 1,134 35 % $ 3,114 53 % $ 2,897 50 %
Current Fiscal Quarter
Total operating expenses as a percentage of total net revenue increased in the
third quarter of fiscal 2020 compared to the same period of fiscal 2019. Total
net revenue for the third quarter of fiscal 2020 decreased $270 million or 8%
while total operating expenses for the quarter increased $29 million or 3%.
Total operating expenses increased $24 million for staffing due to higher
headcount and $16 million for professional fees for the close of a pending
business combination, offset by a decrease of $21 million for advertising
expenses.
Fiscal Year to Date
Total operating expenses as a percentage of total net revenue increased in the
first nine months of fiscal 2020 compared to the same period of fiscal 2019.
Total net revenue for the first nine months of fiscal 2020 increased $73 million
or 1% while total operating expenses for the period increased $217 million or
7%. Total operating expenses increased $123 million for staffing due to higher
headcount, $30 million for outside services, $25 million for corporate related
expenses, and $16 million for professional fees for the close of a pending
business combination.
Non-Operating Income and Expenses
Interest Expense
Interest expense of $7 million for the first nine months of fiscal 2020
consisted primarily of interest on our unsecured term loan and secured revolving
credit facility. Interest expense of $12 million for the first nine months of
fiscal 2019 consisted primarily of interest on our unsecured term loan.
Intuit Q3 Fiscal 2020 Form 10-Q 35
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Interest and Other Income, Net
YTD YTD
Q3 Q3 Q3 Q3
(In millions) FY20 FY19 FY20 FY19
Interest income (1) $ 10 $ 14 $ 33 $ 27
Net gain on executive deferred compensation plan assets (2) (10 ) 5 (4 ) 2
Other (3 ) (2 ) (3 ) (6 )
Total interest and other income, net $ (3 ) $ 17 (1) Interest income in the third quarter of fiscal 2020 decreased compared to the
same period of fiscal 2019 primarily due to lower average interest rates.
Interest income in the first nine months of fiscal 2020 increased compared to
the same period of fiscal 2019 primarily due to higher average invested
balances.
(2) 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. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law onMarch 27, 2020 . We have evaluated the provisions of this act and determined that it did not result in a significant impact on our tax provision for the period. For the three and nine months endedApril 30, 2020 , we recognized excess tax benefits on share-based compensation of$7 million and$59 million , respectively, in our provision for income taxes. For the three and nine months endedApril 30, 2019 , we recognized excess tax benefits on share-based compensation of$20 million and$69 million , respectively, in our provision for income taxes. Our effective tax rates for the three and nine months endedApril 30, 2020 were approximately 23% and 19%, respectively. Excluding discrete tax items primarily related to share-based compensation tax benefits mentioned above, our effective tax rate for both periods was 24%. The difference from the federal statutory rate of 21% was primarily due to state income taxes and non-deductible share-based compensation, which were partially offset by the tax benefit we received from the federal research and experimentation credit. Our effective tax rates for the three and nine months endedApril 30, 2019 were approximately 23% and 21%. Excluding discrete tax items primarily related to share-based compensation tax benefits mentioned above, our effective tax rate for both periods was 23%. The difference from the federal statutory rate of 21% was primarily due to state income taxes and non-deductible share-based compensation, which were partially offset by the tax benefit we received from the federal research and experimentation credit. LIQUIDITY AND CAPITAL RESOURCES
Overview
AtApril 30, 2020 , our cash, cash equivalents and investments totaled$4.0 billion , an increase of$1.2 billion fromJuly 31, 2019 due to the factors discussed under "Statements of Cash Flows" below. Our primary sources of liquidity have been cash from operations, which entails the collection of accounts receivable for products and services, and borrowings under our credit facility. Our primary uses of cash have been for research and development programs, selling and marketing activities, capital projects, acquisitions of businesses, debt service costs and debt repayment, 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.
Intuit Q3 Fiscal 2020 Form 10-Q 36
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The following table summarizes selected measures of our liquidity and capital resources at the dates indicated:
April 30, July 31, $ %
(Dollars in millions) 2020 2019 Change Change
Cash, cash equivalents, and investments $ 3,971 $ 2,740 $ 1,231 45 %
Long-term investments 19 13 6 46 %
Short-term debt 350 50 300 600 %
Long-term debt 48 386 (338 ) (88 )%
Working capital 2,149 1,628 521 32 %
Ratio of current assets to current liabilities 1.8 : 1 1.8 : 1
We have historically generated significant cash from operations and we expect to
continue to do so in the future. Our cash, cash equivalents, and investments
totaled $4.0 billion at April 30, 2020 . None of those funds were restricted and
approximately 94% of those funds were located in the U.S.
On February 24, 2020 , we entered into an agreement and plan of merger (the
Merger Agreement) to acquire Credit Karma, Inc. (Credit Karma), for $7.1
billion , subject to certain customary adjustments set forth in the Merger
Agreement. The purchase price for Credit Karma will be payable in equal portions
of cash and Intuit common stock. The transaction is expected to close before the
end of calendar year 2020. See Note 4 to the financial statements in Part I,
Item 1 of this Quarterly Report for more information.
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 (including the purchase of
Credit Karma), commitments, debt service requirements, and other liquidity
requirements associated with our operations for at least the next 12 months. In
May 2020 , we borrowed the full $1 billion under our unsecured revolving credit
facility in order to provide financial flexibility during the current uncertain
market conditions. We believe that our financial resources will allow us to
manage the impact of COVID-19 on our business operations for the foreseeable
future, which could include reductions in revenue and delays in payments from
customers and partners. However, the challenges posed by COVID-19 on our
business are expected to evolve and we may need to raise additional funds. We
are aware that the impacts of the COVID-19 pandemic have reduced the
availability and attractiveness of external funding sources, and we expect that
until the financial market conditions stabilize accessing financing could be
challenging or at elevated costs. Consequently, we will continue to evaluate our
financial position in light of future developments, particularly those relating
to COVID-19.
We expect to return excess cash generated by operations to our stockholders
through payment of cash dividends, after taking into account our operating and
strategic cash needs. In connection with our pending acquisition of Credit
Karma, we have temporarily suspended share repurchases.
Our secured revolving credit facility is available to fund a portion of our
loans to qualified small businesses. At April 30, 2020 , $48 million was
outstanding under the secured revolving credit facility.
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 quickly respond to these
types of opportunities.
Statements of Cash Flows
The following table summarizes selected items from our condensed consolidated
statements of cash flows for the first nine months of fiscal 2020 and fiscal
2019. See the financial statements in Part I, Item 1 of this Quarterly Report
for complete condensed consolidated statements of cash flows for those periods.
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