直覺電腦 (INTU) 2002 Q4 法說會逐字稿

Good afternoon.

My name is Brandy and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Intuit fourth quarter 2002 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After speakers' remarks, there will be a question-and-answer period.

If you would like to ask a question during this time, simply press star and then the number one on your telephone keypad.

If you would like to withdraw the question, press Star 2.

Thank you, Mr. Bennett.

You may begin your conference, sir.

Thank you.

Good afternoon, everybody and welcome to the Intuit conference call.

With me today are Greg Santora, our CFO and Scott Cook, Chairman of the Executive Committee.

Intuit made three key announcements today.

The first covering our strong financial results for the fourth quarter and fiscal year, second the acquisition of Blue Ocean, which I'll talk about later, and third, the retirement of Greg Santora, our CFO.

Let's start with Greg's retirement.

Coming off multiple great years Greg has decided it's a good time for him to make a change.

Despite my and the Board's efforts to try and get Greg to reconsider, he decided this was the the right time to retire.

He will stay on through the end of the calendar year or until we have a replacement on board to ensure a seamless transition.

And he will participate actively in the search process.

We are grateful for all he has contributed to Intuit's success and the leadership he is going to provide in this transition.

Turning to slide two, let's move to the financial results.

We had another great quarter, capping off another great year.

For fiscal 2002 in total, revenue of $1.36 billion was up 18 percent.

GAAP income from continuing operations was $59 million, up from a loss of $74 million in fiscal year '01.

And GAAP EPS was 64 cents up from a loss of 40 cents in fiscal year '01.

In addition to the GAAP results, we continue to report pro forma numbers because they are useful in helping investors understand our ongoing core operating results.

Pro forma operating income was $282 million, up 50 percent.

And more than 2.5 times the revenue growth rate.

Pro forma EPS of 97 cents was up 29 percent, and we exceeded our most recent EPS guidance given about a month ago by 2 cents.

So why is Intuit continuously delivering solid improvements in revenue and pro forma profits year after year?

On Slide 3, three key fundamentals are driving our success.

First, we have chosen the businesses we're in very deliberately.

Businesses with steady demand and businesses where we have the strategic and durable advantage to produce profitable growth over the long haul.

Second, within these businesses, we create new growth from attacking large, under served portions of the market.

And third, by applying strategic and operational rigger, we are executing well so we capitalize on these multiple large opportunities.

I'll talk in more details about the fundamentals driving our success in a few minutes.

But first, let me turn the call over to Greg, who will cover the financial highlights and what drove our strong performance.

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 typically report a loss in the fourth and first quarters, and we generally report higher revenue and profits in our second and third quarters, which coincide with the peak time for selling our tax products and to a lesser extent our small business products.

As a result, it's best to compare our 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, as Steve of mentioned, GAAP and pro forma.

Please see Slide 21 and the appendix for more details about what's included in the GAAP and pro forma results.

Pro forma financial information supplements GAAP and provides investors with an alternative assessment of Intuit's ongoing core operating results.

I 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 21 and 22 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.

One other important point.

As you know, we completed the sale of Quicken Loans business at the end of July and we're accounting for this business as discontinued operations.

The $23 million gain on the sale is shown on a separate line in our GAAP results.

The net results from the Quicken Loans business have been also segregated into a separate line item in our GAAP results.

We have not included these results or the gain on the sale in pro forma results since they are not part of our ongoing core operating business.

As you read in our press release and fact sheet, we exceeded our guidance for both revenue and pro forma operating income in the fourth quarter.

So I'm going to focus on the results for the fiscal year.

Please turn to Slide 4.

Fiscal '02 was another great year, with accelerated performance at both the top and bottom lines.

Steve covered most of the financial highlights in this chart.

I just add that, along with our strong revenue and profit growth, we also had significant improvement in our pro forma operating margin.

Adding about 440 basis points in fiscal '02 to over 20 percent this year.

This is up from 16.4 in fiscal '01.

This is a great trend, and we expect it to continue in fiscal '03.

On Slide 5, let's look at the factors that drove our strong performance in fiscal '02.

Intuit has a strong business portfolio, businesses that see continuing demand which drives solid unit volume growth.

Our two largest businesses both had stronger demand in fiscal '02.

QuickBooks units were up 12 percent and TurboTax had 19 percent growth in federal units driving stronger overall revenue growth.

We also increased some prices to reflect the improved functionality and increased value we offer our customers.

And we introduce new products with higher price points.

This also contributed to revenue and profit growth.

As we just noted, pro forma operating income grew more than 2 1/2 times as fast as revenues.

Let's look at what drove that dramatic profit growth.

The most significant is the leverage we get from scale or the profit leverage that comes from selling more units.

In general, software has very high up-front fixed costs and low variable costs.

This means each incremental unit sold comes with higher unit profit.

A good example of this was our performance in TurboTax this year.

Second, we get additional profit leverage as we introduce new products and services that have lower incremental development costs.

In QuickBooks, for example, we were able to leverage our core products to introduce six new products this year up from only two in fiscal '01.

With only a 10 percent increase in total QuickBooks development costs.

On top of that, these new products carry substantially higher price points because they have increased functionality and deliver higher value to our customers.

Before I wrap up I'd like to provide updates on our balance sheet and stock buyback program on Slide 6.

Intuit continues to have a strong balance sheet with $1.25 billion in cash and short-term investments or about $5.75 per share at the end of the fiscal year.

This year, we generated over $400 million in cash from operations reflecting the underlying profitability of our business.

We also moved to aggressively repurchase our stock under the program authorized in May of 2001.

We repurchased about 7.4 million shares in fiscal '02 for approximately $318 million.

This is particularly important because in fiscal '02, we granted options for about 6.8 million shares net of cancellations.

In other words, the shares we repurchased more than offset the future dilution of the options when they will be exercised.

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

Thanks, Greg.

On Slide 7 as mentioned earlier, Intuit has become a profitable growth machine.

Driven by three key fundamentals.

The first fundamental is that we have chosen to be in businesses with steady and reliable demand.

And where we have a strategic and durable advantage.

Both of which are important to delivering sustained profit growth.

Let's talk more about steady and reliable demand.

Our key products and services are the opposite of fashions or fads.

They do what people have to do, like doing your taxes, paying your employees, and keeping the books.

Our products solve the problems people have today with solutions that work today.

We have chosen businesses where demand is reliable, not cyclical, because -- because demand doesn't seem to fluctuate much with economic cycles.

The products and services have affordable price points so customers don't make purchase decisions based on the economy.

What's more, an increasing number of businesses in our portfolio deliver consistent recurring revenue where the customer continues to pay Intuit every year as in our income tax, payroll and vertical business management businesses.

And we choose to be in businesses where we have durable strategic advantage.

For example, our large and loyal customer base brings several advantages that are hard to duplicate.

Our large customer base means lower unit costs as fixed costs are spread over a larger number of units.

And fixed development, marketing and infrastructure costs are significant in our business.

Our large customer base means third parties enthusiastically support our products.

This support from independent software developers and financial institutions means Intuit products can offer a more complete solution, are more accessible, and can provide more benefit to customers.

And our large, loyal customer base creates word-of-mouth marketing that lowers our customer acquisition costs.

As an added benefit, our business models drive significant profit leverage.

And there are three dynamics at work here.

First is volume.

As Greg talked about our businesses have significant fixed costs and low variable costs.

As a result, selling more units means we drop significantly more profits to the bottom line.

Second is mix.

We're proving that as we move up market with many of our products and services offerings, our customers are responding well and we can drive mix improvements and more revenue and profits per customer.

Third is value.

As we expand the functionality of our products and services, we deliver products with higher price points to reflect the greater value we deliver to customers.

Just as we have chosen to be in certain businesses, we have made the tough decision to exit other businesses.

Businesses that don't fit our criteria.

As a matter of fact, we've exited four businesses in the past two years.

Most recently, we sold the Quicken Loans business with its cyclical nature tied to interest rates.

It didn't meet our criteria for steady, reliable demand.

Our second fundamental is covered on slide 8.

It's not just enough to be in great businesses.

We also have to continually uncover additional opportunities to drive faster growth.

We do this by identifying significant under served customer needs that create big and profitable growth opportunities for Intuit.

We then respond two different ways to capitalize on these opportunities.

We develop offerings internally or acquire companies and segments where we believe our assets when combined with the acquired companies will turbocharge growth and create additional growth platforms.

We're fortunate that we have multiple engines to accelerate Intuit revenue and profit growth.

I'll talk about four of them today.

One of our biggest growth engines is QuickBooks on slide 9.

Over the past year, we have transformed QuickBooks from a one-size-fits-all approach to a "Right for My Business" approach.

This new and dramatically expanded thinking opens up several under served markets and will create years of future opportunity.

We have moved from an annual QuickBooks basic and Pro launch to something far broader and bigger.

You have seen a lot of new introductions in the past year, QuickBooks for retailers and Accountants plus two new higher end offerings, Premier and Enterprise solutions in addition to the Basic and Pro launch.

For the first time ever, we opened our APIs for third party applications to share data with QuickBooks.

That's a lot of change in just one year and we have many more positive things coming.

Customers have responded very well.

Fiscal year '02 QuickBooks 2001 and 2002 units combined grew 12 percent.

And QuickBooks 2002 units when you look at them on their own grew 26 percent.

Both were well ahead of our expectations.

Plus, we haven't yet seen full-year benefits from the launches of many of these new products.

We're off to a fast start as the new offerings accounted for about 5.5 percent of the unit and more than 12 percent of the revenue mix for the fiscal year.

QuickBooks and related revenue was about $250 million, up 16 percent.

And we expect it to grow by another 20 to 30 percent in fiscal year '03.

A second big growth opportunity on slide 10 is business offerings beyond accounting.

Now, these are products and services that are horizontal in nature and bought by many types of businesses.

Examples would be payroll, technical support, supplies, and IT asset and resource management software developed by Blue Ocean, the acquisition we announced today.

Most of our current offerings have been QuickBooks-focused but we have an opportunity to expand beyond the QuickBooks base and continue to grow this $335 million business that was up 15 percent in revenue in fiscal year '02.

Now, there are multiple growth engines in small business services, like payroll and Blue Ocean.

Payroll is a business we like a lot and one that represents another large under penetrated opportunity.

We made solid progress in fiscal year '02 growing QuickBooks branded payroll revenue to about $108 million, up 39 percent.

In addition, we acquired CBS Payroll in June and we now have a full service outsourced payroll solution.

We're moving quickly to provide integration capabilities between QuickBooks and our new outsourced payroll solution which will deliver a better customer value proposition and give us a unique and durable competitive advantage.

In fiscal year '03, we expect our payroll business to grow 20 to 30 percent excluding the Premier business, which I'll discuss in a few minutes.

We're excited about the growth opportunity in small businesses beyond accounting offerings including our proposed $170 million cash acquisition of Blue Ocean on slide eleven.

Blue Ocean is another acquisition that accelerates progress and delivering on "Right for My Business" strategy.

Blue Ocean is a leading provider of software solutions that help businesses manage their information technology, resources and assets.

Another mission-critical need for companies once they have 20 or so PCs with multiple applications.

Today about 90 percent of businesses juggle this on their own.

So this is another huge under penetrated opportunity for Intuit.

Blue Ocean is already the leader in the segment, with a great product and an attractive price point.

As we add the QuickBooks brand and customer base to this team's many strengths, we'll have another platform to drive profitable growth.

This growth will build on their already impressive track record over the last few years.

On Slide 12 another growth engine is vertical business management solutions.

An engine that did not exist for Intuit just 10 months ago.

This is a huge growth opportunity and we're just getting started.

We like this opportunity because it's large, over $4.5 billion in annual sales.

It's highly fragmented, has no clear leader and is significantly under penetrated.

We have moved aggressively to capitalize on this opportunity acquiring four companies in fiscal year '02.

Our strategy is to buy leading companies with solid customer bases and management teams that, when combined with Intuit assets, turbocharge growth.

The early results from Omware which we acquired last November indicate that we're on the right track.

Omware revenue was up about 35 percent for the year, exiting the year with Q4 growth of over 50 percent.

We're seeing positive early signs from the other recently closed vertical acquisitions and will continue to make additional acquisitions to expand this growth engine in fiscal year '03.

Let me take a second to share how we're defining organic growth for these new acquisitions.

We take the 12-month revenue prior to the close of the acquisition and consider that acquired revenue or the base.

Revenue above that level going forward is considered organic.

With a base of about $90 million in these four vertical businesses, we expect total fiscal year '03 revenue in the 120 to 150 range, or an organic growth rate of greater than 30 percent.

Turning to Slide 13, the last growth engine we'll cover today is TurboTax.

While this is already a huge and growing business for us, this is still a largely under penetrated opportunity.

There are 89 million taxpayers who currently don't use an Intuit product either TurboTax or one of our Pro offerings so there is still plenty of room to grow.

As announced recently, we're pleased to be part of a new partnership between government and private industry that expands the availability of free tax prep and eFiling services to 60 percent of taxpayers.

As you know, Intuit has been offering free tax prep and eFiling to about 50 percent of taxpayers through the Intuit tax freedom project for the last four years.

So we don't envision significant changes from what we offer today.

Last year, 1.2 million taxpayers took advantage of this free service from Intuit and since it's a Web-based product, our incremental costs from the free service, while real, will not significantly impact our financial results.

This new program is a win for taxpayers, speeding up their refunds and increasing the accuracy of their returns.

It's a win for the IRS, in meeting its goal of 80 percent eFiling by 2007.

And it's a win for Intuit removing an uncertainty for our TurboTax business.

We'll go into more detail about our consumer tax strategy and how we plan to attack the 89 million taxpayers who currently don't use an Intuit product when we host our annual investor day on September 17th.

We just covered many of our growth engines that we believe will drive sustained revenue and profit growth.

Now let's shift to Slide 14 and some of our smaller businesses that underperformed in fiscal year '02.

With regard to Quicken, we remain the clear leader in personal finance software.

But this is a mature category that doesn't offer significant room for unit growth.

We do see opportunity with Quicken-related services which had revenue of about $37 million and growth of nearly 50 percent in fiscal year '02.

In a couple of weeks we'll launch our newest service Quicken Brokerage powered by Siebert.

We believe this new service should help us get on a faster growth trajectory in this business.

We have also moved aggressively to reduce costs in our Quicken business, a total of over $45 million over the last two years.

Quicken remains a fairly small business for us, about 10 percent of fiscal year '02 revenue.

But with the tough cost action and the growth opportunity from services, we like where we are today.

Another underperforming business was our Premier Payroll Service this business had revenue about $40 million in fiscal year '02, about flat with the prior year and about 3 percent of total Intuit revenue.

We're a back-end private label provider to banks, so banks, not Intuit, sell the service and are responsible for customer acquisition.

We don't like this business model and while there is no easy short-term fix, we're actively working to improve our position.

Investors should know that we won't let this business harm our long-term performance.

Our Japanese business, which also represents a little more than 3 percent of Intuit revenue, was down about 12 percent due to a weak market.

Our business actually gained share in fiscal year '02 and profits were up significantly as we discontinued the QuickBooks Japan product.

We're working on several alternatives to improve performance but revenue growth appears to be a challenge in the short term.

To sum up, with our leading positions in great businesses, by expanding our mindset to recover and pursue new large growth opportunities, and by bringing more focus and discipline to execution, Intuit has become a profitable growth machine.

Now let's shift gears on Slide 15 and address a couple of key topics, business ethics, corporate governance, and stock options.

Let's start with business ethics and behavior.

Which have always been important at Intuit.

Integrity without compromise is Intuit's number one operating value and has been since our operating values were formalized in 1993.

Everyone at the company is accountable for living up to the highest standards of business code -- business conduct and ethics.

In addition to having a culture of integrity, we have always had robust internal processes and strong corporate governance.

That's why both Greg and I had no reservations voluntarily certifying all previously filed SEC documents beginning with last year's 10-K that was filed in October 2001.

This wasn't mandated, but we went above and beyond the requirements because we're confident in how we run the business and the integrity of our numbers.

We'll also be certifying our fiscal year '02 10-K before the filing deadline in late October.

Strong corporate governance is not new to Intuit, either.

Let's look at how we stack up in a few key areas on Slide 16.

With regards to Board independence, we have an experienced and engaged Board of Directors.

The majority of our Board members are independent and all audit and comp committee members are independent.

We have an active and probing Audit Committee and the Audit Committee meets formally in scheduled private sessions with our independent auditors 8 times a year.

With regards to auditor independence, we have taken a number of steps to ensure continued independence of our outside auditor.

They report directly to the Audit Committee and we limit the use of our audit firm for non-audit services.

We also have restrictions on hiring former employees of our audit firm.

Good governance is about doing the right things for the company and for shareholders.

This has always been a priority at Intuit.

And now with the rest of the world focused on governance, we have been able to benchmark our practices against recently published external corporate governance standards.

Our high percentile scores validated that we have been doing the right things.

So it's really business as usual at Intuit with a few tweaks.

Now let's turn to how we manage our employee stock program on Slide 17.

There are several things we are doing to balance two important objectives: Building a high-performance organization and minimizing shareholder dilution.

First, we have reduced our annual grant rate from over 5 percent to under 3.5 percent of shares outstanding in fiscal year '02.

This was a significant reduction.

But we stood focused on rewarding the best performers at all levels of the company.

Second, as Greg mentioned, the shares we repurchased in fiscal year '02 more than offset the future dilution of those options.

And third, it's important to note that we use stock options as a tool to motivate and reward our best talent at all levels.

In fact, on average, over the last four years, more than 75 percent of our grants have gone to employees below the VP level, or in other words, 75 percent of our stock options went to employees other than the top 45 people in the company.

Expensing stock options is a big topic these days and we have been listening carefully to the dialogue.

Our position is that we're not going to expense options.

We have been providing an annual look at how expensing them would impact our EPS and to give investors even greater visibility going forward, we'll start to provide that information on a quarterly versus annual basis.

Now on Slide 18, let's wrap up with our growth targets.

Our internal goal is to have annual organic revenue growth of at least 15 to 20 percent every year.

With the profit leverage in our businesses and the disciplined management and execution, we expect annual operating profit growth that's 1 1/2 to two times the revenue growth rate.

Growth from acquisitions is incremental.

On Slide 19 with regards to fiscal year 2003, we expect another great year.

Including the Blue Ocean acquisition, we're raising our guidance for revenue growth in the 25 to 33 percent range.

For pro forma operating income growth of 42 to 50 percent and for pro forma EPS growth of 34 to 40 percent.

Wrapping up, I'm pleased with the results we delivered in fiscal year '02 but I'm even more excited about fiscal year '03 and beyond.

We have accomplished a lot over the last couple of years, but the best is yet to come.

I'd like to thank all the Intuit employees for their hard work and focus in delivering another great year.

Now I'd like to open it up for your questions.

At this time, I would like to remind everyone if you would like to ask a question, press star then the number 1 on your telephone keypad.

And we'll pause for just a moment to compile the Q & A roster. [ Pause ] Your first question comes from Michael Hose of Goldman Sachs.

Yeah, hi.

Good afternoon and congratulations on a solid year.

Two questions for you, Steve.

First, I was wondering if you could go into a little bit more detail, I think in the presentation you highlighted that QuickBooks-related revenues are expected to advance something like 30 percent this year.

Maybe give us a sense -- in QuickBooks and maybe extend it to TurboTax, as well, how you're approaching the pricing question and maybe the complexion of that growth.

I know mix is a big factor, as well.

And then separately, if you could give us an update or a sense of what the acquisition pipeline looks like now that clearly there's been several acquisitions that -- there appears to be some early success.

Maybe give us a sense of what we might expect in coming quarters.

Thanks, Michael.

With QuickBooks and TurboTax, price versus mix equation, I think Greg shared pretty specifically, we believe there is still big unit growth opportunities in both of these businesses.

And I think ultimately, unit growth and mix is going to drive more leverage for us than price.

We are going to selectively look at pricing to make sure we're pricing for the value we're delivering but I think you mentioned 30 percent.

The range we believe QuickBooks will grow next year is in the 20 to 30 percent, and a lot of that is we just launched QuickBooks Enterprise Solutions where we are getting very good traction on that new product.

We have more flavors coming.

So I think most of the growth is going to come from continued strong unit growth and driven by more of the higher-end products.

And we also are getting terrific leverage from our Intuit developer network which we think was the key factor in helping us have a successful year.

We are getting a lot of momentum there and we think that's one of the other reasons that unit growth is stronger than we originally projected.

With regard to the acquisition pipeline, we think we have a window of opportunity here to really capitalize on some unique opportunities.

We're pleased with every one of the companies we have acquired.

We're off to a pretty good starts on every one of them so we continue to look for additional acquisitions and that clear our high hurdles where we believe we can find a team in a vertical that gives us some real opportunity for growth.

One thing I would note is that the acquisition of Blue Ocean Software is our first horizontal acquisition and we aim to sell that product to the customers in both the QuickBooks base and also the customers in some of these vertical business management solutions.

Okay.

Thanks a lot.

Your next question comes from Brian King of Prudential Securities.

Hi, good afternoon.

Couple of questions.

First, I guess, with the IRS consortium, I know you guys do about 50 percent, roughly, of taxpayers that you offer for free.

They are saying that they want to go up to 60 percent.

Does that -- have you guys decided yet if you'll move up to that 60 percent profile and does that mean you'll move the minimum threshold of say the 25,000 up a little bit to hit that threshold?

I think what we'll do is -- you know, the consortium is out for a 30-day response and rule-making period.

I think we're thinking about different ways to meet that move from 50 to 60.

And think we'll just -- we are looking at a lot of different things, and I think that might be part of, you know, raising the adjusted gross income hurdle above 25,000 is one of the things we are considering.

There is also some other things we have some ideas about.

We'll have more details on that at the September 17th session when we launch our expanded TurboTax strategy.

And when you say, one of the comments you made, Steve, was that you are going to remove the uncertainty for TurboTax, meaning I think that, uhm, IRS won't have any plans to do their own preparation?

Is that what you meant by that comment?

Yeah.

That's exactly why the power of this win-win public-private partnership is the consortium and the by laws says that the IRS will not get into the tax prep business.

They will do it in partnership with private companies.

Okay.

And just switching gears, CBS Payroll, I know that just closed in June.

But what is the initial outlook look like for that business as you see it and, uhm, maybe kind of the prospects for growth there?

I know you talk a lot about the QuickBooks growth and some of the flavors obviously growing well and some of the vertical solutions doing well but what about for CBS Payroll?

How does that look for you so far?

I think we put that in -- with the QuickBooks brand and also we are working to have the CBS Payroll offering that will be integrated with QuickBooks to provide QuickBooks customers a better solution than what they have today.

So I would put CBS Payroll or the full outsource payroll and the QuickBooks banded payroll into the bubble we said we expect to grow 20 to 30 percent in fiscal year '03.

Okay.

The deluxe product is an outsource product, too.

So we still feel there is a big opportunity -- remember, we have over 600,000 customers that buy the basic tax table business for us.

We think that we ought to be able to convert a few of those when we have a sales force calling on them to upsell them to the full outsource product.

But that dedicated sales force is coming from CBS Payroll?

Exactly.

Okay.

I guess then, finally, is it I guess safe to assume that Greg wants to work on his golf game?

Is that why he's hanging it up?

He is trying to catch up with me in the CEO rankings for handicaps! [ Laughter ]

You don't have any plans, Greg of going anything else?

No, I'm just going to take some time off, work on my golf game, maybe make my pilot's license current, but that's about it.

I don't think I can catch Steve on the index, but I'll try. [ Laughter ]

All right.

Great.

Well, congratulations on the quarter.

Thanks, Brian.

Your next question comes from David Farina of William Blair & Company.

Hi guys.

Greg, can you just give us a little color on what would be like an Apples-to-apples comparison if we kind of stripped out in terms of revenue growth all the acquired businesses this year?

You made some acquisitions.

It's kind of hard to figure out --

$15 million of the revenue growth year-over-year came from acquisitions.

And okay, and what do you expect that number will be?

I know you said $100 -- $190 million from the verticals and then if you add back, you know, CBS Payroll and it looks like to me about $150 million, is that right?

Yeah, I would say $150 to $160.

Probably $160 million is the number I'd use if I added also Blue Ocean and CBS Payroll into the $90 million base that we talked about with the four verticals.

So it would be 90-plus, uhm, 40 plus, 30 is $160 million.

Okay, fair enough.

Lastly on Blue Ocean itself, I mean, uhm, how did your -- what are you looking for in terms of valuation metrics out there in terms of what you're paying for a company?

We see software valuations so low out there in a lot of companies.

How do you guys decide what --

I think you have to be really careful.

It's like comparing Intuit to Enterprise Software companies where we're just not the same.

I think we look at each individual transaction separately and one of the reasons that we like Blue Ocean is because as you saw we took our guidance or 50 million bucks and we took our operating profit about up 5 cents a share.

This is a very profitable business and so the valuations and their growth rate which has been, you know, almost 50 percent a year, factor into the valuation prices we're willing to pay.

So we have a range but we apply that to each specific company, their track record and their opportunity and we have done them from, what, two, less than two, 1 1/2 to 3 plus times revenue.

One last question for you Steve, real quickly.

On Blue Ocean, I mean, the company serves people with 20 plus or more pc's.

That seems a little bit higher than your core market.

How are you going to market that product?

Your typical customer wouldn't have 25 pc's.

You would be surprised.

I have been out to an employee, you know, California Candy Company, that has four employees and has 9 pc's.

It's amazing how many -- how much infrastructure these small businesses have, and I remember we also have over 250,000 customers that have between 25 and 250 employees, which is where 80 percent of Blue Ocean customers are.

So we think we have a great opportunity through our traditional marketing methods of direct marketing and telesales to close these transactions.

Fair enough.

Thank you very much.

Your next question comes from David Joseph of Morgan Stanley.

(indiscernible).

We have a couple of questions.

First, Steve, if you could talk about what you foresee as potentially some of the issues, some of these acquisitions, you indicated that they have gone well so far.

How are you managing from -- them from a head count perspective and what traps are you setting for, say, one to two years from now when some of the integration (indiscernible) [ very low audio ] And that's question one.

I think Dave has a question, as well.

Let me just take that one.

Number one, we don't plan to integrate the code base of these companies with QuickBooks or anything else.

I don't mean integrate.

I mean keep it current with the different set of developers.

Uhm... this is Scott.

The same developers.

We keep the developers.

We keep the management teams.

Those are important assets in what we're buying.

They know their business, know how to drive it forward.

We don't replace that.

What we do is turbocharge by adding additional methods of growth.

I think the key thought here for Mary is that most people when they think about acquisitions they think about, you know, consolidation and restructuring and cost take-out.

We have not had any layoffs as a result of any of these acquisitions, any of these vertical acquisitions that we have made.

It's the same management team.

It's the same employee base.

And so what we do is bring our asset, which is our brand, our financial strength and our customer base and by putting that together with the leading companies we're acquiring -- as I said before, we're buying winners and leaders with good track records.

We're not buying fixer-uppers.

We don't have time to do that we're not in the real estate business here buying fixer-uppers.

So ultimately, what we're seeing is when you put our assets with theirs, we are off to a great start and we don't see a lot of big risk because they run as independent businesses where we are just leveraged synergies and knowledge throughout the company.

So we think these are unique acquisitions compared to most acquisitions people read about these days in the press.

From a process standpoint, it's one thing to manage five.

It's one thing to manage 10.

It's another thing to manage 20 to 25.

And how are you thinking about that structure?

I think we've been very clear that we said in verticals we thought that the range was 5 to 10 and we said we were bullish, it might be 7 to 12.

So there's only a finite number of these vertical companies because of the size of the industry and the QuickBooks base.

So this is not an unlimited plan for verticals.

I think the numbers are still in the 5-7 to 12 range and one of the things we are looking at is how do we put the oversight management infrastructure in with these companies to make sure that we're sharing, facilitating, learning to help them all be the best they can be.

Steve, I just have one quick question for you.

In templgs of QuickBooks sales are you seeing that for new customers and what was the upgrade rate for fiscal '02?

With units of QuickBooks 2002 being up 26 percent, we had very, very strong new user growth, about 400,000 new users.

Which says that QuickBooks by far and away is still the number one choice for new customers.

Upgraders, I mean, it's hard because there's moving parts.

I think it's safe to say we had more upgraders than we had the previous year.

And as you remember, we ended the year saying we thought QuickBooks units were going to be flat in total, if you combine both 2001 and 2002, they were up 12 percent.

And 2002 by itself was up 26 percent.

So QuickBooks clearly had stronger legs than we went into the year forecasting.

And just one last quick question.

It looks like cash flow is very strong for the year, too.

If I'm looking at this correctly.

Looks like it's almost up over 70 percent.

How sustainable is that going forward?

And what were the real drivers of that?

Greg, you want to take that one?

Cash flow, you know, is driven, uhm, pretty substantially by the, uhm, operating income obviously, the profitability of the company.

You know, we also get the benefit -- we also spent a lot of money, David, on acquisitions, almost $255 million this year.

Property, plant and equipment, our capital investments are 64.

So most of it, most of the strength is, uhm, driven by -- by operating income.

And another $100 million of reduction in working capital, which gives us more cash as we've lowered the amount of funds available for the mortgage business.

Do you expect similar growth going forward for fiscal '03?

Yeah, I predict, you know, obviously, it is dependent on the level of acquisitions, but barring that we should be able to see substantial growth in cash flow very consistent with our operating profits.

I think, David, the -- separate acquisitions because that's a different decision but cash flow from operations continues strong as we improve our ability to manage other supply chain where some of the operational rigr and execution comes in we are running a tighter ship.

As we continue to grow operating profits, that cash is going to drop through right to the bottom line.

Great, thanks, guys.

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

Good afternoon.

My first question relates to the new QuickBooks releases.

I know it's early in the cycle for POS and Enterprise, but I was hoping you could give us an update on the initial order flow for those two products.

And also, get us current on your distribution strategy for Enterprise.

Let me take the -- Scott will share one -- distribution strategy for Enterprise continues to be something that we must do a poor job of explaining we're so different than other companies in the marketplace.

We know who our QuickBooks customers are.

Because we have forced registration in the product.

We believe that we can direct-market and direct-sale -- direct-sell over the phone QuickBooks Enterprises Solutions and that we don't have any plans to sell through resellers.

We are going to continue to sell it through some retailers.

Our existing distribution channels might be involved in that.

But we know who these customers are and we believe we can sell it directly to them without the need of any other third parties and we feel pretty confident about that.

And this is Scott.

I think one of the key learning so far -- and you are right, the Enterprise has been out only for a couple of months, is the lack of price resistance among the segments of customers who are buying this.

And specific data here is in QuickBooks Enterprise, it's available in two versions, the software version only and then software plus support at a higher price of $500 higher price. 85 percent of the sales are for the higher-priced version.

Actually $1,000 higher.

It's $3,500 versus $2500.

And similarly in POS, it's available in two versions, software-only version and a version that includes the software plus the hardware components, the card reader, the receipt printer, the UPC scanner.

The second version with hardware is priced twice as much, $1500, versus about $800 for software only.

And again, sales are about two-thirds for the -- of the sales of the unit sales are in the more expensive version.

So we will, I think it's a little early to release Enterprise results because we only started shipping the product in July.

Thirty days ago.

So I think that's something as we have enough track record that we'll probably be sharing probably at the end of Q1.

We'll give you an early peek at both POS, QuickBooks for Retailers and Enterprise.

Just understanding that you are primarily leveraging your telesales effort for certainly Enterprise, are the vast majority of the POS and Enterprise customers coming from your installed base at this point?

Yes.

And that's what our target is but we are seeing some conversion of people from QuickBooks from other accounting products to QuickBooks Enterprise.

That's not the market we have targeted but we are seeing some of that we were a little surprised by that and we hadn't planned on that but we are seeing some of that in many cases they are stepping back from higher-priced solutions to QuickBooks Enterprise which told me they didn't want to leave QuickBooks in the first place.

Great.

And then one final question on the retail tax.

I know you are going to give further guidance and updates at the analyst day, but given your comments about the IRS consortium not materially impacting that business, what is your current thinking about a growth outlook for fiscal '03 for the retail tax business?

I think we'll share that in September but I mean, I think if you look at the performance over the last few years, I don't think it's unreasonable to expect with this new expanded strategy that we are going to launch that we should have similar performance to what we have had over the last few years.

Great.

Thanks for your time.

Thanks, Adam.

Your next question comes from Craig Peckham of Jefferies.

Good afternoon.

Your remark about organic revenue growing at about 30 percent on some of the new acquisitions, I assume that means that the companies you acquire you expect that baseline revenue to be growing at 30 percent.

Exactly.

Is that -- does that represent an acceleration from growth rates prior to acquisition?

I think in most cases, in some cases, yes.

In some cases, it's about the same.

And in the Blue Ocean case it would be lower than what they have been growing on their own so as we lump them all together -- now, Blue Ocean isn't in the vertical numbers I shared but I think in most cases, if you put it all together, it's probably 30 percent growth would be more than they have been growing in aggregate but not, you know, we are not talking about going from zero to 30 percent so they have been growing and they have been healthy businesses on their own.

That's why we believe that we have a great opportunity to build on their strengths with our assets and frankly that's why we shared a range of 120 to 150 is 30 to 60 percent growth.

Okay.

If I can just come back to the IRS question.

Is there any risk that the states are going to pursue similar type strategist?

I wonder if you have had any dialogue in that regard.

I think one of the good news that we heard on this IRS consortium is the state of New York which was going down a different path is going to sign up to be part of the IRS consortium.

I think states do different things.

In California we have a more independent franchise tax board.

So we believe that this consortium might set a benchmark that many of the states will follow and that's the agenda we are going to try and push forward.

We'll see how that goes.

There is probably still some risk at the state level but we think this agreement at the national level with the IRS is a very big positive step forward that gives us a different way to talk about this topic with the states than we have ever had before.

Congratulation on a great quarter.

Thank you.

Your next question comes from Heather Beleany of Salomon Smith Barney.

Hi.

Excuse me.

I just had a couple questions.

Could you comment on the pricing strategy for Blue Ocean, what it is now and if you are going to continue with the similar pricing strategy?

Also, in regard to the Blue Ocean, following up on Mary's question, you talked about 5 to 12 possible vertical markets for the "Right for my Business" strategy but with Blue Ocean being a horizontal acquisition would you plan on making more horizontal acquisitions as well that would not be included in that 5 to 12 number?

Let's start with your second question first.

I don't consider Blue Ocean to be one of the 5 to 12 vertical acquisitions.

I think we are going to continue to look for other horizontal companies.

That's another area that we have talked about in the past where we think our customers have other mission-critical needs that we want to help them with.

This would be one of the expansions that way.

So we are going to look at other horizontals.

With regard to pricing, Heather, it's too early for us to comment.

We just announced the transaction today.

We don't close the transaction, you know, for 4 to 6 weeks.

So it would be premature to comment on Blue Ocean pricing at this point.

But what type of pricing do they currently have?

It's in the press release.

Anywhere from $500 up to $11,000 depending on the offering.

Great.

And then lastly, just wanted to touch on it seems like in the companies that you are acquiring that you are getting a direct sales strategy that way.

Do you have any plans of stepping up your direct sales efforts which would be additive to what you are getting from these acquisitions?

Short answer is no.

Great.

Thank you.

Your next question comes from Jim McDonald of First Analysis.

Yeah.

I'd like to follow up on a couple of the vertical issues.

Have you competed with Microsoft on any of the acquisitions in the verticals, are you seeing they will out there?

The answer is no.

We are going after companies that are privately held.

This with Blue Ocean being the fifth acquisit -- or sixth acquisition in the last 8 months, they have all been private.

We are six for seven.

We have gone after 7 companies.

We have had 6 successful occasions.

We have not run into MicroSoft in any of those.

Okay.

In terms of the sales approaches for these acquisitions, using direct sales and VARs, how do you see that mixing with your overlay of feeding them leads through your base of business?

I think we -- one of the things we have been talking about is we clearly think about how we acquire customers in our QuickBooks world completely different than how we acquire companies -- customers in the vertical world.

And so it's very simple.

We have a customer database of QuickBooks.

We give them the leads and they direct market to them.

And we've seen response rates that have been you know, significantly higher when the same direct mail piece is mailed out.

When these verticals are part of Intuit versus when they were on their own.

It's as simple as giving them the QuickBooks customer base and direct marketing to them for -- say, for instance, Omware direct markets to the QuickBooks construction companies only, not to the broad base.

Let me add to that.

As Steve said, we see the way you distribute a $200 QuickBooks product to retail stores to be entirely different and unrelated to how you correctly sell and distribute 5, 10, $20,000 vertical packages.

For that for the expensive vertical packages, you need a direct reseller and installation force in the field.

And these firms that we're mating up with have developed these very strong selling organizations out in the field.

There is no conflict between the two methods of distribution because there is no confusion in our mind that they are different, will always remain important to their respective businesses.

We are not going to try and impose a one-size-fits-all distribution strategy for these companies we acquire.

What they have has been working and if anything, we are talking with them about how do we expand their existing distribution to make it more successful so we can turbocharge growth.

That's one of the great things that the VARs and resellers love is because of the size of the QuickBooks base we are able to source more hot leads to give to the resellers.

But the resellers then close business on.

That's part of that turbocharging of growth we talked about in the resellers feel it and love it.

Okay.

One more growth question on payroll.

Any more plans on how you'll expand nationwide either through acquisition or expansion of CBS?

I think we'll continue to look at organic growth and adding feet on the street and leveraging organic growth and I think we'll continue to look to see if there's other opportunities that would be good candidates for acquisitions.

Thanks.

Thanks, Jim.

Your next question comes from Glen Green of Think Equity Partners.

Thanks.

Couple of questions.

The first one just relates to the series of acquisitions that you have just done.

Just trying to understand the business model and the potential visibility.

Are these recurring revenue deals at all or is there a one-time software license deals?

If you could just comment on that generally and then I have a follow-up question.

Without exception, these are recurring revenue model deals.

There is initial upfront license fee and then a annual recurring revenue maintenance and support fee that ranges from 15 to 30 percent a year.

An most of them are generally above 20 percent.

All right.

And then a different question relates to your outlook statement and the fact --into the fact sheet that you put out that looks like the seasonal swing in your profitability is even further skewed to the third quarter.

Yes, because as more and more people do their taxes on the Web, where we don't collect the revenue until they file their return, as the Web goes faster than the desktop, it automatically shifts revenue from Q2 where we used to get revenue when we shipped it to the retail store, to Q3 when we, you know, when the taxpayers file their returns.

Also related to that, the first quarter losses, you know, an even greater loss than previously.

Is that due to some kind of seasonality related to the software businesses that you have acquired?

Well, first of all you are getting a big bump in expenses from many of the software companies that we just acquired that aren't in last year's Q1 results.

The second thing is the typical growth in our expenses to get ready for the two big launches of QuickBooks and Tax without the revenue associated with those.

Okay.

Thank you.

Your next question comes from Bart Ware of Winslow Capital.

Yeah.

Thanks, Steve.

One question.

On these verticals, I think on Oamware, originally the management teams are reporting directly to you is that what all the verticals are?

And are you putting your finance people in these things to monitor close rates and backlog, et cetera?

Can you go through that for me, please?

Sure.

We start with all the people that are running these businesses, work directly for me.

I think as we get more of them we are now starting to look at putting in an infrastructure to have somebody after the assimilation phase that can provide more day-to-day support and leverage than I can.

And in many cases, we are not putting our own finance people in there we're, you know, taking the finance people we have and working with them to make sure we get integrated and have one tight financial process and practice as a company.

So, uhm, I think it's -- it's just something that will evolve overtime as we make sure that we have the right talent in all these businesses to -- and infrastructure to enable us to turbocharge their growth and at the same time keep integrity and quality in all the numbers.

Couple other questions.

As far as on the verticals, do you have a ratio of what you expect to cross-sell what your install base will be vis-a-vis outside sales.

No.

We really don't.

The fact of the matter is each of these verticals has been successful on their own and we didn't model or factor in any cross sales in any of the valuations for the things we are doing.

I this there is a big pull from the verticals saying their customers would like to have an integrated payroll offering.

I think there's opportunities for us.

I think that's all to come in the future and as we get more of these we are finding some really interesting synergies between different verticals, for instance between construction, distribution and property management, all of that is kind of upside from the way I look at it.

We have to figure out how to prioritize and go after that.

But what we're learning is there is a lot there we just have to resource it and go after it and we have not modeled that or factored that into our projections.

Last question.

Are you anticipating that your share repurchase in the '03 year is greater than the -- is the 3 percent number what you're talking about as far as option grants in the '03 year.

Our cap is at 3.5 percent so I think we'll continue to look at the -- the Board authorized at our last Board meeting an additional $250 million for share repurchase.

So we took it from 500 to 750.

We continue to generate cash and we're in good financial position.

I think the Board will continue to look at what's the right amount of -- if we want to do anything else on share repurchase but right now I think we have 300 million of capacity.

Under current authorization, close to 370 million left so we can more than offset next year's option dilution if we exercise to that level.

I would tell that you we more than completely offset it last year but our goal isn't every year to offset the option dilution.

It's to manage the trade-off between option grants to get a high-performing team that can deliver the kind of results we have been delivering over the last couple of years and also managing EPS dilution and we're just in a position today where we think a good investment of this cash that we are generate something to buy the shares back.

We go into the quarter with the same philosophy but we'll continue to reevaluate whether that makes sense.

Right now, I would say that we have no change in strategy for the buyback, though.

And I would assume in any vertical acquisitions you would make would continue to be for cash as you have done with these?

Well, think you ought to be careful there because when private companies are selling their business they actually get a vote on whether they want stock or cash.

In the beginning, many of them wanted stock so I think there will be a mix.

We like cash versus stock because it manages -- it minimizes dilution.

But ultimately, these are great companies and if it's a 50/50 mix, we are not going to let the financial structure get in the way of doing smart deals.

Okay.

Great quarter.

Thanks.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

Mr. Bennett, are there any closing remarks?

I would just say thanks to everybody.

We continue to deliver at a high level.

But as we showed with our guidance, I just reflect on what we told investors last year at this time.

In terms of some of the conservative or prudent assumptions we use, we feel very comfortable with our guidance.

We think we have -- we're in great businesses, great positions and great businesses, and we think that there is a lot of opportunity for us.

The big question, how fast can we execute on these opportunities we have?

We're very, very excited about next year.

And we think the path we're on can continue for multiple years going forward.

So that's all I have to say.

Thanks for calling in and participating.

We appreciate your support.

This concludes today's Intuit conference call.

You may now disconnect.