INTUIT INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide readers of our 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: Policies and estimates 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 consolidated statements of cash flows, changes in our 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 Item 8 of this Annual Report. EffectiveAugust 1, 2019 , we adopted the new lease standard using the modified retrospective approach, under which financial results reported in prior periods were not restated. See Note 1 to the financial statements in Item 8 of this Annual Report for more information. In fiscal 2018 and fiscal 2019 we acquired several companies includingTSheets.com LLC ,Exactor, Inc. , andApplatix, Inc. We have included their results of operations in our consolidated results of operations from their respective dates of acquisition. See Note 6 in Item 8 of this Annual 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 future 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 I of this Report. 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. EXECUTIVE OVERVIEW This overview provides a high level discussion of our operating results and some of the trends that affect our business. We believe that an understanding of these trends is important in order to understand our financial results for fiscal 2020 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 Annual Report on Form 10-K. Industry Trends and Seasonality Industry Trends Artificial Intelligence (AI) 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. Intuit Fiscal 2018 Form 10-K 35
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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 also extended their due dates, predominantly to July. As a result, there was 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 implement industry-wide security and anti-fraud measures, including sharing 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 I of this 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$6.0 billion or 79% of our total revenue in fiscal 2020 and we expect our total service and other revenue to continue to grow in the future. Intuit Fiscal 2020 Form 10-K 36
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Key highlights for fiscal 2020 include the following:
Small Business &
Revenue of Self-Employed revenue of Consumer revenue of
$7.7 B $4.1 B $3.1 B
up 13% from fiscal 2019 up 15% from fiscal 2019 up 13% from fiscal 2019
Diluted net income per
Operating income of Net income of share of
$2.2 B $1.8 B $6.92
up 17% from fiscal 2019 up 17% from fiscal 2019 up 17% from fiscal 2019
We ended fiscal 2020 with cash, cash equivalents and investments totaling $7.1
billion .
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our consolidated financial statements in accordance with U.S.
generally accepted accounting principles (GAAP), we are required to 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 consolidated balance sheets. We
believe that the estimates, assumptions, and judgments involved in the following
accounting policies have the greatest potential impact on our consolidated
financial statements, so we consider these to be our critical accounting
policies:
• Revenue Recognition
• Business Combinations
• Goodwill , Acquired Intangible Assets, and Other Long-Lived Assets -
Impairment Assessments
• Accounting for Share-Based Compensation Plans
• Legal Contingencies
• Accounting for Income Taxes - Estimates of Deferred Taxes, Valuation
Allowances, and Uncertain Tax Positions
Our senior management has reviewed the development and selection of these critical accounting policies and their disclosure in this Annual Report on Form 10-K with theAudit and Risk Committee of our Board of Directors. Revenue Recognition We derive our revenue primarily from the sale of online services such as tax, accounting, payroll, merchant payment processing and from packaged desktop software products and desktop software subscriptions. Our contracts with customers often include promises to transfer multiple products and services. In determining how revenue should be recognized, a five-step process is used, which requires judgment and estimates within the revenue recognition process. The primary judgments include identifying the performance obligations in the contract and determining whether the performance obligations are distinct. If any of these judgments were to change it could cause a material increase or decrease in the amount of revenue we report in a particular period. For additional information, see "Revenue Recognition" in Note 1 to the financial statements in Item 8 of this Annual Report. Business Combinations As described in "Description of Business and Summary of Significant Accounting Policies - Business Combinations," in Note 1 to the financial statements in Item 8 of this Annual Report, under the acquisition method of accounting we generally recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree at their fair values as of Intuit Fiscal 2020 Form 10-K 37
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the date of acquisition. We measure goodwill as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method of accounting requires us to exercise judgment and make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities related to uncertain tax positions, and contingencies. This method also requires us to refine these estimates over a one-year measurement period to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to retroactively adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could materially decrease our operating income and net income and result in lower asset values on our consolidated balance sheet. Significant estimates and assumptions that we must make in estimating the fair value of acquired technology, customer lists, and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.Goodwill , Acquired Intangible Assets and Other Long-Lived Assets - Impairment Assessments We estimate the fair value of acquired intangible assets and other long-lived assets that have finite useful lives whenever an event or change in circumstances indicates that the carrying value of the asset may not be recoverable. We test for potential impairment of goodwill and other intangible assets that have indefinite useful lives annually in our fourth fiscal quarter or whenever indicators of impairment arise. The timing of the annual test may result in charges to our consolidated statement of operations in our fourth fiscal quarter that could not have been reasonably foreseen in prior periods. As described in "Description of Business and Summary of Significant Accounting Policies -Goodwill , Acquired Intangible Assets and Other Long-Lived Assets," in Note 1 to the financial statements in Item 8 of this Annual Report, in order to estimate the fair value of goodwill we use a weighted combination of a discounted cash flow model (known as the income approach) and comparisons to publicly traded companies engaged in similar businesses (known as the market approach). The income approach requires us to use a number of assumptions, including market factors specific to the business, the amount and timing of estimated future cash flows to be generated by the business over an extended period of time, long-term growth rates for the business, and a rate of return that considers the relative risk of achieving the cash flows and the time value of money. We evaluate cash flows at the reporting unit level. Although the assumptions we use in our discounted cash flow model are consistent with the assumptions we use to generate our internal strategic plans and forecasts, significant judgment is required to estimate the amount and timing of future cash flows from each reporting unit and the relative risk of achieving those cash flows. When using the market approach, we make judgments about the comparability of publicly traded companies engaged in similar businesses. We base our judgments on factors such as size, growth rates, profitability, risk, and return on investment. We also make judgments when adjusting market multiples of revenue, operating income, and earnings for these companies to reflect their relative similarity to our own businesses. See Note 5 to the financial statements in Item 8 of this Annual Report for a summary of goodwill by reportable segment. We estimate the recoverability of acquired intangible assets and other long-lived assets that have finite useful lives by comparing the carrying amount of the asset to the future undiscounted cash flows that we expect the asset to generate. In order to estimate the fair value of those assets, we estimate the present value of future cash flows from those assets. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows and the time value of money. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. We also make judgments about the remaining useful lives of acquired intangible assets and other long-lived assets that have finite lives. See Note 5 to the financial statements in Item 8 of this Annual Report for a summary of cost, accumulated amortization and weighted average life in years for our acquired intangible assets. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or more of our reporting units, we may be required to record future impairment charges for goodwill and acquired intangible assets. Impairment charges could materially decrease our future net income and result in lower asset values on our consolidated balance sheet. During the fourth quarters of fiscal 2020, fiscal 2019, and fiscal 2018 we performed our annual goodwill impairment tests. Using the methodology described in "Description of Business and Summary of Significant Accounting Policies -Goodwill , Acquired Intangible Assets and Other Long-Lived Assets," in Note 1 to the financial statements in Item 8 of this Annual Report, we determined that the estimated fair values of all of our reporting units exceeded their carrying values and that they were not impaired. In addition, during this analysis we concluded that the estimated fair values of all of our reporting units substantially exceeded their carrying values. Intuit Fiscal 2020 Form 10-K 38
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Accounting for Share-Based Compensation Plans Restricted stock units (RSUs) granted typically vest based on continued service. We value these time-based RSUs at the date of grant using the intrinsic value method. We amortize the fair value of time-based RSUs on a straight-line basis over the service period. Certain RSUs granted to senior management vest based on the achievement of pre-established performance or market goals. We estimate the fair value of performance-based RSUs at the date of grant using the intrinsic value method and the probability that the specified performance criteria will be met. Each quarter we update our assessment of the probability that the specified performance criteria will be achieved and adjust our estimate of the fair value of the performance-based RSUs if necessary. We amortize the fair values of performance-based RSUs over the requisite service period for each separately vesting tranche of the award. We estimate the fair value of market-based RSUs at the date of grant using aMonte Carlo valuation methodology and amortize those fair values over the requisite service period for each separately vesting tranche of the award. TheMonte Carlo methodology that we use to estimate the fair value of market-based RSUs at the date of grant incorporates into the valuation the possibility that the market condition may not be satisfied. Provided that the requisite service is rendered, the total fair value of the market-based RSUs at the date of grant must be recognized as compensation expense even if the market condition is not achieved. However, the number of shares that ultimately vest can vary significantly with the performance of the specified market criteria. All of the RSUs we grant have dividend rights that are subject to the same vesting requirements as the underlying equity awards, so we do not adjust the intrinsic (market) value of our RSUs for dividends. We use a lattice binomial model and the assumptions described in Note 11 to the financial statements in Item 8 of this Annual Report to estimate the fair value of stock options granted. We estimate the expected term of options granted based on implied exercise patterns using a binomial model. We estimate the volatility of our common stock at the date of grant based on the implied volatility of publicly traded one-year and two-year options on our common stock. Our decision to use implied volatility is based upon the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. We base the risk-free interest rate that we use in our option valuation model on the implied yield in effect at the time of option grant on constant maturityU.S. Treasury issues with equivalent remaining terms. We use an annualized expected dividend yield in our option valuation model. We adjust share-based compensation expense for actual forfeitures as they occur. We amortize the fair value of options on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. We may elect to use different assumptions under our option valuation model in the future, which could materially affect our net income or loss and net income or loss per share. See Note 11 to the financial statements in Item 8 of this Annual Report for more information. Legal Contingencies We are subject to certain legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business. We review the status of each significant matter quarterly and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we record a liability and an expense for the estimated loss. If we determine that a loss is possible and the range of the loss can be reasonably determined, then we disclose the range of the possible loss. Significant judgment is required in the determination of whether a potential loss is probable, reasonably possible, or remote as well as in the determination of whether a potential exposure is reasonably estimable. Our accruals are based on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Potential legal liabilities and the revision of estimates of potential legal liabilities could have a material impact on our financial position and results of operations. See Note 13 to the financial statements in Item 8 of this Annual Report for more information. Accounting for Income Taxes - Estimates of Deferred Taxes, Valuation Allowances, and Uncertain Tax Positions We estimate our income taxes based on the various jurisdictions where we conduct business. Significant judgment is required in determining our worldwide income tax provision. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax rules and the potential for future adjustment of our uncertain tax positions by theUnited States Internal Revenue Service or other taxing jurisdictions. We estimate our current tax liability and assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we show on our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be realized. To the extent we believe that realization is not likely, we establish a valuation allowance. When we establish a valuation allowance or increase this allowance in an accounting period, we record a corresponding tax expense in our consolidated statement of operations. We record a valuation allowance to reflect uncertainties about whether we will be able to utilize our deferred tax assets before they expire. We assess the need for an adjustment to the valuation allowance on a quarterly basis. The assessment is based on our estimates of future sources of taxable income in the jurisdictions in which we operate and the periods over which our deferred tax assets will be realizable. While we have considered future taxable income in assessing the need for a valuation allowance for the periods presented, we could in the future be required to increase the valuation allowance to take into account additional deferred tax assets that we may be unable to realize. An increase in the valuation allowance could have an adverse impact on our income tax provision and net income in the period in which we record the change. Intuit Fiscal 2020 Form 10-K 39
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We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not of being sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. We evaluate our uncertain tax positions on a quarterly basis. Our evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in our income tax expense in the period in which we make the change, which could have a material impact on our effective tax rate and operating results. See Note 10 to the financial statements in Item 8 of this Annual Report for more information. Intuit Fiscal 2020 Form 10-K 40
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Tables of Contents RESULTS OF OPERATIONS A discussion regarding our financial condition and results of operations for fiscal 2020 compared to fiscal 2019 is presented below. A discussion regarding our financial condition and results of operations for fiscal 2019 compared to fiscal 2018 can be found under Item 7 of Part II in our Annual Report on Form 10-K for the fiscal year endedJuly 31, 2019 , filed with theSEC onAugust 30, 2019 , which is available free of charge on theSEC's website at www.sec.gov and on the Investor Relations section of our corporate website at investors.intuit.com. Financial Overview (Dollars in millions, except per Fiscal Fiscal Fiscal 2020-2019 2019-2018 share amounts) 2020 2019 2018 % Change % Change Total net revenue$7,679 $6,784 $6,025 13 % 13 % Operating income 2,176 1,854 1,560 17 % 19 % Net income 1,826 1,557 1,329 17 % 17 % Diluted net income per share$6.92 $5.89 $5.09 17 % 16 % Total net revenue increased$895 million or 13% in fiscal 2020 compared with fiscal 2019. Our Small Business & Self-Employed segment revenue increased 15% primarily due to growth in the Online Ecosystem. Our Consumer segment revenue increased 13% primarily due to a shift in mix to our higher priced offerings including TurboTax Live and growth in TurboTax federal units. See "Segment Results" later in this Item 7 for more information. Operating income increased$322 million or 17% in fiscal 2020 compared with fiscal 2019. The increase was due to the higher revenue described above partially offset by higher costs for staffing, outside services, corporate related expenses, and a one time restructuring charge for severance expenses. See "Operating Expenses" later in this Item 7 for more information. Net income increased$269 million or 17% in fiscal 2020 compared with fiscal 2019 due to the increase in operating income described above. Diluted net income per share for fiscal 2020 increased 17% to$6.92 , in line with the increase in net income. Segment Results The information below is organized in accordance with our three reportable segments. 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 is segment net revenue less segment cost of revenue and operating expenses. Segment expenses do not include certain costs, such as corporate selling and marketing, product development, general and administrative expenses and share-based compensation expenses, which are not allocated to specific segments. These unallocated costs totaled$2.0 billion in fiscal 2020,$1.7 billion in fiscal 2019, and$1.6 billion in fiscal 2018. Unallocated costs increased in fiscal 2020 compared with fiscal 2019 and in fiscal 2019 compared with fiscal 2018 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$28 million in fiscal 2020,$26 million in fiscal 2019, and$21 million in fiscal 2018. See Note 14 to the financial statements in Item 8 of this Annual Report for reconciliations of total segment operating income to consolidated operating income for each fiscal year presented. Intuit Fiscal 2020 Form 10-K 41
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Small Business & Self-Employed [[Image Removed: logoquickbooksa21.jpg]]
[[Image Removed: chart-e413920a64845a87b1c.jpg]]
Small Business & Self-Employed segment revenue 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 businesseswho 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, andQuickBooks 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 professionalswho serve small businesses); desktop payroll products (QuickBooks Basic Payroll, QuickBooks Assisted Payroll and QuickBooks Enhanced Payroll); merchant payment processing services for small businesseswho use desktop offerings; financial supplies; and financing for small businesses. 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. Fiscal Fiscal Fiscal 2020-2019 2019-2018 (Dollars in millions) 2020 2019 2018 % Change % Change Product revenue$ 1,032 $ 1,036 $ 1,038
Service and other revenue 3,018 2,497 2,023
Total segment revenue
15 %
% of total revenue 53 % 52 % 51 %
Segment operating income
17 %
% of related revenue 47 % 44 % 43 %
Revenue classified by significant product and service offerings was as follows:
Fiscal Fiscal Fiscal 2020-2019 2019-2018
(Dollars in millions) 2020 2019 2018 % Change % Change
Net revenue:
QuickBooks Online Accounting $ 1,354 $ 980 $ 695 38 % 41 %
Online Services 828 683 511 21 % 34 %
Total Online Ecosystem 2,182 1,663 1,206 31 % 38 %
QuickBooks Desktop Accounting 755 732 716 3 % 2 %
Desktop Services and Supplies 1,113 1,138 1,139 (2 %) - %
Total Desktop Ecosystem 1,868 1,870 1,855 - % 1 %
Total Small Business & Self-Employed
15 %
Intuit Fiscal 2020 Form 10-K 42
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Revenue for our Small Business & Self-Employed segment increased$517 million or 15% in fiscal 2020 compared with fiscal 2019. The increase was primarily due to growth in Online Ecosystem revenue. Fiscal 2020 revenue includes$30 million of nonrecurring revenue related to the Payroll Protection Program, of which$16 million related to our Online Ecosystem and$14 million related to our Desktop Ecosystem. Online Ecosystem Online Ecosystem revenue increased$519 million or 31% in fiscal 2020 compared with fiscal 2019. QuickBooks Online Accounting revenue increased 38% in fiscal 2020 compared with fiscal 2019 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 21% 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$2 million in fiscal 2020 compared with fiscal 2019 primarily due to a decline in Desktop units, Desktop Payroll, and Desktop Payments, which was partially offset by growth in our QuickBooks 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$362 million or 23% in fiscal 2020 compared with fiscal 2019 due to the higher revenue described above which was partially offset by higher expenses for staffing, outside services, and a one time restructuring charge for severance expenses. Intuit Fiscal 2020 Form 10-K 43
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Consumer [[Image Removed: logoturbotaxa21.jpg]]
[[Image Removed: chart-aaeae02cd73254d6a6a.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.
Fiscal Fiscal Fiscal 2020-2019 2019-2018
(Dollars in millions) 2020 2019 2018 % Change % Change
Product revenue $ 203 $ 201 $ 210
Service and other revenue 2,933 2,574 2,298
Total segment revenue
11 %
% of total revenue 41 % 41 % 42 %
Segment operating income
10 %
% of related revenue 62 % 63 % 63 %
Revenue for our Consumer segment increased $361 million or 13% in fiscal 2020
compared with fiscal 2019 primarily due to a shift in mix to our higher priced
product offerings including TurboTax Live and an 11% growth in TurboTax federal
units.
Consumer segment operating income increased $200 million or 11% in fiscal 2020
compared with fiscal 2019 due to the higher revenue described above, which was
partially offset by higher expenses for staffing, advertising and marketing, and
corporate related expenses.
Intuit Fiscal 2020 Form 10-K 44
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Strategic Partner [[Image Removed: logoproconnecta21.jpg]]
[[Image Removed: chart-e8ab7dea145f5708adf.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.
Fiscal Fiscal Fiscal 2020-2019 2019-2018
(Dollars in millions) 2020 2019 2018 % Change % Change
Product revenue $ 400 $ 386 $ 376
Service and other revenue 93 90 80
Total segment revenue
4 %
% of total revenue 6 % 7 % 7 %
Segment operating income
12 % % of related revenue 68 % 67 % 62 % Revenue for our Strategic Partner segment increased$17 million or 4% in fiscal 2020 compared with fiscal 2019 primarily due to a higher average revenue per customer. Strategic Partner segment operating income increased$15 million or 5% in fiscal 2020 compared with fiscal 2019 primarily due to the higher revenue described above and relatively stable spending. Intuit Fiscal 2020 Form 10-K 45
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Cost of Revenue
% of % of % of
Fiscal Related Fiscal Related Fiscal Related
(Dollars in millions) 2020 Revenue 2019 Revenue 2018 Revenue
Cost of product revenue $ 72 4 % $ 77 5 % $ 82 5 %
Cost of service and other
revenue 1,284 21 % 1,070 21 % 881 20 %
Amortization of acquired
technology 22 n/a 20 n/a 15 n/a
Total cost of revenue $ 1,378 18 % $ 1,167 17 % $ 978 16 %
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 costs for data processing and storage capabilities from cloud
providers, customer support costs, and costs for the tax and bookkeeping experts
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 fiscal 2020 compared with 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
was relatively consistent in fiscal 2020 compared with fiscal 2019.
Operating Expenses
% of % of % of
Total Total Total
Fiscal Net Fiscal Net Fiscal Net
(Dollars in millions) 2020 Revenue 2019 Revenue 2018 Revenue
Selling and marketing $ 2,048 27 % $ 1,927 28 % $ 1,631 27 %
Research and development 1,392 18 % 1,233 18 % 1,186 20 %
General and administrative 679 9 % 597 9 % 664 11 %
Amortization of other acquired
intangible assets 6 - % 6 - % 6 - %
Total operating expenses
Total operating expenses as a percentage of total net revenue decreased in fiscal 2020 compared to fiscal 2019. Total net revenue increased$895 million or 13% and total operating expenses increased$362 million or 10%. The increase in operating expenses was primarily driven by$176 million for higher staffing expenses due to higher headcount,$54 million for outside services,$52 million for corporate related expenses,$40 million for a one time restructuring charge for severance expenses, and$29 million for professional fees related to pending business combinations. Non-Operating Income and Expenses Interest Expense Interest expense of$14 million in fiscal 2020 consisted primarily of interest on our unsecured term loan, unsecured revolving credit facility, secured revolving credit facility, and senior unsecured notes. Interest expense of$15 million in fiscal 2019 consisted primarily of interest on our unsecured term loan and secured revolving credit facility. See Note 7 and Note 8 to the financial statements in Item 8 of this Annual Report for more information. Interest and Other Income, Net (In millions) Fiscal 2020 Fiscal 2019 Fiscal 2018 Interest income (1)$ 39 $
46 $ 18 Net gain (loss) on executive deferred compensation plan assets (2)
5 3 7
Other (8 ) (7 ) 1
Total interest and other income, net $ 36 $ 42 $ 26
Intuit Fiscal 2020 Form 10-K 46
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(1) Interest income decreased in fiscal 2020 compared to fiscal 2019 due to lower
average interest rates.
(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 Our effective tax rates for fiscal 2020 and fiscal 2019 were approximately 17%. Excluding the tax benefits related to share-based compensation, our effective tax rate for fiscal 2020 was approximately 21%. This rate did not differ significantly from the federal statutory rate of 21% as state income taxes and non-deductible share-based compensation were substantially offset by the benefit we received from the federal research and experimentation credit. Excluding the tax benefits related to share-based compensation our effective tax rate for fiscal 2019 was approximately 24%. This differed from the federal statutory rate of 21% primarily due to state income taxes and non-deductible share-based compensation, which were partially offset by the benefit we received from the federal research and experimentation credit. See Note 10 to the financial statements in Item 8 of this Annual Report for more information about our effective tax rates. AtJuly 31, 2020 , we had net deferred tax assets of$63 million which included a valuation allowance for state research and experimentation tax credit carryforwards, foreign loss carryforwards, foreign intangible deferred tax assets and state operating and capital loss carryforwards. See "Critical Accounting Policies and Estimates" earlier in this Item 7 and Note 10 to the financial statements in Item 8 of this Annual Report for more information. Intuit Fiscal 2020 Form 10-K 47
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LIQUIDITY AND CAPITAL RESOURCES
Overview
AtJuly 31, 2020 , our cash, cash equivalents and investments totaled$7.1 billion , an increase of$4.3 billion fromJuly 31, 2019 due to the factors described in "Statements of Cash Flows" below. Our primary sources of liquidity have been cash from operations, which includes the collection of accounts receivable for products and services, the issuance of senior unsecured notes, and borrowings under our credit facilities. Our primary uses of cash have been for research and development programs, selling and marketing activities, repurchases of our common stock under our stock repurchase programs, the payment of cash dividends, debt service costs and debt repayment, acquisitions of businesses, and capital projects. As discussed in "Executive Overview - Industry Trends and Seasonality" earlier in this Item 7, 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: July 31, July 31, $ % (Dollars in millions) 2020 2019 Change Change Cash, cash equivalents and investments$ 7,050 $ 2,740 $ 4,310 157 % Long-term investments 19 13 6 46 % Short-term debt 1,338 50 1,288 2,576 % Long-term debt 2,031 386 1,645 426 % Working capital 4,451 1,628 2,823 173 % Ratio of current assets to current liabilities 2.3 : 1 1.8 : 1 We have historically generated significant cash from operations and we expect to continue to do so during fiscal 2021. Our cash, cash equivalents, and investments totaled$7.1 billion atJuly 31, 2020 , none of those funds were restricted, and approximately 97% of those funds were located in theU.S. In the fourth quarter of fiscal 2020, we borrowed the full$1 billion under our unsecured revolving credit facility and issued$2 billion in senior unsecured notes for general corporate purposes, which may include funding a portion of the pending acquisition of Credit Karma, and other possible acquisitions of businesses or assets or strategic investments. InAugust 2020 , we repaid the$1 billion outstanding under the revolving credit facility. See "Commitments for Senior Unsecured Notes" later in this Item 7 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 pending acquisition of Credit Karma), commitments, debt service requirements, and other liquidity requirements associated with our operations for at least the next 12 months. 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 potential reductions in revenue and delays in payments from customers and partners. 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. AtJuly 31, 2020 ,$48 million was outstanding under the secured revolving credit facility. See "Credit Facilities" later in this Item 7 for more information. We evaluate, on an ongoing basis, the merits of acquiring technology or businesses, or establishing strategic relationships with and investing in other companies. Our strong liquidity profile enables us to quickly respond to these kinds of opportunities. Intuit Fiscal 2020 Form 10-K 48
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Statements of Cash Flows
The following table summarizes selected items from our consolidated statements
of cash flows for fiscal 2020, fiscal 2019, and fiscal 2018. See the financial
statements in Item 8 of this Annual Report for complete consolidated statements
of cash flows for those periods.
Fiscal Fiscal Fiscal
(Dollars in millions) 2020 2019
2018
Net cash provided by (used in): Operating activities$ 2,414 $ 2,324 $ 2,112 Investing activities (97 ) (635 ) (532 ) Financing activities 2,034 (965
) (639 ) Effect of exchange rates on cash, cash equivalents, restricted cash, and restricted cash equivalents
(6 ) (3 ) (11 ) Net increase in cash, cash equivalents, restricted cash, and restricted cash equivalents
$ 4,345 $ 721
During fiscal 2020 we generated$2.4 billion in cash from operations. We also received$2 billion from the issuance of senior unsecured notes,$1 billion from borrowings under our unsecured revolving credit facility and$25 million from the net sales and maturities of investments. During the same period we used$561 million for the payment of cash dividends,$323 million for the repurchase of shares of our common stock under our stock repurchase programs,$137 million for capital expenditures,$33 million from the issuance of common stock under employee stock plans, net of payments for employee taxes withheld upon vesting of restricted stock units,$50 million for the repayment of debt, and$44 million for net originations of term loans. During fiscal 2019 we generated$2.3 billion in cash from operations. We also received$48 million from borrowings under our secured revolving credit facility and$33 million from the issuance of common stock under employee stock plans, net of payments for employee taxes withheld upon vesting of restricted stock units. During the same period we used$556 million for the repurchase of shares of our common stock under our stock repurchase programs,$501 million for the payment of cash dividends,$155 million for capital expenditures,$64 million for the acquisition of a business net of cash acquired,$49 million for net originations of term loans, and$50 million for the repayment of debt. Stock Repurchase Programs and Dividends on Common Stock As described in Note 11 to the financial statements in Item 8 of this Annual Report, during fiscal 2020 and fiscal 2019 we continued to repurchase shares of our common stock under a series of repurchase programs that our Board of Directors has authorized. AtJuly 31, 2020 , we had authorization from our Board of Directors to expend up to an additional$2.4 billion for stock repurchases. In connection with our pending acquisition of Credit Karma, we have temporarily suspended share repurchases. We have continued to pay quarterly cash dividends on shares of our outstanding common stock. During fiscal 2020 we declared cash dividends that totaled$2.12 per share of outstanding common stock or approximately$562 million . InAugust 2020 our Board of Directors declared a quarterly cash dividend of$0.59 per share of outstanding common stock payable onOctober 19, 2020 to stockholders of records at the close of business onOctober 12, 2020 . We currently expect to continue paying comparable cash dividends on a quarterly basis; however, future declarations of dividends and the establishment of future record dates and payment dates are subject to the final determination of our Board of Directors. Business Combinations OnFebruary 24, 2020 , we entered into an agreement and plan of merger (the Merger Agreement) to acquireCredit 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 subject to receiving required regulatory approval. See Note 6 to the financial statements in Item 8 of this Annual Report for more information. Commitments for Senior Unsecured Notes InJune 2020 , we issued$2 billion of senior unsecured notes comprised of the following: •$500 million of 0.650% notes dueJuly 2023 ;
•
•
Intuit Fiscal 2020 Form 10-K 49
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•
Interest is payable semiannually onJanuary 15 andJuly 15 of each year, beginning onJanuary 15, 2021 . AtJuly 31, 2020 , our maximum commitment for interest payments under the Notes was$164 million through the maturity dates. The Notes are senior unsecured obligations of Intuit and rank equally with all existing and future unsecured and unsubordinated indebtedness of Intuit and are redeemable by us at any time, subject to a make-whole premium. Upon the occurrence of change of control transactions that are accompanied by certain downgrades in the credit ratings of the Notes, we will be required to repurchase the Notes at a repurchase price equal to 101% of the aggregate outstanding principal plus any accrued and unpaid interest to but not including the date of repurchase. The indenture governing the Notes requires us to comply with certain covenants. For example, the Notes limit our ability to create certain liens and enter into sale and leaseback transactions. As ofJuly 31, 2020 we were compliant with all covenants governing the Notes. See Note 8 to the financial statements in Item 8 of this Annual Report for more information. Credit Facilities Unsecured Revolving Credit Facility and Term Loan OnMay 2, 2019 we entered into an amended and restated credit agreement with certain institutional lenders for a credit facility with an aggregate principal amount of$1.4 billion , including a$400 million unsecured term loan that matures onFebruary 1, 2021 and a$1 billion unsecured revolving credit facility that matures onMay 2, 2024 . Under the amended and restated credit agreement we may, subject to certain customary conditions including lender approval, on one or more occasions increase commitments under the unsecured revolving credit facility in an amount not to exceed$250 million in the aggregate and may extend the maturity date up to two times. Advances under the unsecured revolving credit facility accrue interest at rates that are equal to, at our election, eitherBank of America's alternate base rate plus a margin that ranges from 0.0% to 0.1% or theLondon Interbank Offered Rate (LIBOR) plus a margin that ranges from 0.69% to 1.1%. Actual margins under either election will be based on our senior debt credit ratings. InMay 2020 , we borrowed the full$1 billion under the unsecured revolving credit facility and atJuly 31, 2020 ,$1 billion was outstanding. InAugust 2020 , we repaid the$1 billion outstanding under this revolving credit facility. We monitor counterparty risk associated with the institutional lenders that are providing the credit facility. Under the amended and restated credit agreement we may, subject to certain customary conditions including lender approval, on one or more occasions increase commitments under the term loan in an amount not to exceed$400 million in the aggregate. The term loan accrues interest at rates that are equal to, at our election, eitherBank of America's alternate base rate plus a margin that ranges from 0.0% to 0.125% or LIBOR plus a margin that ranges from 0.625% to 1.125%. Actual margins under either election will be based on our senior debt credit ratings. The term loan is subject to quarterly principal payments of$12.5 million throughOctober 31, 2020 , with the balance payable onFebruary 1, 2021 . AtJuly 31, 2020 ,$338 million was outstanding under the term loan. The amended and restated credit agreement includes customary affirmative and negative covenants, including financial covenants that require us to maintain a ratio of total gross 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 annual interest expense of not less than 3.00 to 1.00 as of the last day of each fiscal quarter. As ofJuly 31, 2020 we were compliant with all required covenants. Secured Revolving Credit Facility OnFebruary 19, 2019 a subsidiary of Intuit entered into a two-year$300 million secured revolving credit facility with a lender. The revolving credit facility is secured by cash and receivables of the subsidiary and is non-recourse toIntuit Inc. Advances under this secured revolving credit facility are used to fund a portion of our loans to qualified small businesses and accrue interest at LIBOR plus 2.39%. Unused portions of the credit facility accrue interest at a rate of 0.5%. OnMarch 2, 2020 , we amended the secured revolving credit facility to extend the commitment term fromFebruary 19, 2021 toFebruary 19, 2022 and the final maturity date fromAugust 19, 2021 toAugust 19, 2022 . The agreement includes certain affirmative and negative covenants, including financial covenants that require the subsidiary to maintain specified financial ratios. As ofJuly 31, 2020 we were compliant with all required covenants. AtJuly 31, 2020 ,$48 million was outstanding under this facility, with a weighted-average interest rate of 5.74%, which includes the unused facility fee. The outstanding balance is secured by cash and receivables of the subsidiary totaling$144 million . Cash Held by Foreign Subsidiaries Our cash, cash equivalents and investments totaled$7.1 billion atJuly 31, 2020 . Approximately 3% of those funds were held by our foreign subsidiaries and subject to repatriation tax considerations. These foreign funds were located primarily in theUnited Kingdom ,Canada , andIndia . As a result of the 2017 Tax Act we do not expect to pay incrementalU.S. taxes on repatriation. We have recorded income tax expense forCanada andIndia withholding taxes on earnings that are not permanently reinvested. In the event that funds from foreign operations are repatriated tothe United States , we would pay withholding taxes at that time. Intuit Fiscal 2020 Form 10-K 50
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OFF-BALANCE SHEET ARRANGEMENTS
At
The following table summarizes our known contractual obligations to make future
payments at
Payments Due by Period
Less than 1-3 3-5 More than
(In millions) 1 year years years 5 years Total
Amounts due under executive deferred
compensation plan $ 123 $ - $ - $ - $ 123
Senior unsecured notes - 500 500 1,000 2,000
Unsecured term loan 338 - - - 338
Unsecured revolving credit facility 1,000 - - - 1,000
Secured revolving credit facility - 48 - - 48
Interest and fees due on debt 29 51 40 55 175
Operating leases (1) 53 108 87 43 291
Purchase obligations (2) 135 68 - - 203
Total contractual obligations (3) $ 1,678 $ 775 $ 627 $ 1,098 $ 4,178
(1) Includes operating leases for facilities and equipment. Amounts do not
include
lease payments for leases signed but not yet commenced. We had no
significant finance leases at
statements in Item 8 of this Annual Report for more information.
(2) Represents agreements to purchase products and services that are
enforceable, legally binding and specify terms, including: fixed or
minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the payments.
(3) Other long-term obligations on our consolidated balance sheet at
2020 included long-term income tax liabilities of
related primarily to unrecognized tax benefits. We have not included this
amount in the table above because we cannot make a reasonably reliable
estimate regarding the timing of settlements with taxing authorities, if
any.
RECENT ACCOUNTING PRONOUNCEMENTS
For a description of recent accounting pronouncements and the potential impact of these pronouncements on our consolidated financial statements, see Note 1 to the financial statements in Item 8 of this Annual Report. Intuit Fiscal 2020 Form 10-K 51
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