直覺電腦 (INTU) 2003 Q1 法說會逐字稿

Good afternoon.

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

At this time,would like to welcome everyone to the Intuit first quarter fiscal year 2003 earnings conference call.

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

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

If would you like to ask a question during this time, simply press star then the number 1 on your telephone key pad.

If you would like to withdraw your question, press star, then the number 2 on your telephone key pad.

Thank you.

Mr. Bennett, you may begin your conference.

Thank you.

Good afternoon, everybody, and welcome to the Intuit first quarter 2003 conference call.

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

Turning to Slide 2, we're off to a great start in fiscal year '03.

Over the past year, we've talked about five growth engines and multiyear strategies to attack these large, underserved opportunities.

Based on the early results, we believe our strategies and execution are right on target.

With regards to Q1 results, once again, we delivered.

Revenue was up 32% to $223 million, slightly above the high end of our guidance.

We had a GAAP loss of 26 cents per share.

This was a substantial improvement from the year-ago loss of 44 cents per share, and our pro forma loss of 21 cents per share with two cents better than the high end of our guidance.

Based on the first quarter, we remain confident about the outlook for fiscal year '03 as we move into our peak season, the second and third quarters.

I'll talk more in a minute about why we're confident about the future, but first, let me turn the call over to Greg.

We'll talk about our Q1 performance.

Here's Greg.

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

As a result, it is best to compare annual results which are not affected by these seasonal distortions.

I'd also like to point out that Intuit looks at its financial performance in two ways, GAAP and company pro forma.

Please see Slide 14 in 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 that some remarks today include forward-looking statements and actual results may differ significantly.

Risks that could impact these statements are included on Slides 14 and 15 in the appendix and in the company's Fiscal 2002 Form 10K and other S.E.C. filings, as well as the press release issued earlier this afternoon.

As Steve mentioned, Intuit had a strong first quarter.

Turning to Slide 3, Intuit continued to execute on a right for my business strategy, which drove 32% revenue growth over last year's Q1.

About two-thirds of the revenue growth came from our acquisitions and a third was organic.

We still expect that on a full-year basis, about two-thirds of our revenue growth will be organic and the other third from acquisitions.

Since we are not in tax season, virtually all of our revenue growth came from our three small business growth engines, QuickBooks, Small Business Services, Small Business verticals.

Steve will provide more information about these growth engines later.

On slide 4, Intuit always loses money in its first quarter.

We projected a higher pro forma operating loss in Q1 fiscal '03 versus Q1 fiscal '02 as we invested in sales and marketing for our new products as well as infrastructure to support future growth.

We came in better than expected.

Two cents better than the high end of our guidance.

An important factor contributing to better than expected results was a 5 percentage point reduction in our cost of revenues for the quarter, from 37% in Q1 of fiscal '02 to 32% this current fiscal quarter.

Driving this improvement were the success of our new high-end products in QuickBooks and the resulting mix enhancement.

Naturally, this led to margins that were higher.

And to a lesser extent, increased prices.

Finally, in Q1 of last year, we moved a large number of servers that supported Quicken.com from Excite to our own data center.

Since then, we have right-sized the infrastructure, which has significantly and permanently lowered our costs for this business.

Looking forward, better execution and continued mix in improvement are expected to contribute about a two-point year-over-year reduction in cost of revenue on a full fiscal year basis.

Moving on to the balance sheet on Slide 5, we exited the quarter with $831 million in cash.

We spent about 177 million on our Blue Ocean acquisition and about 300 million to prepurchase approximately 6.6 million shares as part of our stock repurchase program.

For the second year in a row, the shares we bought under our repurchase plan should more than offset the future delusion of this year's option grants when exercised.

For the full year, we expect to generate cash from operations in line with pro forma operating results.

On Slide 6, another important area where we focused a lot of attention is managing our option program.

Balancing the concerns about delusion with our need to attract and motivate top talent.

We committed to making certain in fiscal '03 -- for all employee option plans combined do not exceed 3.5%.

In fiscal '02, we reduced our annual net grant rate from nearly 5% to 3.2% of shares outstanding.

In line with our commitment, we've limited our request for additional shares reserved for the 2002 equity incentive plan to 2.3% of common stock outstanding.

And we will continue to be focused on prudently managing this important area.

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

Thanks, Greg.

On Slide 7, we've highlighted our five growth engines.

QuickBooks, Small Business Services, Vertical Businesses, Professional Accountant Solutions, and TurboTax.

Let's take a look at how we did in the first quarter in the three growth engines related to our Small Business, Right for My Business strategy.

As you would expect, we'll have much more to say about the other two growth engines as we move into tax season in the second and third quarters.

Starting with QuickBooks on Slide 8, we continue to see good results from QuickBooks 2002, which began selling last December.

In the first quarter of fiscal year '03, units sold were up 32%.

QuickBooks revenue was up 55% to $38 million.

Another highlight was that half a quarter -- of fiscal quarter one, QuickBooks revenue growth came from new, higher-end offerings less than one year old.

Premiere that launched last December Point of Sale launched in May 2002 and Enterprise launched in July 2002.

To date we've had end-user sales of 67,000 copies of QuickBooks Premiere.

Over 4,000 copies of QuickBooks Point of Sale and nearly 2,000 copies of QuickBooks Enterprise.

This QuickBooks success continues the positive trend we saw when we launched new, higher-end TurboTax offerings last year.

And there's much more to come.

Today, we announce seven new QuickBooks 2003 versions.

One of knows new offerings is a QuickBooks for construction companies, a flavor designed to meet the needs of contractors.

And we have more flavors in the pipeline, with a total of 5 to 15 planned in the next couple years.

The positive momentum of our new QuickBooks strategy continues.

On Slide 9, another growth engine with great potential and strong results is Small Business Services.

These are services that go beyond accounting, including payroll and HR services, technical support, IT resource management, online services and supplies.

In the first quarter, small business services revenue of 101 million was up 29%.

In some businesses, had even stronger growth.

Payroll, the largest component grew 39% to 48 million.

The branded payroll business was up even more with growth of 50%.

This includes about $6 million in revenue from our acquisition of CBS Payroll.

The QuickBooks support business continued to perform well with revenue up 36% to 13 million.

We had 6 million of revenue from the acquisition of Blue Ocean Software, which has had nice initial organic growth after the acquisition.

And finally, our supplies business had revenue of about 31 million for the quarter, about flat with the first quarter last year.

You can expect us to continue to improve execution as well as expand the variety of offerings in our Small Business Services Engine, both through acquisition and internal development.

Turning to Slide 10, Intuit's newest growth engine is Vertical Business Management Solutions, which added 19 million in revenue this quarter.

This is an engine we built over the past year through acquisition.

We're excited about this opportunity, think our strategy is on target, and are getting additional traction in execution.

In addition, we have an active pipeline and continue to look for additional acquisitions.

We're very positive about this growth engine, but we're feeling some pressure on our higher ticket products given the current economic environment.

To put things in perspective, we started with a base revenue of about $90 million for our Vertical Businesses.

We expect 10% to 30% organic growth rate for these businesses in fiscal year '03, an while this is strong performance we're pleased with, it's a little slower growth than we'd originally projected.

With respect to our two other growth engines, TurboTax and Professional Accountant Solutions, we're feeling good about both businesses as we gear up for another tax season.

On Slide 11, let me take a second to talk about two underperforming businesses, Japan and Premiere Payroll.

Our Japan business is essentially the same business as last quarter.

The market is weak and revenue growth is a challenge.

In Premiere Payroll was essentially flat with last year's first quarter.

In both businesses, we're working to improve our position and have factored their performance into our guidance.

On Slide 12, let me summarize what you've been hearing from Intuit.

We have five growth engines with large, underserved opportunities.

We have multiyear strategies to attack those opportunities.

We continue to focus on executing better and better.

The result is we're building a track record of sustained, stronger financial performance.

In keeping with that performance trend, we're reflecting with strength of first quarter results in our total year fiscal year '03 guidance.

Based on the strength in the first quarter, we've raised the low end of our revenue growth from 25% to a new floor of 27%.

Given that we have our biggest quarters ahead of us, we've kept the high end of the revenue growth range at 33%.

With regards to pro forma EPS growth, we raised both the bottom of the range from 34% to 37% growth, and the top of the range from 40% to 42% growth.

I'm pleased with our Q1 results and feel very good about the total year.

I'd like to thank all of the Intuit employees that made this great performance possible.

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

At this time, if you would like to ask a question, please press star then the number 1 on your telephone key pad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Brian Keen of Prudential Securities.

I do apologize.

The question has been withdrawn.

Your next question comes from Greg Peckman of Jefferies Company.

Hi, a couple of questions in the quarter, by the way.

With regard to the range on the revenue growth for Business Verticals, 10% to 30 seems like a pretty wide range.

Can you walk us through what some of the swing factors are there.

And also, if could you maybe give us more additional color about where specifically you might be getting some push-back on pricing?

Well, I don't sense we're getting a lot of push-back on pricing.

What we're seeing is people are deferring purchases, and as we look at all four of the verticals that we own, Craig, what we're seeing is we're not losing orders, we're not running into new competitors, and it's not really a price issue, it's just people are deferring purchases.

At the same time, compared to other enterprise software companies, which some of these transactions are, we think 10% to 30% growth is still pretty darn good.

I think the question about the wide range is, there is some uncertainty, and as we get into some larger transactions, we need to have the range at this point of year until we learn more about these businesses.

The good news is we're comfortable with the -- with the floor, and we expect a great year, and we think we're building momentum for the future in all four of these verticals, that's why we're still working an active pipeline, because we think we're on the right track here.

Oh, fair enough.

If I might follow up with one more.

Regarding the new QuickBooks flavors that you've announced today, it sounds to me like maybe some overlap with some of the business verticals, particularly with regard to the construction application.

Can you help us understand the differences there?

Yeah, I wouldn't term it overlap.

I would term it that we're filling in pieces of a spectrum, a continuous spectrum from traditional one-size-fits-all QuickBooks to a version of QuickBooks tailored to the needs of contractors, to a higher-end, more fully integrated business management solution called Master Builder that comes from OMWare.

So I think what will happen is we'll have upsale of traditional QuickBook users to a flavor of QuickBooks for contractors, which will then increase the pipeline long term for people to migrate even farther up to the Master Builder product and additional revenues.

So I think this is a strategy you'll see us applying in many of the verticals as we go forward, and it gives customers choice, lets them pick what's right for their business, and also helps them migrate from lower-revenue opportunities to higher-revenue opportunities for us.

Okay, thank you, Steve.

Your next question comes from Mary Meeker of Morgan Stanley.

Thanks, Dave has a question here, and I think we might have a couple.

Thanks.

Yeah, just quickly, two questions.

One is, how did Enterprise Solutions come in?

Was that in line with expectations, above expectations?

Also, can you give us a little color on payroll?

What exactly was the QuickBooks product, and what was CBS Payroll in the quarter?

Lastly, you have three new products coming out for TurboTax between now and the end of January, I believe.

Can you give us an update on that, when we can expect to see those launched?

Yeah, let's start with the middle one first.

Well, let's start with Enterprise first.

We're pretty pleased with 2000 copies of Enterprise in something we launched off-season in the middle of July when most people aren't buying.

So let's see what happens now when we get into the year end, you know, buying season.

We think that's terrific performance for a new product that just launched three, four months ago.

So I'm thrilled with both POS performance and with Enterprise performance.

With regard to a branded Payroll, we said the numbers were up 50%, and 6 million of that was from the CBS acquisition.

The rest of it was real strength, and QuickBooks Deluxe -- Deluxe Payroll, and Basic, what we now call DIY.

So we had very, very strong performance, even if you back the 6 million in revenue out on the branded side.

And what was the -- oh, the three new tax products.

What was the question there again, David?

Could you give us an update on when we can expect to see those launched?

I think the end of the month.

The end of November.

We feel very comfortable in terms of where we are, and I think we'll see the full spectrum in the next few weeks.

Any early read on which you think would be the most successful?

We think clearly the Spanish-speaking flavor of -- we're executing the Right For Me Strategy in tax now, for TurboTax, which we think will be terrific.

And I think we'll get broader coverage with the Spanish-speaking version.

I think that'll be easier.

We'll do experimentation here.

I think all of them will sell, some will sell more than others, but we like the fact that we're on the leading edge of bringing new solutions and innovation.

And I think you'll see us continue to do that, but time will tell.

We'll have more data after we get them in the markets.

Thanks a lot.

Thanks, Steve.

Thanks, David.

Thanks, Mary.

The next question from Heather Bolleni of Solomon Smith Barney.

Hi, good afternoon.

I was just wondering if you could talk for a minute about the new QuickBooks products that will be launching for the 2003 version.

If you could just give us an idea in the basic product what type of new functionality are we looking at, and secondly, have you talked about or disclosed pricing at all for that product yet?

I actually don't know the details on the products.

I know, Scott, how much you know about what's new in the products.

Yeah, we have disclosed pricing.

The new SKU in the verticals area, such as Contractor, sell for the same price as QuickBooks Premiere.

So it's in the $400 range, or more than double what we typically have been getting on QuickBooks.

What QuickBooks Contractor adds, for example, an entirely new product, is it adds reports and templets for contractors, it adds accounts codes for contractors, terminology for contractor, help and support for contractors and the ability to improve job costing.

These are things that our study of contractors indicated they want, and now we're providing them, and they're fairly unique.

That's part of the appeal here.

We've added two QuickBook Premiere the generic QuickBooks Premiere, added HR planning, the ability to manage the fleet force.

QuickBooks Enterprises more speed in its design, new FDKs for the QuickBooks Online Edition, Version 7.0.

So I, this morning, drove down to our office, from our developer conference, up in San Francisco, in Burlingham, near the airport, and we were expecting 400 developers.

We had 480 there, in our first developer conference, and the enthusiasm is quite high.

We're building an increasing range for QuickBooks that makes it a better solution for business customers.

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

Hi, guys.

I'm wondering if on the new upper end of QuickBooks products if you have an idea of what percentage of the people who both QuickBooks Premier were previously QuickBooks users and were they QuickBooks users who had gone away and came back?

Can you give us a sense of who you're penetrating there?

Karen, I think the vast majority were customers that had upgraded, but we do have a bunch of interesting stories of people who had been QuickBooks customers, had migrated to other solutions, found them costlier, harder to use, and have now thrown out much more expensive legacy systems and come back to QuickBooks Enterprise.

But I think that's more the exception than the rule.

I think the bulk of it is QuickBooks customers that have upgraded, this is clearly a product that better meets their needs as they've grown and become more complex.

Steve, it sounds like, with the vertical, your expectations with the verticals being softer, and I'm not sure you said what your original expectations were.

I know you're saying 10 to 30.

Is it QuickBook taking up the slack, you're doing better than you had anticipated?

No, I would say, Karen, completely unrelated.

I think the -- as we've moved into the verticals, I'm pleased with 10% to 30% growth for that package of four businesses, but I think we're being affected, delays and purchase, decisions are being delayed and pushed back, but I don't think we're seeing any of those.

Most of those are in the Enterprise side, the larger size transactions, so I don't see any, you know, cannibalization.

I'm sorry, I misspoke.

What I mean,in terms of raising your earnings guidance, you know, where -- if the verticals are running a little softer than you expected, what's running better to make up for better earnings guidance?

Well, I think it's -- I think -- look, all the things we challenge our businesses to always add up to much more than what we would ever provide in terms of guidance.

So I think we'll have some that are stronger and some that are weaker, but the fact is, Q2 and Q3 is the whole game for us and based on everything we're seeing, we're still very, very confident about the year.

So I think there's always going to be puts and takes, and ultimately my job is to deliver the guidance that we provide.

But I tell you, we're making great progress in every one of the five growth engines.

Great, thank you.

The next question is from Michael Hoatz of Goldman Sachs.

Yeah, hi, good afternoon.

A couple of quick questions for you.

First, on the QuickBooks side, I was hoping you could speak to the mix between direct and retail.

It seems like more of the business has shifted to the direct channel, maybe talk about what you think is driving that.

Second, I was hoping you could go through your sense on just the state of the inventory situation.

I remember last year there was some issues about how willing the retailers were to get stocked up, and whether that's going to be a factor this year, in your estimate -- estimation.

And then lastly, you're flagging two businesses here as being kind of underperforming in the past, that's been an early indication of either plans to sell those businesses or radically restructure.

Could you just comment on that a little bit more?

You trying to share my secrets with everybody here?

I think -- look, I think the businesses that have -- we've communicated in -- that are underperformers, we communicate because we are not happy with the strategic position of those businesses, which means that something is going to fundamentally change.

And we look at the full range of options on that, but I would argue we're not talking about incremental change.

We look for fundamental change in businesses that are underperforming.

With respect to direct to retail, as we had solid QuickBooks 2002 last year, we are continuing to -- the mix is shifting from retail to direct as we launch these new higher-end products.

And we think that will continue.

While we performed well at retail, we're performing even better direct, as you all have seen the MPD data results, these numbers we're sharing today are clearly way higher than what you would have been able to see at retail.

That's the same thing that had happened last year in Tax with Web, or last year with QuickBooks, so I think more and more of our businesses, we move to higher-priced SKUs, it's going to be direct.

That's positive for us, but it also makes it harder for you to -- for us to be transparent, and that's why sharing more data in our facts sheet about what's going on with some of those SKUs for the first time.

With respect to inventory in the channel, we've dramatically improved our supply chain.

Our service levels, as we shared at Investors Days Quicken launch were 99%, 18 points better than last year.

We have inventory in the channel that's lower, roughly the same, tight with last year, but what we've dramatically improved was our fulfillment process.

And because the products have sold, QuickBooks has sold really well, I think the channel is more willing to -- to take inventory than they were last year when QuickBooks units were flat.

Okay, and just lastly, if I may, should we assume that in Tax that, you know, most of the increase in pricing is going to be driven by mix as opposed to raw -- raw price increases?

No, I -- no, I think -- no, we haven't announced retail pricing on Tax, but we have announced direct.

It's on our website, so everybody could go look to see what we were doing on direct.

I think we'll continue to look at pricing the products for the value we deliver.

And I think we'll see more for mix and mixing people up, but I think we -- we still will look at kind of core pricing, and we're going to work all the levers, unit, price, and mix.

But ultimately the big game is going to be mix and unit growth, and based on our activation technology we put in this year, we think that should give us a little bump on unit growth.

Terrific.

Thank you.

Thanks, Michael.

Your next question comes from Adam Holt of JP Morgan.

Good afternoon.

Another question, I apologize for belaboring about the vertical businesses, but to the extent that, you know, you have changed your thinking about your revenue expectations for those businesses, how has that impacted your profitability expectations, and are you go to make any changes on the cost sides of those businesses?

Absolutely not.

We're investing for growth.

These are long-term business opportunities.

If anything, we're investing more, because everything we see, we see as a huge opportunity as we go out and talk to customers.

Scott Cook and I were just down at MRI, our property management company's user conference in San Diego, earlier in the week, the feedback we got said our customers loved us, but there's a lot of things we could do to be even better.

We just think there's an infinite opportunity to improve all of our businesses in our portfolio, and we think the best defense is a good offense.

So we think they're all great growth opportunities, and we will not be cutting costs in any of those verticals in the short term.

We'll be investing prudently, but we bought these companies to drive growth, the opportunities are there, it's just up to us now to execute on all the opportunities and deliver both revenue and profit growth.

And when you talk of the high-end products there, you're speaking principally about MRI and Eclipse?

We get into a little bit of the higher-end products in some of the not-for-profit, but mostly, the larger ones, MRI and Eclipse.

And then, I just had one other question on one of the breakouts in the revenue mix, the other line in Small Business Services was up 64%.

I was wondering if could you talk in a little bit more detail what's in that line and what's driving that year-on-year performance?

Thanks.

All right.

Let me find the -- Oh.

A big part of that was technical support.

QuickBooks technical support was the big part of that.

And the other thing was 6 million in incremental revenue from the Blue Ocean acquisition, Adam.

Great, thanks for your time.

Okay.

Your next question comes from Jim McDonald of First Analysts.

Hi, gentlemen.

This is Greg Jackson in for Jim.

Most of my questions have been asked.

But on the cost side, if you could give us a little more detail in terms of where you see trends going for customer service, R&D, G&A, we were expecting higher customer service and lower on R&D and G&A.

I wonder if you could tell us where you're investing your money.

And the second question, you've spoken to MRI and Eclipse.

Could you give us more color on the other verticals, which ones are performing as expected?

Which are more on the 30% range?

I think we're looking at the whole package, and that's what we're communicating, starting, Grant, with the second part.

Looking at the whole range of the business, add them all together, there's always puts and takes, and the answer is 10% to 30% in total.

On the cost side, this is a company that's continuing to invest its resources to drive better customer experiences and revenue growth.

And I think it's hard to compare, you know, G&A and functional costs in quarter one when our revenues are so far out of balance.

Can you talk to Linda later, and she'll give you more details for your model.

The company grew 32% in the first quarter, we grew gross margins 42% in the first quarter.

So this is a company that continues to deliver, and our best quarters are ahead of us, Q2 and Q3, we're very confident about the year.

I guess maybe a little different way to ask it, then, it looks like you're investing quite a lot these new QuickBooks applications, but some of the higher-end products also require quite a bit of customer service.

Is there something that we're missing there in terms of where you're spending your money and what the impact of the higher-end product is on your customer service?

No, I don't think you're missing anything, because the margins on those products are higher than the core product.

And very often, with some of the higher-end products, the customer service is paid for by the client.

So at Enterprise, customer service is paid for by the client.

You see the same in some of the vertical business management companies, those are profit-generating customer service businesses.

And on that first question, on the verticals, are they -- is there anything you would like to point to that is specifically doing quite well?

I think 10% to 30% growth in this environment for the portfolio core businesses is darn good.

No specific ones that you'd like to highlight?

No.

Okay.

Thanks.

Your next question comes from Brian Keen of Prudential Securities.

Yeah, hi.

I guess I got banned from my question before I even got to ask it there.

But I guess I'm just sitting here looking at the QuickBooks numbers, and, you know, it's kind of one of the things I think drives the business, especially Small Businesses units, and how are units up 32% year over year?

What is driving that incredible performance?

Well, number one, the comparisons were pretty dismal last year in the fourth quarter, a bad year for QuickBooks, so it's, you know, start with that.

Two, it's -- a lot of new things, the new SKUs, the fact that we, for the first time ever, opened our APIs so that as Scott talked about earlier, our QuickBooks 2002 could integrate with third party applications.

We're just starting to gain traction in the network effect of having developers build to the QuickBooks SDK and making QuickBooks more of a small business management platform.

So I think the comparisons are unusually weak for Q1.

I think the comparisons for Q2 and Q3 will be harder for us, and wouldn't expect to see 32% unit growth in the next three quarters.

But I do expect to see QuickBooks growth for the year, in the 20% to 30% range.

So we think that this quarter is unusually high.

I wouldn't want investors to expect 50% revenue growth for the whole year on QuickBooks.

I don't think that would be realistic.

Are you guys surprised by the nonresponse you've had by opening up the APIs and getting the developers in there, that that's driving some of the unit growth?

Yeah, this is Scott.

Let me answer.

Yeah, I am.

That was a year ago when we first went public with the opening the APIs.

This was brand new for us at Intuit.

We didn't know how -- whether we were going to do a decent job at this, whether developers would respond, and they are.

Last year at this time, we announced the APIs for the first time.

We had 15 developers who had built with them and were announcing applications with us a year ago.

Today, we just issued another announcement of SDK Version 2, and now there are 70 developers who have announced at the same time applications that are now ready to launch.

That's over four fold growth a year and that's far above what I expected.

And now a total of 150 applications one year into it, which just to give perspective, one of the things we've heard from, the other major accounting desk top players, they've had a developer network for a couple years and had 10 applications in their developer network.

So we think clearly our QuickBooks install customer base is something developers are very anxious to get at, an as we've talked about in small business for a long time, the market is so fragmented and small, cost effective customer acquisition is a big challenge for anybody trying to enter this market.

And since we have the customers, and they like us, and they need -- they have these needs to add more value, we think integrating with the third party applications is just a win for developers to reach them, and it's a win for customers, because they're going to get a better solution.

Let me build on that by adding one more surprise.

As Steve was saying, one of the big things we do for developers is help them reach their market and sell more of the applications.

After all, they're businesses.

That's what they're in business to do.

We now have a number of developers telling us the leads that we drive to them are their bigger source of new customer acquisition.

I have to admit, I didn't expect we'd get that this fast.

So quickly.

Yeah.

And my view on this is, we're just starting, and remember, the only people that can integrate third-party applications are people that bought QuickBooks 2002.

And so, we think over time, as the word gets out, more and more people will upgrade, because of this phenomena.

Okay, great.

And just, finally, on the Payroll, I'm tracking CBS Payroll.

You've had it about six months and it look like it's got about 3,000 new customers, so almost tracking at a 50% annual growth rate, just, can you talk a little bit about the progress there and how you see that going forward, Steve?

Yeah, I was out -- actually, both Scott Cook and I were out traveling with CBS Payroll sales people this week, and the thing we are very, very excited about is we just soft launched a new product, this complete payroll we talked about, which is a fully outsourced product that's integrated with QuickBooks.

We think it is a unique proposition, a unique value proposition that our competitors will not be able to meet, ever match, because it's integrated into the UI for QuickBooks.

And the reception in the marketplace, from the sales force, from the accountants I called on, from the end users, is really, really positive.

Now, we've got a lot execution to do.

We've got to ramp it up, but we think there's a huge need for here for QuickBooks customers, if you remember, there's over 300,000 QuickBooks customers that already outsourced their product to a third-party payroll company.

We think we'll have a clearly superior solution, and all we have to do is get 20% of those over the next three years to double the size of our business.

So we're very, very bullish about Payroll, because we think we have a unique and better offering than what the competitors will be able to do.

Great, thanks a lot.

Great quarter.

Thank you.

Your next question comes Derek Queen of Jenson Associates.

Hi, I just want to be -- a clarification on the growth outlook.

Does that include acquisitions already made or does that assume acquisitions to come?

No, it's -- we would never, ever put in our guidance anticipated acquisitions.

The guidance includes only acquisitions that are completed, nothing in our pipeline would ever be included in guidance.

Great, great, thank you for that.

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

Thank you.

A couple questions.

The first one is, you know, clearly stepped up the share buy-back the last couple quarters, just what is your appetite at this point to buy back at such an aggressive level?

The board authorized 500 million in May 2001 and in July of 2002, based on what our prospects were and how we felt, they added another 250 million.

We've got about 100 -- less than 150 million left, and we'll see.

I mean, I think we'll -- I think -- we'll spend that and we'll see where we are.

We're still generating a lot of cash.

We still like our prospects and feel bullish about the futures.

So when we run out of this allocation, we'll kind of see what happens next.

And the next question is, you know, the consumer confidence trends have obviously sort of trended downward, and I'm wondering if you have sort of an early read on your upcoming season as it relates to your core QuickBooks upgrade cycle.

If there's any read you have, any market research you might have?

If there's any impact related to the consumer confidence trends you're sort of worried about?

I would say no, we're not worried about the consumer confidence trends, because the feedback we're getting from these new products is they are having such a positive impact on people's business that they're driving such productivity, that we expect to have another great season.

I was just out with a customer that had just bought QuickBooks POS, actually a company that rents Harleys, a franchise operation called Eagle Rider and they installed a POS QuickBooks POS functionality.

It has dramatically improved their productivity because it tracks inventory for them, it prints bar codes for them to make the whole retail transaction in their store much easier.

So they invested in this, and it's made running their business easier and less labor intensive and taken waste inefficiency and errors out.

We think as long as we continue to provide solutions and help small businesses be more efficient and more productive, even in challenging economic times, we think we'll be able to sell a lot of units.

And one final question, a clarification, related to the verticals, the 10% to 30% organic growth guidance you provided now, what was the guidance coming out of August, or your September analyst day?

We were a little bit more bullish, probably too bullish, 30 to 50, and now we're saying 10 to 30.

Okay, great, thank you.

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

Yeah, thanks.

A couple of questions.

Steve, on the verticals, is the customers' resistance just because of the current state of their business, because, obviously, you're cross selling into your QuickBooks space there, or is that because they're upgrading to some of the existing -- the flavors that you've come out with?

Yeah, I would say, Bart, it's not so much the QuickBooks customers aren't upgrading.

I think a lot of it is just the size of these transactions, for instance, at Eclipse, the average transaction is $115,000.

So it's just delayed purchases based on the economic environment, and one of our business not-for-profit, funding is a little tough for some of these not-for-profit companies, so municipalities and things.

So I think it's economic conditions and timing as opposed to anything else.

But we're seeing there's some positives and some negatives and the cycles can change quickly.

But overall, we continue to focus on executing better and when the market turns around, we're going to be well positioned to grow even faster than what we're projecting now.

Okay, and two other questions, one, obviously you're mandating registration now on the consumer, the TurboTax business can you kind of quantify what kind of incremental pop you think that will be for you guys?

More than five and less than 100%.

I mean, because -- obviously, it can be pretty substantial.

More than five and less than 100.

So take your -- we just don't know.

Part of this is, we have no way of knowing if somebody did from one license in the past, whether they did four or five units from their computer, or whether they passed it along to three or four of their friends, we just doesn't know and would have no way to know, so that's why the range is so wide.

I think it'll be more than 5% and less than 100, but that's about -- you know, your guess is as good as mine.

But I think it will be additive to a historical growth rates.

Okay.

And lastly, correct me if I'm wrong, but you guys maintained a minority interest in the -- in the mortgage business.

Is that showing up here in the P&L, or where do -- how is that accounted for?

It showed up -- it shows up in one of the -- one of the notes, because we sold our 12.5% equity position in Quicken Loans back to management.

Really at their request, because it would help them in their capital raising structure to pay us off on the credit line we'd given them.

And so, we actually booked a very nice gain on that, and that's all in our financials this quarter.

So we no longer have an equity interest in Loans.

Bart, the gain on that is reflected in the GAAP statements, the 5.5 million from discontinued operations.

The other thing we do, though, is we continue to have a long-term brand licensing and distribution relationship with Quicken Loans, and they're continuing to do very, very well, we're just not an equity participant any longer.

Right.

Okay, thanks very much.

Okay.

Your next question is a follow-up from Jim McDonald.

Hi, gentlemen, just a last couple on list.

In the Investor Day, you spoke about new plans of targeting accountants as a way of driving more sales, driving more sale.

Can you give more insight into that, and then within Payroll, you guys obviously have been out with the CBS Payroll folks.

Can you give us any more plans in terms of how you're looking to target -- Payroll through a more direct sales force?

Well, with regard to PAS, we're not ready to talk about that yet.

We're actually executing -- starting to execute and build on our new strategy.

We're excited about it, but we're going to probably wait until after tax season over, because our customers on this are pretty tied up until April 15th, as you can imagine.

So if we announce anything, it will be late March at the earliest, so we won't be talking about that in detail.

With regard to CBS, we continue to expand our feet on the street sales force.

We think that's progress we're making.

We're expanding it as we speak.

The team is excited about the opportunity.

We're finding recruiting could be a lot easier now than it was, we have lots of people who want to join our team, especially when they hear about out new outsource payroll practice integrated with QuickBooks, which is organic growth now and execution.

That's the mode win.

We think we have a great solution, a great platform and it's just execution, and we're making progress.

But there's big quick hits here, it's just fundamental, you know, three yards and a cloud of dust, and based on the earlier comment, we're making nice traction in terms of acquiring new customers.

Thanks.

At this time, Mr. Bennett, there are no further questions.

Do you have any closing remarks?

Well, I think the only thought I have is, thanks for everybody's support.

We're off to a fast start, and our best quarters are to come, Q2 and Q3, so we're very confident about the year.

That's basically it.

Good-bye, and we'll talk to you all soon.

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