直覺電腦 (INTU) 2002 Q3 法說會逐字稿

Good afternoon. My name is [Kiri], and I will be your conference facilitator today. At this time, I would like to welcome everybody to the Intuit third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would

like to withdraw your question, press star, then the number 2 owe your telephone keypad. Thank you, Mr. Bennett. You may begin your conference.

Thanks, and good afternoon, everybody. Welcome to the Intuit conference call, covering results for the third quarter of fiscal 2002. With me today are Greg Santora, our CFO, and Scott cook, chairman of the executive committee.

Turning to slide 2, we had a killer quarter, the best we have had in the nine quarters since I joined Intuit. Revenue was up 28% over the third quarter last year. Pro forma operating income increased 42%. And pro forma EPS of 75 cents was up 36%.

And we beat the raised EPS consensus by three cents. You'll recall we raised guidance one month ago, so, in total, our EPS is eight cents better

than consensus when the quarter began.

This was another quarter of solid growth driven by executing well on Intuit's strategy to penetrate large, underserved markets, and drive profitability from volume leverage and operational rigor. Now let me turn the call over to Greg who will cover the financial highlights of the quarter. Here's Greg.

Thanks, Steve. Before we go over our specific financial results I'd like to

remind everyone that due to the seasonal nature of our business, our results can and do vary significantly from quarter to quarter. We generally report higher revenue and profits in our second and third quarters, which coincide with the peak time for selling our tax and small business products. As a result, it's best to compare annual results which are not affected by these seasonal

distortions.

I'd like to point out that Intuit looks at its financial performance in two ways, GAAP and pro forma. Please see slide 28 in the appendix for more details about what's included in the GAAP and the pro forma results.

Pro forma financial information supplements GAAP and provides investors with an alternative

assessment of our core operating business. I'd also want to point out that Intuit's pro forma results are presented using the same consistent standards from quarter to quarter and year to year.

Finally, please note, some remarks today include forward-looking statements, and actual results may differ significantly. Risks that could impact these statements are included on slides 28 and -9 in the appendix and in the company's fiscal 2001

form 10-K and other SEC filings, as well as the press release issued earlier this afternoon.

Moving on to slide 3, I'd like to spend a moment on the financial highlights from the third quarter. As Steve has mentioned, we delivered another great quarter. Third quarter revenue of 545 million was 28% higher than last year. Third quarter pro forma EPS was 75% -- or 75 cents, up 36% over Q3 last year and three cents better than consensus

estimates.

On a GAAP base, EPS was 67 cents for the quarter, up from a loss of seven cents in Q3 of last year. More details on GAAP and pro forma results are provided in our press release.

Moving to slide 4, this quarter's strong performance is not a one-time event. Fiscal '02 is shaping up to be another really good year. In

fiscal '02, we expect to grow revenue around 20%, pro forma operating income in the high 40%, and pro

forma EPS in the high 20% range. We've also been improving our operating margins. In fiscal '02 we expect to add about 400 basis points to our pro forma operating margin, bringing it to around 21%.

On slide 5, you can see the performance of our key revenue growth engines for the third quarter. Our two largest businesses, tax and small business, had

terrific performance and drove the bulk of the growth.

Let's look more closely at the consumer and professional tax businesses, which accounted for 58% of the quarter's revenue and about 71% of the 120 million year-over-year revenue growth. Consumer tax revenue is up 43% over Q3 last year. Consumer tax revenue is up 28% for the full season. This strong performance was due in large part to

20% unit growth in combining desktop and web federal units, totaling 7.7 million units.

Growth was particularly strong on the Web. Paid federal TurboTax units were up 85% over last year's season, reaching a total of 2.2 million. You'll find this data and the other information I cover on our fax sheet.

We also had good results from the new high-end tax

products we introduced on the desktop and Web this year. They represented 10% of the mix in units and 12% in dollars for the season.

When NPD Intellect does its final tally, we expect to end the season with a higher unit retail share of almost one point higher than last year, despite the aggressive actions by H&R block. It's important to note that as more of our TurboTax business comes from the Web, this growth isn't

visible in the NPD Intellect data.

Now let's shift to ProTax. ProTax revenues up 19% for the quarter and 25% for the season, driven primarily by the addition of new customers from the aquisition of [Task]. This is a highly profitable business with great recurring revenue, driven to a large extent by high customer retention rates which were greater than 93% this season.

Now, moving on to small business performance, we're beginning to see the initial benefits of executing

our Right for My Business strategy. QuickBooks related revenues grew 36% year over year, primarily driven by the success of our QuickBooks 2002 products. We had a strong QuickBooks unit growth, as end-user unit purchases of QuickBooks 2002 were up about 30% compared to QuickBooks 2001 for the same period last year. End-user dollar purchases were up 50%.

We saw an exceptionally strong shift to the direct channel in this quarter. 40% of QuickBooks units sold versus 25% in Q3 last year. This shift in large part resulted from higher upgrades in the quarter and helped drive profitability above expectations.

Again, because many upgrade customers typically purchase directly from Intuit, this growth isn't

reflected in the NPD Intellect data.

Let's talk for a second about payroll. Both QuickBooks branded payroll businesses, Basic and Deluxe, had strong quarter, with a combined revenue growth of 38%. Since fiscal Q3 '01, we've added about a hundred thousand Basic customers and more than 2,000 Deluxe customers bringing the total QuickBooks branded payroll customer base to about 683,000. This large base provides us a unique

opportunity to upsell our new fully outsourced payroll service that will come from the CBS acquisition, allowing us to further penetrate this large opportunity.

Now let's look at how the other parts of the company did. Another bright spot was our Canada business which had revenue growth in the third quarter of 57%. We expect full year revenue growth in Canada of about 30%. As expected, we saw

Quicken loans growth slow in Q3 with revenue up 24% year over year. This business accounted for about 7% of the 120 million of revenue growth for the quarter. Due to the strong first-half performance, we still expect full-year growth to be in the 45 to 55% range. While Intuit had strong Q3 performance in many of its businesses, three of our smaller businesses didn't do as well. While our share of Quicken units at retail remains above 70%, the category for personal finance software is down.

Are lower Quicken sales and lower ad revenue on Quicken.com our Quicken-related businesses were

down 20% for the quarter and are expected to be down about 10% for the year.

Revenue from our Japan business declined about 17% in the quarter and should be done about 10% for the year, due to difficult economic conditions, declining accounting software category sales, and the discontinuation of QuickBooks in that country.

Our Premier Payroll business was roughly flat, and should be flat -- should be flat for the full year. This reflects a change in focus by the partner responsible for customer acquisition.

As a result, customer growth has slowed.

Turning to slide 6, you can see that once again we delivered pro forma profit growth that was one and

a half times greater than revenue growth. We increased our pro forma operating margin from about 39% to 43% for the quarter.

The improvement resulted from a combination of factors, including unit growth, mix improvements, expense management, and price increases. We expected our pro forma operating margin to be about 21% for the year.

One final point. We continue to apply strategic rigor throughout the company to optimize return on our resource investments. We increased R&D spending in our highest growth businesses, small business, consumer tax, and professional tax by approximately 10% over the prior-year period. At the same time, we significantly decreased, or stopped spending, in less strategic areas and in discontinued businesses. The net result was that the 53 million in third-quarter R&D spending was

flat year over year.

To sum up, the combination of Intuit's strong businesses and a more rigorous approach to running the company, drove top- and bottom-line performance in Q3. We are on track for another great year.

With that, I'd like to hand the call back to Steve.

Thanks, Greg. On slide 7,

as I said earlier, we had a great quarter. And delivering great quarters is not a one-time event

for Intuit. We've been consistently executing and delivering strong performance over the last two years. Let's take a second to look at a snapshot of Intuit's performance for fiscal years 2001 and 2002 combined. We've completed seven of the eight quarters, so while not exact, these numbers should be pretty close.

Over the last two years, Intuit will more than double pro forma operating income from 155 million to more than 320 million. Intuit will increase pro forma EPS over 70%. Intuit will increase pro forma operating margins over 700 basis points to more than 21%. And Intuit will grow revenue about 40%. I hope you agree, this represents two years of solid performance and nice acceleration over historical performance levels.

Now let's look forward on slide 8. Let me share on you thinking for fiscal year 2003. Here's what we see. Revenue growth of 17 to 22%. Pro forma EPS growth of 25 to 30%. And pro forma operating income growth of 30 to 35%. This growth reflects the continued execution of Intuit's strategy to penetrate large, underserved markets, and drive profitability from volume leverage and operational rigor. We're excited about our performance over the last few years, but even more excited about our

ability to continue that trend into fiscal year 2003 and beyond.

Let's take a second to look at why we're excited about our prospects.

Our biggest growth opportunity is small business. Just last September, we announced or Right for My Business strategy, and we're executing aggressively in driving great traction. I don't know if we've

-- can we call them and see -- somebody is not muted.

Anyway, let's keep going. On slide 9, by applying strategic rigor, changing our mind-set, and redefining four focus, we've moved from less than 500 million to an $18 billion small business opportunity. This opportunity is underserved, and there's plenty of room for growth, a large part of which will be organic, driven by our core

competence and great track record of customer- driven innovation.

On slide 10 as most of you know our Right for My Business strategy capitalizes on the fact that different businesses have differing needs. That's why our strategy is to offer customers a variety of choices so they can select what's right for their specific situation. Customers have demonstrated they are willing to pay more for solutions that are

right for their business, by. By responding effectively to their needs, we can continue to drive revenue and profit growth.

Turning to slide 11, we're delivering Right for My Business solutions by innovating and executing on three fronts: Accounting solutions for bigger and/or more complex businesses, solutions that go beyond accounting to business management, and industry-specific solutions. On slide 12, we're

now offering higher-end accounting solutions that capitalize on the fact that firms sized just above QuickBooks' traditional target audience are underserved. Proof of this can be seen in the fact in the fast growth our first semi-upscale product, QuickBooks Premier. Though just launched last December, in Q3 '02, QuickBooks Premier editions represented nearly 7% of the unit mix and 14% of the dollar mix for QuickBooks 2002. Intuit's next step up is to better serve this segment is the

QuickBooks Enterprise Solutions business management software that will begin shipping in July. This new product is priced at $2500 for software only and 3500 including services. We're very excited about the prospects to help our customers and drive incremental revenue from this new higher-end accounting product.

Another element of our Right for My Business strategy is to deliver industry-specific solutions.

We do this with flavors of QuickBooks and by opening our QuickBooks APIs to third-party developers. We're very excited about the initial results of both of these efforts.

So slide 13, let's talk for a second about the progress with the Intuit developer network. We made the software developer kit available in late November, and there are already 93 third-party applications available that share data with

QuickBooks. This is a win for developers. They're reaching customers they might not have been able to

reach on their own. Several of these developers report that Intuit is now their largest source of new customers. They're getting traction and incremental revenue. This is a big deal for customers, as one of their most frequent requests is to connect QuickBooks with the other business apps they use to run their small business. Not surprisingly, customers are responding well, with

over 40,000 third-party applications sold in just a few months through the QuickBooks solutions marketplace. Only one of many channels where customers can buy.

Momentum is building as more and more applications get added.

The developer network is great for Intuit, as it drives additional revenue because customers need to

buy or upgrade to QuickBooks 2002 Premier or Pro to take advantage of these new solutions.

Now let's talk about QuickBooks flavors, or versions of QuickBooks tailored to the needs of specific industries on slide 14.

The first flavor, QuickBooks Accountants Edition was shipped in December and its results are in line with expectations and included in the QuickBooks

Premier results I shared earlier. We just launched a second flavor, QuickBooks point-of-sale for retailers a few weeks ago. We'll have more details on both of these flavors next quarter.

Looking forward, we're developing more QuickBooks flavors and expect to introduce from five to 15 over the next few years.

On slide 15, we now have multiple small business

growth engines. One centered around our traditional growth engine, QuickBooks, and the other, which is completely new to Intuit, is vertical industry solutions. On slide 16, for many firms, the best solution to their needs is a vertical industry software solution. Vertical solutions are tailored to the specific needs of individual industries and typically run most aspects of the business. You can think about it as an ERP for smaller companies. Verticals tend to

have common characteristics, as you can see on slide 17. Initial licenses typically cost 5,000 or

more. These businesses generally have an annual recurring revenue stream of 15 to 30% of the license fee for service and support, and their greatest challenge is cost-effective customer acquisition. Most companies that build these solutions lack the brand and reach to penetrate the large and fragmented small business market. When their strengths are combined with Intuit's large

customer base brand and distribution, we have the opportunity to produce rapid acceleration and penetration and profitable growth.

On slide 18, in November we made our first acquisition, [Omware], in the construction management vertical industry. And we're seeing positive early results. By combining Intuit and [Omware]'s many strengths, we saw Q3 revenue up 27% versus last year when [Omware] was a stand alone

company. But that doesn't tell the full story. Because of the Intuit brand and customer base, the active pipeline of 8100 prospects has grown dramatically since the acquisition and is roughly 20 times larger than last year at this pointed.

We expect to drive revenue growth in Intuit's new construction vertical business 50 to 75% this year, and we expect the fiscal year '03 growth rate to be even higher.

These great initial results reinforce our enthusiasm for the opportunity in multiple vertical industries. We've just announced plans for our second acquisition of American Fundware, a leader in public sector solutions for nonprofit organizations. This is another proven company with a solid leadership team, customer base, revenues, profits, and proven technology.

Another company with much greater growth potential as part of Intuit. You can expect more acquisitions of vertical industry solution companies to come that will create additional growth platforms for Intuit.

On slide 19 is another new growth area for Intuit, outsourced payroll, a business with high profit potential that remains underpenetrated and a big growth opportunity for Intuit. We recently

announced plans to acquire CBS Payroll, which will give us the platform to accelerate our presence in

this large segment. Many customers want a fully outsourced payroll solution, and this acquisition will allow us to offer this option and drive additional revenue and profit growth.

We've talked a lot about the small business opportunity in our plans, so let me sum up on slide 20. As I have discussed, we're executing on all

three fronts of our Right for My Business strategy and gaining real traction, and we're just beginning. We're thinking very big. This is a large, $18 billion and growing small business opportunity, and Intuit expects to be the clear leader.

Now let's shift gears on slide 21 and take a look at consumer tax. As Greg mentioned, we just finished another record season and believe there's

still a lot of room for growth ahead. There are 36 million taxpayers still preparing their returns with pencil and paper, and 20 million more that use franchise tax preparation. We think these taxpayers represent a big underserved growth opportunity for Intuit.

Intuit plans to further penetrate this large opportunity with a two-prong approach on slide 22. First, continued product and service innovation

that adds more value to our customers, and, second, continued expansion of the distribution channels so we further penetrate the self-preparer segment and reach and attract more new customers. We have several examples of how well those strategies paid off in the last tax season. On the product front, we had great success with our new high-end Web and desktop TurboTax products Greg talked about. We also enhanced the instant data entry feature of our automated tax return and had over one million

imports, over six times last year's rate.

On the distribution fronts, we dramatically expanded distribution for Web TurboTax, and launched pre-paid access cards that encouraged greater Web usage. We also added new retailers, like Safeway and [Vaughan's] in selected locations which helped us reach a broader customer base and grow the category.

We have lots of new innovations on the drawing board for next tax season. We'll share more

details at our investor day in September.

We have lots of positive news today, but everything isn't rosy. Greg shared the performance specifics of several underperforming businesses. Let me share a couple quick shots on how we're dealing with them. On slide 23 we've taken a number of actions in our Quicken-related businesses. Quicken

continues to have a solid leadership position with retail's share of units over 70%.

Our challenge is that this segment is just not growing. Over the last couple years, we've right- sized the cost base of this business, and to drive new growth, we've recently announced an alliance with Seibert Financial Corp. to offer online brokerage services to Quicken and Quicken.com customers. This strategic move will enable to us

better monetize this large and loyal customer base. I like this plan and believe we're on the right path to improve performance of this business that represents about 8% of Intuit's revenue.

On slide 24, there are two other smaller businesses that have underperformed this year. With respect to Premier Payroll, this is a business where we're the private label back-end provider for banks and don't control customer acquisition. This business

model is very different from our QuickBooks and CBS Payroll offerings where we deal directly with customer acquisition and control all the critical success factors.

There's no easy short-term fix for Premier, but you should know that we won't let this business harm our long-term performance. With respect to Japan, our core accounting software category is down 15 to 20%. Our revenues will be down less than that for

the year. While still nicely profitable, we're working to redefine our market and focus so we can get back on the growth path.

A final thought on Premier Payroll in Japan. Combined, they represent about 6% of Intuit's revenue, so their impact is relatively minor. And we're working towards and will find the right solution for both.

On slide 25, let's talk about our long-term growth targets. We have an internal long-term target of

at least 20% actual revenue growth, and we expect pro forma operating income growth to be 1.5 to two times the revenue growth rate. The revenue goal -- growth goal includes 15 to 20% organic revenue growth. Growth from acquisitions would be incremental to the organic growth rate. So why do we believe we can deliver this kind of growth on a sustained basis? We have strong businesses in

great businesses with large underserved segments. This creates a big growth opportunity for Intuit, and we're living lots of organic growth from our existing businesses, and there's more growth on the horizon, with new products or services either just coming to market or in development.

We also have a great growth opportunity from acquisitions. We're going to continue acquisitions at an aggressive pace, particularly in the small

business area.

Most companies make acquisitions for cost savings. But our acquisitions are all about capitalizing on growth synergies. Now let's shift to profit growth.

We expect to continue to deliver pro forma EPS and operating profit that grows 1 1/2 to two times faster than the revenue growth rate. We did that

in fiscal year '01; we'll do it again this year, and have targeted the same performance for fiscal year '03. We call that profit leverage. The reason we're able to deliver this kind of profit leverage is that we have leading positions in businesses where scale is important. So we generate profit leverage as we drive more unit volume.

In addition, we continue to focus on operational

rigor, so we eliminate waste and inefficiency and drop more profits to the bottom line. This concept applies to Intuit's existing portfolio of businesses as well as the companies we are looking to acquire. We've added strategic and operational rigor to our history correspond core competence of customer-driven innovation. This combination is driving our ability to deliver exceptional results on a sustained basis.

On slide 26, looking again at fiscal year '03 guidance, we expect to grow revenue in the range of

17 to 22%. Pro forma operating income, 30 to 35%, and pro forma EPS 25 to 30%.

Wrapping up, I'm excited about this quarter's performance and what looks to be a great fiscal year '02. But I'm even more excited about fiscal year '03 and beyond.

I'd like to thank all of the Intuit employees for their innovation and hard work in delivering these great results. Now, we'd like to open up for your questions.

At this time I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Mike [Hoages] of Goldman Sachs.

Hi. Good afternoon, and congratulations on the strong quarter. Two questions, one on tax and one on small business. First on tax, it does seem like there's been a pretty pronounced shift towards the Internet for personal tax preparation, and I was wondering if

you could go into some detail about the relative economics of getting it -- for you guys of having a return done on the Internet versus in the software, traditional software way, and then, secondly, on the small business side, given the seemingly strong momentum in [Omware] and the billion-seven position in cash and marketable securities on the balance sheet, I was wondering if you could update us on the pipeline for acquisitions and just give us a sense of what we might expect over the next six to

12 months.

Sure, Mike. With regard to tax, you know, Web tax was up 85% and desktop was up I think about 6 or 8, so clearly more and more consumers are choosing the Web. What they're telling us is that it's convenience and that they don't have to pay until they actually submit the -- submit the return.

The economics for us, both are profitable and above a certain break-even point where we are now on the

Web. I'd say our variable cost is lower on the Web than it is on the desktop products, and as we continue to drive more and more volume that way, or customers choose that, we're not driving it, I think that should improve our operating margins long-term.

With regard to small biz, the pipeline, I could

tell you but I'd have to kill everybody on the phone. I could -- I think we were pretty straightforward in our answer. We think this is a tremendous opportunity to combine domain expertise, existing great technology, customers, products, revenue, and profits with our brand customer base and distribution and really drive accelerated growth and we're going to be aggressive at acquiring companies in this space, some for cash, some for stock. We have an active pipeline and

you'll be hearing more as we go forward.

All right. Thanks, Steve.

Your next question comes from [Karen Mayer] of Banc of America Securities.

Hey, Steve, great looking quarter. I have a couple of questions, one kind of broader, and that is, as more of your QuickBooks products

now come direct and you're going up market and with the launch of Hercules product, is there a necessity either there or in payroll for you to have a sales force or do you believe that your customers will come directly to you for that? And can you give ace sense of maybe on you the economics are better -- and I don't know if Mike will ask this -- on the direct versus retail? I mean clearly that's a lot more profitable. And then last quarter you gave us a sense of the

attachment rate of services. Do you have that number?

One at a time here. On direct sales force, the answer is, we believe because we've had forced registration for QuickBooks since I think 1999 that we know who our customer base is, we know pretty much how many employees they have, so we believe by marketing directly to our customers, that we could have a

very successful customer acquisition or upgrade strategy and do not believe we need a sales force

for selling the higher-end QuickBooks product.

With respect to outsource payroll or the CBS acquisition, I think to sell a stand-alone outsourced payroll product we do need a sales force, and CBS has a sales force of 75 salespeople today that we would expect to expand as we try to grow that business.

With regard to QuickBooks payroll, I don't think we need a sales force to sell QuickBooks payroll. I think we have demonstrated we can continue to grow that, adding another hundred thousand customers in the last year, that we can draw -- do that through telesales and direct marketing activities.

With regard to profitability between direct and retail, you know, direct is obviously more

profitable because we don't pay the margin for retailers and -- our shipping costs are a little higher, but it's -- it's in total more profitable. But not dramatically so.

Okay. And then the attachment rate of other services?

I think we -- what do you want to say on that one? -- I think the answer is

we have some details in the faq sheet, an area that we need to keep working to do better and better on it. I think what we talked about last quarter was the attach rates for our registration pilot, which we are expanding on a broader basis. I mean we're in the process of doing that and I think we owe you more data on that as we go forward. The answer is that attach rate on tax was up over last year. We have a lot of good stories there. We just wanted to focus on the high level numbers this time

around.

Okay, terrific. Thank you.

Your next question comes from David Farina of William Blair.

Good afternoon. Steve, can you just tell us a little bit about how much cannibalization you're seeing from the online

versus the desktop, significant or are these more incremental customers and can you also just give us

a little more detail on the profile of an acquisition small business in terms of are you going after companies that you know, already have ties into QuickBooks or you don't care in terms of, you know, separate application? You understand what I'm asking there?

Yep.

Okay.

With regard to cannibalization, the last data -- and obviously we don't have it yet for this season, but the thing that's so great for us is that the majority of Web TurboTax customers had never's desktop product before. Two seasons ago it was 70% had never used any desktop product before. So the Web product was

clearly growing and expanding the market, as was some of our new distribution relationships today. Over 50% of our customers were new from our [Safeway and Bonds] pilot that we did this year. So we continued to do innovation to grow and expand the category.

With respect to the criteria we look for for vertical business acquisitions, the first thing we do is we look at the industry. We look for

industries that are in the 150 to $250 million size, we look at the competitive dynamics in that industry, we look at the growth rate and how penetrated business management solutions are, and so we decide which industries we like. Then we look at individual companies in the industry, and one of the factors we look at is the QuickBooks and/or Quicken -- you know, because three million customers still use Quicken to run their small business. So we look for synergies that way. But

we are not buying these companies to put QuickBooks as their accounting engine. It's important for investors to realize we're going to support multiple code bases here, multiple accounting engines because we're buying a company that has an integrated solution today, and it'll best for customers that they continue to use this platform or technology product that works for them, that meets their needs. What we think a lot of QuickBooks customers, when they outgrow QuickBooks,

they have to convert anyway, so what we're going to do is work to make the conversion easier from

QuickBooks to some of these vertical business management solutions. But this is about growth, not -- not about, you know, putting QuickBooks as the technology engine for each one of these verticals.

The last thing I would say, David, on that is obviously the number 1 thing we're looking for when

we look at companies in a vertical at the strength of their management team, we're only buying companies that have first class management teams. We're not buying fixer-ups, we're going to buy companies that share our dream of being the leader in their industry and by putting our resources together with theirs, we can think we can drive a much more accelerated growth rate than they could drive on their own.

Thanks, Steve.

Your next question comes from Brian [Keene] of financial securities.

It's Brian [Keene] from Prudential Securities. Impressive quarter. My first question is for Greg. Greg, on the pro forma results there's a charge for vacant facilities that you took of 13 million. Wouldn't that be more of a one

time charge, I'm just curious to know what that was and why you took it into the pro forma numbers well.

Yes, it is a one-time charge for what we believe is going to be vacant facilities for the remaining term that we're obligated to pay on. But we felt that was more of a legitimate operating expense because we put those facilities online in anticipation of growth in

headquarters area, we didn't need them and it felt more like an ongoing operations charge, just an acceleration of it according to the accounting rules since we're not going to be able to occupy them or sublet them at rates that are reasonable.

I think, Brian, the thing I would add on that is the real estate market in Silicon Valley has changed a lot in the last two years, and I think before I came there were more aggressive

plans to be adding employees in Silicon Valley, and I think we will still add some employees in Silicon

Valley but I think you had to go after space in case you needed it, because it was such a premium. I think we've now looked at deploying resources to other places not in Silicon Valley and we just found that we had a bunch of excess space and decided it was the right thing to do to take the charge.

Okay, and then, Steve, where do you think operating margins, I mean even if you take that charge out the margin looks to me almost like a 45% operating margin, and obviously we've seen a lot of margin expansion. But where is the ceiling, I guess, for operating margin, you know, in three to five or ten years from now?

Well, I don't know where the ceiling is. As we've talked about several times in

public forums we're not solving for operating margin. But we did share a benchmark I think at the last year at the end of our year-end conference call where we shared what we thought best in class software and service companies' operating margins were, and when compared to ours. And they ranged from the low -- low thirties to the -- to Microsoft, which is above 40%, and we said longer term we didn't see any reason why our performance as a company should not be in line with best in

class service and software companies, which is in general north of 30%.

Okay. And then the last question I just had here was on the Quicken loans, is there a breakout of how -- how much of that is purchased versus refi business, and maybe how do we look at that business going forward, or how at least have you guys modeled that for projections going forward?

The answer is no, there's not a breakout. But I will tell you the pipeline now is actually much more balanced between first purchase and refi, and we're see that change come every day. We've got a lot of new distribution deals, we're having great luck with our Yahoo distribution deal we just signed and I think we just signed a deal with Microsoft, too, with MSN. So we've still got lots of ways to grow this

business, but we have not modeled aggressive growth of this business into our guidance for fiscal year

'03.

When you first came to the company, Steve, I think it was clear that, you know, Intuit was underperforming given the opportunity. I mean is it safe to say that we've turned the corner with kind of how you feel and how the numbers are coming through, would you say that?

I would say that I am pleased with our performance over the last two years, and that's why we shared the two-year snapshot. But I believe that these new things, these new opportunities, like vertical, small business management and some of these new high end QuickBooks products and QuickBooks flavors, I think we have outsourced payroll, I think we've got a lot of brand-new growth engines, big markets that are

underpenetrated that provide us still preopportunity for additional growth. And I think if we get the revenue growth, we're going to get, because of the nature of these business models, nice profit leverage on the unit growth we can drive. So we're focused on making the company the best it can be, and that's driving revenue growth and helping our customers run their businesses more effectively.

Well, congratulations. It's becoming more clear every day.

Thank you.

Your next question comes from David Joseph of Morgan Stanley.

Hey, Steve and Greg. Just really two quick questions. Small business, obviously

it's a focus from fiscal '03. Was wondering how you see it growing, actually, in fiscal '03 and even longer term, where you see it kind of falling as a percent of total revenue, in the mix of things.

Also, just looking at -- also just really quickly, how is the developer network doing? Is that seeing any traction in terms of third-party applications being developed there? And then also, Quicken, you

guys signed a deal recently with Seibert. Is that -- how should we look at that business? Is that

something that remains less than 10% of total business? Does it grow in fiscal '03, et cetera?

Let's start with the last one first. I would view that the Seibert deal is a life extension and gets us back on the growth path for Quicken. Our core Quicken desktop software segment is shrinking, but we're finding ways to

grow by adding on services, affinity related services, and frankly they've been growing very nicely over the last few years so we think brokerage is a great addition to that, we think we've got a great partner so I think we're going to see a nice turnaround in that business especially since we've taken some tough actions and right- sized the cost base to so it will be more profitable as we drive revenue growth.

But it remains a non-core asset for you guys for the most part?

No, I would not conclude that. I would say that it's less than 10% of our revenue but it's 70% of our company's brand awareness. I think Quicken is a very strategic asset to the company and I think it's an important long-term part of our strategy. But we've got to find a way to get the business back on a better

growth and profitability track. And I think the game plan we just talked about will help us do that.

With respect to IDN, we have 93 applications in the marketplace already, after, you know, just a few months. We talked to people like Donna Dubinsky from Hand spring who is on our board, they're just shocked at how much traction we're getting from developers making this much progress already. So

every week we're adding five or six new applications, and we've sold over 40,000 third- party applications in the QuickBook solutions marketplace. So -- And a lot of developers are telling us this is their best source of new leads. So I'm very pleased with the traction we are getting on that.

With respect to small business again, I'm not solving for mix, but I tell you small business is

the Beth growth opportunity we have as a company. I still believe we have great growth opportunities

in consumer tax. We just have more growth opportunities in small business, and so I think longer term, oh, for the last year or so I've been saying we've been more and more a tax and small business company. But I'm not really focused on kind of a mixed number there. I think we're just going to try and be the best we can be in all the different businesses and we'll see where it ends

up.

But that is the main driver of growth in fiscal '03? How are you guys thinking about that?

Small business will be the number 1 driver of growth in this company for, my hypothesis, as long as I'm the CEO, since I'm hoping this is the last job I ever have, that

should be for a long time. And with regard to -- but I think consumer tax is going to grow pretty well, too, so -- but small business is clearly the growth engine, the biggest growth engine for this company.

Thanks, guys.

Your next question comes from Adam Holt of J.P. Morgan H&Q.

Good afternoon. First -- actual million two questions relate to the small business opportunity. If you look at the $18 billion opportunity you've identified, by far the largest subsector is payroll, H.R., and benefits. The first question is, you know, what gives you confidence you're going to be successful in cross- selling outsourced payroll and what's -- you know, are you being underpenetrated but also a very

competitive environment? And then the second question is, can you give us, you know, a game plan and execution metrics for an H.R. and benefits strategy.

Why we believe -- thanks, Adam. Why we believe that payroll is a big opportunity for us is that we have 683,000 customers today, of which over 600,000 buy a basic tax table service from us that we think are a great

opportunity for us to upsell. And we think that's a unique asset that very few other people have.

They already use QuickBooks, we already have a relationship with them. And so we think by having a full outsourced payroll offering, which they've been asking us for, many of them, we have a great chance for upsell. We also -- this is an industry where there's 20%, roughly, annual churn, or 80% retention of small business customers for some of the big players, so we think that should create an

opportunity for us to win new customers from other folks. So it's a combination of attracting new customers, upselling our existing customers, and then picking some of the pieces off from the churn, as more -- and plus, category growth as more and more companies outsource their payroll, we think there's a big -- there's a big opportunity in this -- the infrastructure we get with the CBS acquisition gives us a very, very competitive offering for that market.

With respect to benefits, we have a QuickBooks H.R. organizer product that's coming to market in the summer, in July, which is our first QuickBooks -- real QuickBooks expansion of this market. It's built into a QuickBooks Enterprise Solutions business management, but we're also going to sell it as a stand-alone module so people can add it on to QuickBooks. So we're pretty excited about that, and we'll -- it's a little early but we'll see what

comes with that.

That was one of the things that our customers most requested in the research, so we're responding directly to their needs.

And do you think you'll cultivate the H.R. and benefits opportunity primarily through partnership, or should this be another area where we look for you to be acquisitive?

I think you saw that we were just acquisitive with CBS Payroll. I think depending on the nature, I think we will try and be acquisitive for things that add to the core of what we're doing. I think for third-party services I think you'll see us form relationships with other third parties like we did with Principal for IRA and benefit, you know, specific services. So I think you'll see a combination of both.

All right, thank you.

Thanks, Adam.

Your next question comes from Bart Ware of Winslow Capital Management.

Yeah, hi, Steve. Two questions for you. Obviously you guys have accelerated your

share repurchase here. And can you just kind of give me what your thoughts are, obviously you articulated a huge acquisition pipeline there, but what we should look at share repurchase, vis-à-vis options issuance in '03?

Sure.

Then I've got a follow-up question.

Sure, Bart. The board authorized about a year ago now, authorized a three-year, $500 million buyback of which we spent around $80 million. So we've still got -- is that right, Greg, 80 -- roughly $80 million?

About 150 year to date.

So we've got 350 million to go, and we expect to continue to buy back the

stock, and then we'll see where that goes. We believe we can buy back the stock, continue the stock buy-back, and then make all the acquisitions that we need to make and have plenty of cash to run the company. So we don't see that -- we think -- we think we're in great position to capitalize on all of these and make acquisitions, do the buyback, and I think that's a great position to be in.

Should we assume that your -- your

share repurchase can offset any option [unintelligible]?

I think we -- we had a new shareholder vote this year we have -- we are working -- you know, we are committed to less dilution than our historical pattern and that was part of our shareholder approval in our January vote, so I think we will have less issuance of options going forward. I think this year's cap is

3 1/2 percent, and so we're going to continue to work on, you know, managing dilution, and I think

that's one of the reasons you see us talking more and more about EPS here, because ultimately investors are buying EPS, and I think you'll see us move more and more to focus on EPS, including the things we talked about in our scripts today.

Okay. And then my second question, somebody previous asked on the mortgage

business, and I guess I was just looking for a little more clarity, because, based on your guidance, you're going to obviously have a down fourth quarter here on mortgage, and I know you're doing a number of different things for growth in '03, but it seems to plan flat up-growth in '03 would be a stretch.

Yeah, I -- I don't think that's right that -- I guess that is right for

Quicken loans for the fourth quarter. Because we had such a strong fourth quarter last year. Look, I think the answer is my job is to look at our entire portfolio of businesses and take the businesses that are performing well and the businesses that are not performing as well and manage the total outcome to deliver at least the results in the range that we talked about today, and I'm very comfortable with the guidance we just provided for fiscal year '03.

Okay, thanks very much.

Thanks, Bart.

Your next question comes from Heather [Bellini] of Salomon Smith Barney.

Hi, this is actually Dino speaking for Heather. With regards to your outsource

payroll, can you go into a little more color on what you expect for the sales force in terms of expansion, the capacity that you're at right now with the 75?

Yeah, I think, Dino, it's better to wait for us to wait until we close the transaction which we expect to close in the fourth quarter, so I think you'll hear more about that in our plans at the end of the year, but we've just

signed the agreement to acquire. We're still working on the plans for, you know, what happens

after the acquisition, but I'd rather wait till we close the transaction, and then we'll share some of that thought at the end of the year in the August call.

Okay, great.

Your next question comes from

Craig [Peckham] of [Jeffries] & Company.

Hi, Steve and Greg. A question about QuickBooks. Coming out of 2000, you had -- you had the benefit of a good upgrade rate. And it looks like one of the reasons why QuickBooks worked so well this year was also because you had a good upgrade contribution. Heading into next year, though, is there any reason why we should expect to have an easier time anniversarying some of these

upgrades?

I think we've found that the upgrade partner is some people upgrade every year, some people upgrade every two years, some people upgrade every three years, and some people upgrade when they feel like the product is -- has made enough change they want to upgrade, and some people actually never upgrade. So I think the answer for this is really -- I think this is back to the more

normal pattern of upgrade and Y2K really was the blip. I think as we've gotten away from Y2K and we continue to add more features into the product, the upgrade rate should get back to more normal.

But I think if we just focus on upgrades, that's not really the key message for QuickBooks. The message for QuickBooks and how we grow in the future is higher-end skews where we're selling a 2500 or $3500 product versus a $200 product, plus

the different flavors which will be higher priced point. So I think upgrades are important but I would argue that even if the upgrade rate was flat for the rest of our life we can drive large growth from QuickBooks and more revenue per customer from flavors and higher accounting versions.

This is Scott. Let me add to that. The final piece of what Steve said is really key. We're now beyond the era, because of our

Right for My Business strategy, beyond the era of just selling another plain vanilla upgrade. The

amount of appeal that yet another upgrade has is declining. But when you talk to a small business person who has one level of interest in upgrade, and you say, "Hey how about something designed for your industry, or designed for the size of your business," not only does their interest in purchase go up but also the price they're willing to pay goes up. So part of payoff on the Right for My

Business strategy is that it's a much more appealing proposition, both price and volume-wise for our large existing base of customers to buy new versions, flavors, and sizes of QuickBooks.

The other thought, Craig, or one other thought is we think that the whole Intuit developer network in opening our APIs is going to make QuickBooks more of a small business platform which we think also will continue to help us add

more value to customers and drive upgrades, as people can integrate third-party applications they're using with QuickBooks, which is something we had never done in the past. So we think we've got a lot of tailwind behind us from our initiatives, all of which are new in the last year, that we're just starting to see the benefits of that we think -- we think QuickBooks is going to be quite a growth engine for our company for quite a few years in the future.

And, Steve, you've said in the past that were trying to identify I think the word used was "solutions" for Quicken.com. Should we view the Seibert arrangement as sort of what you meant there, or are you still trying to come up with alternative strategies as well?

I like the game -- we've taken a lot of cost out of the business, and I like

the game we're on right. Now I don't think you should expect any more big announcements with regard to Quicken or Quicken.com. I'm comfortable with the plan that we're on, and I think we've got a real chance to improve the performance of that business both on the top and bottom line, from the recent actions we've taken and the announcements we've made.

Okay, thank you.

Your next question comes from Jim

McDonald of First Analysis.

Yes, Steve, great quarter. Let me just see if you'll give us some kind of feeling of [unintelligible] national payroll company after the CBS acquisition.

I think there's only about

three national companies, Paychex, ADP, and [Seridia] none of which I would expect us to be buying so I think the answer for us is organic growth built on this platform and if there's any other smaller companies around I mean we'll obviously look at them. But there's not a big, long list of independent payroll companies that we could acquire. It's a little bit more like ProTax these days. Most of the consolidation has already happened. So I think the game now, there might be

some small additional transactions, but the real game there now is, you know, core blocking and tackling in organic growth, and I think we're well positioned to do that with our large QuickBooks payroll base and customer base.

What I was really asking is how quickly might you build up a sales force to be national.

Again, I think it's -- Jim, I think it's premature to speculate on this transactions until we close the transaction. We've got a signed deal but we're still waiting for all the approval, and I think it would be something that we'd -- the answer generically what you said, as fast as we can would be the answer I would give you.

Okay. Thanks a lot.

Your next question comes from Grant Jackson of First Analysis.

Hi, gentlemen. Especially -- I know it's early, but can you tell us what sort of demand you're seeing from the [ESBN] product and then if you're looking two or three years out, with small business can you tell us what sort of proportion you would expect to see from [ESBN]

versus the vertical applications versus the core products?

We -- number one, we just started taking orders for the higher-end QuickBooks product yesterday. So it's premature to -- and we don't start shipping until July, so it's premature to speculate on that. But our research and our feedback from customers has been very, very positive about -- about the -- the need that this

product would be filling.

With respect to the other things, I mean we're just not solving for mix. I mean it's -- we're trying to -- we're going to be the best we can be in QuickBooks, grow it as fast as we can, we're going to be -- we're going to make as many acquisitions as make sense for us where we can continue growing verticals, so I think it's -- it's not a very good answer, but the fact is we're not solving for a mix

in the company. We're taking each piece and trying to really focus on driving growth and solving customer problems, and I think we'll see where the dust falls.

Okay, and just one last question, and that is, when do you expect the vacant facility charges to leave the books? In other words, I guess when -- when is your lease up?

Greg, this is a charge that basically accelerates the future commitment into a one-time event, so that operating expense on a go-forward basis will not be part of our financials. Just to put it in perspective, on the annual basis, it's a relatively small number, because these commitments are five to seven years.

Thank you.

Your next question comes from Scott Kessler of Standard & Poors Equity Group.

How about the next one?

Your next question comes from Steve [Rostin] of [Glenn Capital Management].

First of all, a great two years in a challenging environment. I think it's

appreciated.

Thanks, Steve.

Can you talk -- you started to talk about a couple minutes ago, Steve, about Enterprise Solutions. Can you -- with your experience now, with a few months under your belt of QuickBooks Premier, what -- what do you think in terms of -- can you give us some milestones that

you're looking for to measure your own success in the first three to six months after release of the new product?

You know, it's an interesting thing, Steve. I would say we use the term "enterprise" because, interestingly, that's what our customers told us they like best. One thing we should make sure we're clear on with investors is Enterprise and defined by QuickBooks

is under 250 employees, and we have no plans to go above target companies with more than 250 employees. But we derrick I know we're going to get the product -- our view on this say launch and learn. We're going to get the product on the market. We've had great results from our beta testers, we've done a lot of research on this, and so I think it will be well received but it's too early to speculate on how many companies will make the leap from their existing product to the 25 to

$3500 solution. I just say we're going to continue to put these flavors and other things out there and we'll see how the market reacts. Our track record this year when you look at how well we've done with our premier, QuickBooks Premier, and our high-end tax products that we announced, you know, 10% of our tax units we just put on the market and were well received and QuickBooks Premier was well received. So, you know, we'll see, but we'll share the data as we go along, but I'd rather not project

specific numbers.

Are you going to sell that pretty much into your installed base, the Enterprise Solutions product, and will you have an outbound effort to do that?

Yeah, I mean I think we believe we know the customer base. Our initial focus is going to upsell our existing customer

base. Now, if somebody else wants to buy it -- you know, the answer is, companies don't start with a

hundred, 150 employees. They start with five or ten and then they grow. And so we think that this product is a normal migration for companies that are growing, so I don't think it's a big new customer acquisition tool. I think we do that with our other QuickBooks products and then we grow with these companies as we grow and expand.

Thank you.

Thanks, Steve.

There are no further questions at this time. Gentlemen, do you have any closing remarks?

I would just say thanks to everybody for listening. You heard that we -- you

heard our two-year track record, a good year in fiscal year '02 and you saw our guidance for fiscal year '03, and for the first time ever you saw our goal for long-term revenue growth, and you saw us share a lot of opportunities on why we feel that's within our grasp. So thanks for listening, and we'll talk to you again next quarter.

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