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, 2020 . 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 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 II of this Quarterly Report. InAugust 2020 we reorganized certain technology and customer success functions that support and benefit our overall platform. Additionally, certain legal, facility and employee service costs are now managed at the corporate level. As a result, these costs are no longer included in segment operating income and are now included in other corporate expenses. For the three and six months endedJanuary 31, 2020 , we reclassified$45 million and$88 million from Small Business & Self-Employed,$28 million and$53 million from Consumer, and$4 million and$7 million from ProConnect to other corporate expenses. InAugust 2020 , we also renamed our Strategic Partner segment as the ProConnect segment. This segment continues to serve professional accountants. Segment results for fiscal 2020 have been reclassified to conform to the fiscal 2021 segment presentation. InDecember 2020 , we acquired Credit Karma in a business combination, which operates as a separate reportable segment. We have included the results of operations of Credit Karma in our condensed consolidated results of operations from the date of acquisition. Segment operating income for Credit Karma includes all direct expenses related to selling and marketing, product development, and general and administrative, which is different from our other reportable segments where we do not fully allocate corporate expenses. Therefore, Credit Karma segment operating income is not comparable to the segment operating income of our other reportable segments. See Note 5, "Business Combinations," to the financial statements in Part I, Item 1 of this Quarterly Report for more information. Intuit Q2 Fiscal 2021 Form 10-Q 29
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Table of Contents 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. 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 four reportable segments - Small Business & Self-Employed, Consumer, ProConnect, and Credit Karma.
[[Image Removed: intu-20210131_g2.jpg]](1) Credit Karma revenue from
2020
Small Business & Self-Employed: This segment serves small businesses and the self-employed
around the world, and the accounting professionals who assist 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
offering serves consumers and helps them understand and improve their financial lives by
offering a view of their financial health.
ProConnect: 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.
Credit Karma: This segment serves consumers with a personal finance platform that
provides personalized recommendations of credit card, home, auto and personal loan, and
insurance products; online savings and checking accounts; and access to their credit
scores and reports, credit and identity monitoring, credit report dispute, and data-driven
resources.
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 (AI), 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, along the way.
Our strategy for delivering on our bold goals is to become an AI-driven expert
platform where we and others can solve our customers' most important problems.
We plan to accelerate the development of the platform by applying AI in the
three key areas:
•Machine Learning - Building algorithms which progressively learn from data to
automate tasks for our customers.
Intuit Q2 Fiscal 2021 Form 10-Q 30
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Table of Contents •Knowledge Engineering - Turning rules, such asIRS regulations, and relationships about data into code to eliminate work and provide tailored experiences. •Natural Language Processing - Processing, analyzing and understanding human language to create interactions with customers and automate repetitive tasks. As we build our AI-driven expert platform, we are prioritizing our resources on five strategic priorities across the company. These priorities focus on solving the problems that matter most to customers and include: •Revolutionizing speed to benefit: When customers use our products and services, we aim to deliver value instantly by making the interactions with our offerings frictionless, without the need for customers to manually enter data. We are accelerating the application of AI with a goal to revolutionize the customer experience. This priority is foundational across our business, and execution against it positions us to succeed with our other four strategic priorities. •Connecting people to experts: The largest problem our customers face is lack of confidence to file their own taxes or to manage their books. To build their confidence, we are connecting our customers to experts. We offer customers access to experts to help them make important decisions - and experts, such as accountants, gain access to new customers so they can grow their businesses. •Unlocking smart money decisions: Crippling high-cost debt and lack of savings are at unprecedented levels across theU.S. To address these challenges, we are creating a personal financial assistant that helps consumers find the right financial products, put more money in their pockets and access financial expertise and advice. Our recently completed acquisition of Credit Karma accelerates our ability to achieve this vision, by combining two trusted brands, customer reach, data and platform capabilities to deliver breakthrough benefits that will power prosperity for customers around the world. •Be the center of small business growth: We are focused on helping customers grow their businesses by offering a broad, seamless set of tools that are designed to help them get paid faster, manage and get access to capital, pay employees with confidence, and use third-party apps to help run their businesses. At the same time, we want to position ourselves to better serve product-based businesses to benefit customers who sell products through multiple channels. •Disrupt the small business mid-market: We aim to disrupt the mid-market with QuickBooks Online Advanced, our online offering designed to address the needs of small business customers with 10 to 100 employees. This offering enables us to increase retention of these larger customers, and attract new mid-market customers who are over-served by available offerings. Industry Trends and Seasonality Industry Trends 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. Seasonality Our Consumer and ProConnect offerings have 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 results in higher net revenues during our second and third quarters endingJanuary 31 andApril 30 , respectively. During fiscal 2020, as a relief measure in response to the COVID-19 pandemic, the Internal Revenue Service 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. During fiscal 2021 theIRS began accepting and processing returns onFebruary 12, 2021 , as opposed toJanuary 27, 2020 in the prior year. As a result, revenue during our second quarter of fiscal 2021 was lower compared to the same quarter of fiscal 2020. We expect the seasonality of our Consumer and ProConnect businesses to continue to have a significant impact on our quarterly financial results in the future.
Intuit Q2 Fiscal 2021 Form 10-Q 31
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Table of Contents 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 received ISO 27001 certification for a portion of our systems and 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. Additionally, Credit Karma's security measures are regularly reviewed and updated. 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$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. Key highlights for the first six months of fiscal 2021 include the following: Small Business & Self-Employed Cash, cash equivalents, and Revenue of revenue of investments of$2.9 B$2.3 B$2.7 B up 1% from the same period of up 12% from the same period of fiscal 2020 fiscal 2020
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 endedJuly 31, 2020 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. Except for the critical accounting policy and estimates discussed below, we believe that there were no significant changes in those critical accounting policies and estimates during the first six months of fiscal 2021. 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 theAudit and Risk Committee of our Board of Directors.Goodwill - Impairment Assessments As discussed in our Annual Report on Form 10-K for the fiscal year endedJuly 31, 2020 , in the absence of indicators of impairment we test goodwill for impairment annually during our fourth fiscal quarter. As part of that test, we compare the estimated fair value of each reporting unit to its carrying value. We determine the estimated fair value of each reporting unit based on a weighted combination of income and market approaches. We describe the estimates, judgments and assumptions
Intuit Q2 Fiscal 2021 Form 10-Q 32
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Table of Contents we make in connection with goodwill impairment assessments under "Goodwill , Acquired Intangible Assets and Other Long-Lived Assets" in Note 1 to the financial statements in Item 8 of that report and "Goodwill , Acquired Intangible Assets and Other Long-Lived Assets - Impairment Assessments" in the Critical Accounting Policies and Estimates section of Item 7 of that Form 10-K. InDecember 2020 we acquired Credit Karma and have determined it is a separate reporting unit. As of the acquisition date the estimated fair value of the Credit Karma reporting unit approximated its carrying value of$7.2 billion . In the course of estimating the fair value of that reporting unit, we considered the current macroeconomic environment, Credit Karma's ongoing recovery from the macroeconomic environment surrounding the COVID-19 pandemic, its performance compared to internal financial expectations and key business milestones, and its financial performance compared to that of similar lines of business within comparable companies. For all of our reporting units, estimates of fair value can be affected by a variety of factors, including external factors such as industry or economic trends, and internal factors such as changes in our business strategy and our internal forecasts. The recent global economic downturn has caused significant disruptions in the credit markets. Potential events or circumstances that could reasonably be expected to negatively affect the key assumptions we used in estimating the fair value of our Credit Karma reporting unit include a prolonged downturn in the credit markets that leads to credit card companies and lenders offering fewer credit cards and loans, a reduction in their marketing activities, and a decrease or suspension of their activity on Credit Karma's platform. Additionally, the creditworthiness of Credit Karma's members may continue to be negatively impacted, which could reduce participation on Credit Karma's platform by financial institution partners. If the estimated fair value of our Credit Karma reporting unit declines due to any of these factors, we may be required to record future goodwill impairment charges. RESULTS OF OPERATIONS Financial Overview (Dollars in millions, YTD YTD except per share Q2 Q2 $ % Q2 Q2 $ % amounts) FY21 FY20 Change Change FY21 FY20 Change Change Total net revenue$ 1,576 $ 1,696 $ (120) (7) %$ 2,899 $ 2,861 $ 38 1 % Operating income (loss) (25) 270 (295) (109) % 184 280 (96) (34) % Net income 20 240 (220) (92) % 218 297 (79) (27) % Diluted net income per share$ 0.07 $ 0.91 $ (0.84) (92) %$ 0.81 $ 1.13 $ (0.32) (28) % Current Fiscal Quarter Total net revenue for the second quarter of fiscal 2021 decreased$120 million or 7% compared with the same quarter of fiscal 2020. The acquisition of Credit Karma contributed$144 million to total revenue in the fiscal 2021 period. Our Small Business & Self-Employed segment revenue increased during the quarter primarily due to growth in our Online Ecosystem revenue. Consumer segment revenue decreased due to a later opening of the tax season this year. TheIRS began accepting and processing returns onFebruary 12, 2021 , as opposed toJanuary 27, 2020 in the prior year. See "Segment Results" later in this Item 2 for more information about the results for all of our reportable segments. Operating loss for the second quarter of fiscal 2021 was$25 million compared with operating income of$270 million in the same quarter of fiscal 2020. Revenue decreased as described above, and expenses increased due to increases in staffing, share-based compensation, amortization of other acquired intangible assets, and professional fees and transaction costs related to the acquisition of Credit Karma. The increase in total expenses was partially offset by a decrease in marketing. See "Cost of Revenue" and "Operating Expenses" later in this Item 2 for more information. Net income for the second quarter of fiscal 2021 decreased$220 million due to the decrease in revenue and increase in expenses described above. This was partially offset by a$30 million gain from the collection of a note receivable that was previously written off, a$9 million gain on other long-term investments, and lower tax expense for the period. Diluted net income per share decreased to$0.07 for the second quarter of fiscal 2021, due to the decrease in net income, and an increase in the weighted average shares outstanding due to the shares issued as part of the acquisition of Credit Karma. Fiscal Year to Date Total net revenue for the first six months of fiscal 2021 increased$38 million or 1% compared with the same period of fiscal 2020. The acquisition of Credit Karma contributed$144 million to total other revenue in the fiscal 2021 period. Our Small Business & Self-Employed segment revenue increased primarily due to growth in our Online Ecosystem revenue. Consumer segment revenue decreased due to a later opening of the tax season this year. TheIRS began accepting and processing returns onFebruary 12, 2021 , as opposed toJanuary 27, 2020 in the prior year. See "Segment Results" later in this Item 2 for more information about the results for all of our reportable segments.
Intuit Q2 Fiscal 2021 Form 10-Q 33
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Table of Contents Operating income for the first six months of fiscal 2021 decreased$96 million or 34% compared with the same period of fiscal 2020. The decrease was due to the increase in revenue described above and a decrease in marketing expense, which was more than offset by an increase in expenses for share-based compensation, staffing, amortization of other acquired intangible assets, and professional fees and transaction costs primarily related to the acquisition of Credit Karma. See "Cost of Revenue" and "Operating Expenses" later in this Item 2 for more information. Net income for the first six months of fiscal 2021 decreased$79 million or 27% compared with the same period of fiscal 2020 primarily due to the decrease in operating income described above and a higher tax expense for the period, partially offset by a$30 million gain from the collection of a note receivable that was previously written off and a$17 million gain on other long-term investments. Diluted net income per share decreased to$0.81 for the first six months of fiscal 2021, due to the decrease in net income, and an increase in the weighted average shares outstanding due to the shares issued as part of the acquisition of Credit Karma. Segment Results The information below is organized in accordance with our four reportable segments. See "Executive Overview - About Intuit" earlier in this Item 2 and Note 12 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 approximately 6% for the three and six months endedJanuary 31, 2021 and approximately 5% for the three and six months endedJanuary 31, 2020 . InAugust 2020 we reorganized certain technology and customer success functions that support and benefit our overall platform. Additionally, certain legal, facility and employee service costs are now managed at the corporate level. As a result, these costs are no longer included in segment operating income and are now included in other corporate expenses. For the three and six months endedJanuary 31, 2020 , we reclassified$45 million and$88 million from Small Business & Self-Employed,$28 million and$53 million from Consumer, and$4 million and$7 million from ProConnect to other corporate expenses. InAugust 2020 , we also renamed our Strategic Partner segment as the ProConnect segment. This segment continues to serve professional accountants. InDecember 2020 we acquired Credit Karma in a business combination which operates as a separate reportable segment. We have included the results of operations of Credit Karma in our condensed consolidated results of operations from the date of acquisition. See Note 5, "Business Combinations," to the financial statements in Part I, Item 1 of this Quarterly Report for more information. 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. For our Small Business & Self-Employed, Consumer, and ProConnect reportable segments, we include expenses such as corporate selling and marketing, product development, and general and administrative, which are not allocated to specific segments, in unallocated corporate items as part of other corporate expenses. For Credit Karma, segment expenses include all direct expenses related to selling and marketing, product development, and general and administrative. Unallocated corporate items for all segments include share-based compensation, amortization of acquired technology, amortization of other acquired intangible assets, and goodwill and intangible asset impairment charges. These unallocated costs for all segments totaled$1.2 billion in the first six months of fiscal 2021 and$1.1 billion in the first six months of fiscal 2020. Unallocated costs increased in the fiscal 2021 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. For all reportable segments, segment expenses also do not include amortization of acquired technology and amortization of other acquired intangible assets which totaled$59 million in the first six months of fiscal 2021 and$15 million in the first six months of fiscal 2020. See Note 12 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 Q2 Fiscal 2021 Form 10-Q 34
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Table of Contents
Small Business & Self-Employed [[Image Removed: intu-20210131_g3.jpg]]
[[Image Removed: intu-20210131_g4.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, 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 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; 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. YTD YTD Q2 Q2 % Q2 Q2 % (Dollars in millions) FY21 FY20 Change FY21 FY20 Change Product revenue$ 227 $ 235 (3) %$ 575 $ 571 1 % Service and other revenue 851 738 15 % 1,684 1,448 16 % Total segment revenue$ 1,078 $ 973 11 %$ 2,259 $ 2,019 12 % % of total revenue 69 % 57 % 78 % 71 % Segment operating income$ 592 $ 447 32 %$ 1,359 $ 1,040 31 % % of related revenue 55 % 46 % 60 % 52 % Intuit Q2 Fiscal 2021 Form 10-Q 35
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Table of Contents
Revenue classified by significant product and service offerings was as follows:
YTD YTD
Q2 Q2 % Q2 Q2 %
(Dollars in millions) FY21 FY20 Change FY21 FY20 Change
Net revenue:
QuickBooks Online Accounting $ 404 $ 330 22 % $ 796 $ 636 25 %
Online Services 240 200 20 % 469 395 19 %
Total Online Ecosystem 644 530 22 % 1,265 1,031 23 %
QuickBooks Desktop Accounting 160 165 (3) % 401 404 (1) %
Desktop Services and Supplies 274 278 (1) % 593 584 2 %
Total Desktop Ecosystem 434 443 (2) % 994 988 1 %
Total Small Business & Self-Employed $ 1,078 $ 973 11 % $ 2,259 $ 2,019 12 %
Revenue for our Small Business & Self-Employed segment increased $105 million or
11% in the second quarter of fiscal 2021 and $240 million or 12% in the first
six months of fiscal 2021 compared with the same periods of fiscal 2020. The
increase in both periods was primarily due to growth in Online Ecosystem
revenue.
Online Ecosystem
Online Ecosystem revenue increased 22% in the second quarter of fiscal 2021 and
23% in the first six months of fiscal 2021 compared with the same periods of
fiscal 2020. QuickBooks Online Accounting revenue increased 22% in the second
quarter of fiscal 2021 and 25% in the first six months of fiscal 2021 primarily
due to an increase in customers as well as a shift in mix to our higher priced
offerings. Online Services revenue increased 20% in the second quarter of fiscal
2021 and 19% in the first six months of fiscal 2021 primarily due to an increase
in revenue from our payments and payroll offerings. Online payments revenue
increased due to an increase in customers and an increase in charge volume per
customer. Online payroll revenue increased due to a shift in mix to our full
service offering and an increase in customers.
Desktop Ecosystem
Desktop Ecosystem revenue decreased 2% in the second quarter of fiscal 2021
compared with the same quarter of fiscal 2020. Declines in Desktop unit sales
and Desktop Payroll revenue were partially offset by growth in our QuickBooks
Desktop Enterprise subscription offering due to an increase in customers.
Desktop Payroll revenue decreased due to fewer customers.
Desktop Ecosystem revenue increased slightly in the first six months of fiscal
2021 compared with the same period of fiscal 2020. During the first quarter of
fiscal 2021 there was an increase in revenue from license updates associated
with our Pro Advisor offerings and higher revenue from version protection as a
result of price increases in the prior year. Revenue in the first six months of
fiscal 2021 also increased due to growth in our QuickBooks Desktop Enterprise
subscription offering due to an increase in customers. These increases were
partially offset by declines in Desktop unit sales and desktop payroll due to
fewer customers.
Small Business & Self-Employed segment operating income increased 32% in the
second quarter of fiscal 2021 and 31% in the first six months of fiscal 2021
compared with the same periods of fiscal 2020, primarily due to the increase in
revenue described above and lower expenses for marketing.
In August 2020 , we reorganized certain technology and customer success functions
that support and benefit our overall platform. Additionally, certain legal,
facility and employee service costs are now managed at the corporate level. As a
result, these costs are no longer included in segment operating income and are
now included in other corporate expenses. For the three and six months ended
January 31, 2020 , we reclassified $45 million and $88 million from Small
Business & Self-Employed to other corporate expenses.
Intuit Q2 Fiscal 2021 Form 10-Q 36
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Consumer [[Image Removed: intu-20210131_g5.jpg]]
[[Image Removed: intu-20210131_g6.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 offering.
YTD YTD
Q2 Q2 % Q2 Q2 %
(Dollars in millions) FY21 FY20 Change FY21 FY20 Change
Product revenue $ 66 $ 90 (27) % $ 73 $ 96 (24) %
Service and other revenue 81 409 (80) % 193 503 (62) %
Total segment revenue $ 147 $ 499 (71) % $ 266 $ 599 (56) %
% of total revenue 9 % 30 % 9 % 21 %
Segment operating income (loss) $ (155) $ 191 (181) % $ (151) $ 171 (188) %
% of related revenue (105) % 38 % (57) % 29 %
Revenue for our Consumer segment decreased $333 million or 56% in the first six
months of fiscal 2021 compared with the same period of fiscal 2020 due to a
later opening of the tax season this year. The IRS began accepting and
processing returns on February 12, 2021 , as opposed to January 27, 2020 in the
prior year.
Segment operating loss was $151 million in the first six months of fiscal 2021
compared to segment operating income of $171 million in the same period of
fiscal 2020 primarily due to the decrease in revenue described above. Higher
expenses for staffing were more than offset by lower expenses for marketing.
In August 2020 , we reorganized certain technology and customer success functions
that support and benefit our overall platform. Additionally, certain legal,
facility and employee service costs are now managed at the corporate level. As a
result, these costs are no longer included in segment operating income and are
now included in other corporate expenses. For the three and six months ended
January 31, 2020 , we reclassified $28 million and $53 million from Consumer to
other corporate expenses.
Due to the seasonality of our Consumer offerings, we do not believe that the
revenue or operating results for the first six months of fiscal 2021 is
indicative of trends for the full fiscal year. We will not have substantially
complete results for the 2020 tax season until the third quarter of fiscal 2021.
Intuit Q2 Fiscal 2021 Form 10-Q 37
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ProConnect [[Image Removed: intu-20210131_g7.jpg]]
[[Image Removed: intu-20210131_g8.jpg]]
ProConnect segment product revenue is derived primarily from Lacerte, ProSeries, and ProFile desktop tax preparation software products and related form updates.
ProConnect 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
Q2 Q2 % Q2 Q2 %
(Dollars in millions) FY21 FY20 Change FY21 FY20 Change
Product revenue $ 202 $ 220 (8) % $ 214 $ 231 (7) %
Service and other revenue 5 4 25 % 16 12 33 %
Total segment revenue $ 207 $ 224 (8) % $ 230 $ 243 (5) %
% of total revenue 13 % 13 % 8 % 8 %
Segment operating income
83 % 83 % 70 % 69 %
In August 2020 , we renamed our Strategic Partner segment as the ProConnect
segment. This segment continues to serve professional accountants.
Revenue for our ProConnect segment revenue decreased $13 million or 5% in the
first six months of fiscal 2021 compared with the same period of fiscal 2020 due
to a delay in forms availability and, to a lesser extent, a later opening of the
tax season this year. The IRS began accepting and processing returns on February
12, 2021 , as opposed to January 27, 2020 in the prior year.
Segment operating income decreased 4% in the first six months of fiscal 2021
compared with the same period of fiscal 2020 primarily due to the decrease in
revenue described above partially offset by a decrease in staffing expenses.
In August 2020 , we reorganized certain technology and customer success functions
that support and benefit our overall platform. Additionally, certain legal,
facility and employee service costs are now managed at the corporate level. As a
result, these costs are no longer included in segment operating income and are
now included in other corporate expenses. For the three and six months ended
January 31, 2020 , we reclassified $4 million and $7 million from ProConnect to
other corporate expenses.
Due to the seasonality of our ProConnect offerings, we do not believe that the
revenue or operating results for the first six months of fiscal 2021 is
indicative of trends for the full fiscal year. We will not have substantially
complete results for the 2020 tax season until the third quarter of fiscal 2021.
Intuit Q2 Fiscal 2021 Form 10-Q 38
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Credit Karma [[Image Removed: intu-20210131_g9.jpg]]
[[Image Removed: intu-20210131_g10.jpg]]
Credit Karma revenue is derived from cost-per-action transactions, which include
the delivery of qualified links that result in completed actions such as credit
card issuances and personal loan funding; Cost-per-click and cost-per-lead
transactions, which include user clicks on advertisements or advertisements that
allow for the generation of leads, and primarily relate to mortgage and
insurance businesses; and to a lesser extent, cost-per-advertisement impression
transactions, which are banner and brand advertisement impressions displayed on
a user's screen.
YTD YTD
Q2 Q2 % Q2 Q2 %
(Dollars in millions) FY21 FY20 Change FY21 FY20 Change
Product revenue $ - $ - N/A $ - $ - N/A
Service and other revenue 144 - N/A 144 - N/A
Total segment revenue $ 144 $ - N/A $ 144 $ - N/A
% of total revenue 9 % - % 5 % - %
Segment operating income $ 38 $ - N/A $ 38 $ - N/A
% of related revenue 26 % N/A 26 % N/A
On December 3, 2020 we acquired Credit Karma. Our results of operations include
the operations of Credit Karma beginning on the date of acquisition.
Credit Karma contributed $144 million in revenue in the second quarter of fiscal
2021. Revenue is primarily generated from cost-per-action transactions which are
related to credit card issuances and personal loan funding.
Segment operating income was $38 million in the second quarter of fiscal 2021.
Expenses were primarily related to staffing and marketing.
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Cost of Revenue
% of % of YTD % of YTD % of
Q2 Related Q2 Related Q2 Related Q2 Related
(Dollars in millions) FY21 Revenue FY20 Revenue FY21 Revenue FY20 Revenue
Cost of product revenue$ 22 4 %$ 24 4 %$ 37 4 %$ 41 5 % Cost of service and other revenue 331 31 % 310 27 % 565 28 % 577 29 % Amortization of acquired technology 14 n/a 6 n/a 21 n/a 12
n/a
Total cost of revenue$ 367 23 %$ 340 20 %$ 623 21 %$ 630
22 %
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, costs for the tax and bookkeeping experts that support our TurboTax Live and QuickBooks Live offerings, costs related to credit score providers, and depreciation expense for developed technology; 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 second quarter and first six months of fiscal 2021 compared with the same periods of fiscal 2020. 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 second quarter and decreased slightly for the first six months of fiscal 2021 compared with the same periods of fiscal 2020. The acquisition of Credit Karma contributed$41 million to cost of service and other revenue for the three and six months endedJanuary 31, 2021 . The increase in cost of service and other revenue as a percentage of service and other revenue for the second quarter of fiscal 2021 is primarily due to the decrease in revenue from our Consumer segment. During fiscal 2021 we have also experienced a decrease in customer success costs as a result of fewer customer contacts, a decrease in data center costs as a result of moving to cloud providers, and a decrease in depreciation expense. Operating Expenses % of % of % of % of Total Total YTD Total YTD Total Q2 Net Q2 Net Q2 Net Q2 Net (Dollars in millions) FY21 Revenue FY20 Revenue FY21 Revenue FY20
Revenue
Selling and marketing$ 580 37 %$ 593 35 %$ 942 32 %$ 976 34 % Research and development 368 23 % 333 20 % 693 24 % 667 23 % General and administrative 250 16 % 159 9 % 419 14 % 305 11 % Amortization of other acquired intangible assets 36 2 % 1 - % 38 1 % 3 - % Total operating expenses$ 1,234 78 %$ 1,086 64 %$ 2,092 72 %$ 1,951 68 % Current Fiscal Quarter Total operating expenses as a percentage of total net revenue increased in the second quarter of fiscal 2021 compared to the same period of fiscal 2020. Total net revenue for the second quarter of fiscal 2021 decreased$120 million or 7% due to the decrease in revenue from our Consumer segment driven by a later opening of the tax season this year. TheIRS began accepting and processing returns onFebruary 12, 2021 , as opposed toJanuary 27, 2020 in the prior year. Total operating expenses for the quarter increased$148 million or 14%, which included$101 million of operating expenses related to Credit Karma. Total share-based compensation expense increased$71 million ; total staffing increased$67 million , including$45 million related to Credit Karma; total amortization of other acquired intangible assets increased$35 million , which was primarily related to Credit Karma; and professional fees and transaction costs primarily related to the acquisition of Credit Karma increased$30 million . Total marketing expense decreased$43 million . Fiscal Year to Date Total operating expenses as a percentage of total net revenue increased in the first six months of fiscal 2021 compared to the same period of fiscal 2020. Total net revenue for the first six months of fiscal 2021 increased$38 million or 1% and was impacted by the decrease in revenue from our Consumer segment driven by a later opening of the tax season this year. TheIRS began accepting and processing returns onFebruary 12, 2021 , as opposed toJanuary 27, 2020 in the prior year. While total revenue increased slightly, total operating expenses for the period increased$141 million or 7%, which included$101 million of operating expenses related to Credit Karma. Total share-based compensation expense increased$70 million ; total staffing increased$57 million , including$45 million related to Credit Karma; total amortization of other acquired intangible
Intuit Q2 Fiscal 2021 Form 10-Q 40
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Table of Contents assets increased$35 million , which was primarily related to Credit Karma; and professional fees and transaction costs primarily related to the acquisition of Credit Karma increased$35 million . Total marketing expense decreased$55 million . Non-Operating Income and Expenses Interest Expense Interest expense of$15 million for the first six months of fiscal 2021 consisted primarily of interest on our senior unsecured notes, unsecured term loan, unsecured revolving credit facility, and secured revolving credit facility. Interest expense of$5 million for the first six months of fiscal 2020 consisted primarily of interest on our unsecured term loan and secured revolving credit facility. Interest and Other Income, Net YTD YTD Q2 Q2 Q2 Q2 (In millions) FY21 FY20 FY21 FY20 Interest income (1)$ 2 $ 11 $ 6 $ 23 Net gain on executive deferred compensation plan assets (2) 14 4 13 7 Other (3) 38 - 44 (1) Total interest and other income, net$ 54 $
15
(1) Interest income in the second quarter and the first six months of fiscal 2021 decreased compared to the same period of fiscal 2020 primarily 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. (3) In the second quarter of fiscal 2021 we recorded a$30 million gain from the sale of a note receivable that was previously written off. We also recorded gains on other long-term investments of$9 million and$17 million during the three and six months endedJanuary 31, 2021 , respectively. 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. For the three and six months endedJanuary 31, 2021 , we recognized excess tax benefits on share-based compensation of$12 million and$64 million , respectively, in our provision for income taxes. For the three and six months endedJanuary 31, 2020 , we recognized excess tax benefits on share-based compensation of$23 million and$52 million , respectively, in our provision for income taxes. Our effective tax rates for the three and six months endedJanuary 31, 2021 were approximately 8% and 6%, respectively. The acquisition of Credit Karma has resulted in an increase in the annual effective tax rate from 25% atOctober 31, 2020 to 26% atJanuary 31, 2021 primarily due to non-deductible share-based compensation and transaction costs. Excluding the effect of the change in annual effective tax rate for the quarter and discrete tax items, primarily related to share-based compensation tax benefits mentioned above, our effective tax rate for the three and six months endedJanuary 31, 2021 was approximately 26%. The difference from the federal statutory rate of 21% was primarily due to state income taxes, non-deductible share-based compensation and non-deductible transaction costs related to the Credit Karma acquisition, 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 six months endedJanuary 31, 2020 were approximately 15% and 2%, 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. LIQUIDITY AND CAPITAL RESOURCES
Overview
At
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from operations, which entails the collection of accounts receivable for
products and services, the issuance of senior unsecured notes, 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.
The following table summarizes selected measures of our liquidity and capital
resources at the dates indicated:
January 31, July 31, $ %
(Dollars in millions) 2021 2020 Change Change
Cash, cash equivalents, and investments $ 2,738 $ 7,050 $ (4,312) (61) %
Long-term investments 41 19 22 116 %
Short-term debt 325 1,338 (1,013) (76) %
Long-term debt 2,033 2,031 2 - %
Working capital 1,417 4,451 (3,034) (68) %
Ratio of current assets to current liabilities 1.5 : 1 2.3 : 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$2.7 billion atJanuary 31, 2021 . None of those funds were restricted and approximately 91% of those funds were located in theU.S. OnDecember 3, 2020 we acquired Credit Karma. The fair value of the purchase price totaled$7.2 billion and included$3.4 billion in cash, 10.6 million shares of Intuit common stock with a fair value of$3.8 billion and assumed equity awards for services rendered through the acquisition date of$47 million . See "Business Combinations" below for more information. 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 was used to fund a portion of the acquisition of Credit Karma. InAugust 2020 , we repaid the$1 billion outstanding under the revolving credit facility. The unsecured revolving credit facility is available to us for general corporate purposes. Based on past performance and current expectations, we believe that our cash and cash equivalents, investments, and cash generated from operations will be sufficient to meet anticipated seasonal working capital needs, capital expenditure requirements, contractual obligations, commitments, debt service requirements, and other liquidity requirements associated with our operations for at least the next 12 months. We 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. Our secured revolving credit facility is available to fund a portion of our loans to qualified small businesses. AtJanuary 31, 2021 ,$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 six months of fiscal 2021 and fiscal 2020. 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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