直覺電腦 (INTU) 2003 Q2 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Intuit second quarter conference call.

All lines have been placed on mute.

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

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

If you would like to withdraw your question press star and two.

Please note a process change this quarter.

Rather than providing a power point presentation, Intuit has posed the script, is available on the company Website at www.intuit.com, company forward investors.

The presentation you will hear on this call includes forward-looking statements and actual results may differ materially.

Risks that could impact these statements are included on page 10 of the conference call crypt and in Intuit 2002 form 10-K and other S.E.C. filings as well as the press release issued earlier this afternoon.

Many of the numbers on the presentation will be presented on a pro forma basis.

Please see page 9 about what's included in the GAAP and pro forma results.

Thank you.

Now I'll turn the call over to Stephen Bennett, Intuit apples press and Chief Executive Officer.

Thanks Amy and welcome to the 2002 second quarter conference call.

With me are Brad Henske and Scott Cook.

Intuit delivered another great quarter, and GAAP and pro forma growth at the high end of our guidance.

And we are on target to deliver yet another great year.

Consequently we're updating our fiscal 2003 guidance to reflect the second quarter performance.

Intuit's new total year guidance is for revenue growth between 30 and 35%, pro forma EPS growth in the 50 to 54% range, and pro forma operating income growth between 53 and 59%.

More than double our pro forma operating income of just two years ago.

We continue to deliver strong performance by executing our strategies in each of our five growth engines.

But before I go into more details on how the growth engines performed let me turn it over to Brad who will provide financial highlights and perspective on the quarter.

Thanks, Steve.

It's great to be here.

I'm very happy to be part of a terrific team that is committed to driving stronger performance for Intuit.

Let's start with the quarter.

As Steve just mentioned Intuit had a strong second quarter as we continue solid execution against our growth strategies.

Second quarter is $558m, up 17% year over year and at the high end of our guidance.

All the numbers reflect the sale of our Japanese business.

Revenue growth was driven primarily by higher unit sales in many of our growth engines, and a shift to higher value offerings and incremental, from acquisitions.

Pro forma operating income was $184m up 12% from the year-ago quarter and above the high end of our guidance.

Pro forma EPS was 61 cents, up 15%, over Q2 '02 and four cents above the high end of guidance.

Both pro forma and EPS benefit from strong revenue growth in the quarter.

All in all this is a very good quarter and we're on track for the year.

Let's move to the balance sheet.

Intuit had cash and short-term investments at $1.1b, up approximately $285m from the end of Q1.

In Q2 we received a final payoff of the quick end (ph) loans, bridge loan of $180m.

In the quarter we repurchased $123m of Intuit stock.

During the first six months of fiscal 2003 Intuit repurchased approximately 9 million shares for a total of $423m at an average price of $47.

Now I'd like to talk a little bit about a couple of dynamics that we continue to see this year.

Seasonality and our channel mix.

As most of you know our business is highly seasonal.

We report higher profits in second and third quarters, which coincide with our tax products and extend our small business products.

We typically reported a loss in first and fourth quarters.

This year we are expecting higher year over year growth in Q3 that we saw in Q2.

Primarily because a more and more of our revenue continues to shift from second to the third quarter.

This is a driven primarily by a shift in our consumer tax business, which represents approximately 25% of total revenue and is concentrated in the second and third quarters.

In FY '00, 54% of our revenue came in Q3.

In FY '01 it was 63% in FY '02 it was 70%.

We expected this trend to continue.

In FY '03 two things are driving the timing shift, first is continued mixed shift to the web from the packaged TurboTax.

Web users TurboTax purchase and pay when they're actually at the point of tax filing which is typically in Q3 and typically two to three months later than we would have shift the box product to retail.

In addition we are using a new direct marketing approach this year.

In lieu of spending multiple direct marketing pieces to previous customers we sent approximately 7 million CDs containing the actual TurboTax product as part of my CD offering.

Customer can pay to activate the products and prepare their returns at their convenience, typically in Q3, and again later then if they had bought the package product at retail.

This is another reason why we expecting past year over growth in Q3 than Q2.

The second big dynamic is the shift in our channel mix.

Let me start by saying we sell through a number of channels and happy to have our customers buy through any of our channels.

Having that said, we see more and more of our customers go to our direct channels both package sales and the web, in fact looking at the company as a whole direct sales represented 76% of Intuit's total revenue in Q2 up from 69% in the year earlier period.

Some examples.

In QuickBooks where many of our new high-end solutions are available primarily through direct, the direct channel contributed 38% of sales in Q2 up significantly from 29% in the year ago quarter.

We've completely reconfigured our QuickBooks.com Website, to make a more customer acquisition channel with positive results.

In fact 37% of our customers who purchased high-end QuickBooks flavors on QuickBooks.com in the second quarter were new to Intuit.

And in TurboTax 71% of our revenue was direct versus 59% in the year-ago quarter.

This was due to additional web volume as well as an increase in software purchases direct from Intuit.

There's an important implication to this trend, which is that the historical useful NPD Tech World data is becoming less and less relevant to attracting our business.

It measures a shrinking portion of our business and understates unit growth and doesn't capture the fastest growing channels.

It misses some of our fastest growing businesses like payroll, which is sold entirely direct.

Before moving on to future guidance, I'd like to remind everyone that we closed the sale of our Japanese business, which we announced last Friday because of its size the accounting rules require us to treat our Japanese business as a discontinued operation, both currently and historically.

We accordingly updated our FY' 03 revenue guidance last week by subtracting out the Japan revenue for the first half of the year.

See last week's press release nor more details.

On guidance, to reflect the strong performance in second the quarter we again updating our FY '03 guidance today.

For fiscal 2003 we now expect revenue of $1.71b to $1.77b growth of 30 to 35%, from fiscal 2002.

Pro forma operating income of $419m to $430m, growth of 53% to 59% from fiscal 2002 which is approximately one and a half to two times our revenue growth rate.

Pro forma earnings per year of $1.38 to $1.42, which is growth of 50% to 54% from fiscal 2002.

Thank you for your attention, now I'd like to turn it back to Steve for his thoughts on the successes in our businesses.

Thanks Brad.

For the pass several years we've consistently delivered the same message and substantial growth in revenue and profits.

We have multiple growth engines with large underserved opportunities.

We have multiyear strategies to attack those opportunities and we continue to execute better and better to capitalize on these large opportunities.

Let's take a look at how we're doing in each of our five growth engines.

First with TurboTax; we're in the first year of our new right for me TurboTax strategy and we're seeing good early results and on track to deliver another record tax season.

Q2 TurboTax revenue of about $95m was up 11% and on Track with expectations.

Before we look ahead to the full tax season I'd like to spend some time on product activation, given all the noise we've all been hearing.

Product activation has two effects on Intuit's business.

First, is the positive impact we expect to see as pass along copies are activated.

Second, somewhat offsetting this is a modest increase in cost for additional customer support.

We've also had a small amount of returns, more than last year, but only about one-half of 1% of total retail purchases.

This is very small and should be more than offset by the additional units that result from activation.

The problem we're solving for is piracy.

Last year we got paid for only about a third of the approximately $15m federal returns prepared and filed on TurboTax desktop products.

With this year's TurboTax license taxpayers can still prepare and file multiple returns from one PC.

So while we don't expect to get paid for all of these additional $10m returns, we believe many resulted from pass-along copies and will result in additional TurboTax sales.

Now, for a small but very vocal group of people, product activation is a crusade.

But for the vast majority of our customers, it's a non-issue.

And for Intuit, it's a big opportunity.

Before we move on, let's look at some indicators we're tracking that give us confidence that is we move into the busiest months of our tax season.

As of February 8th our direct assets are showing solid growth, up 11% over the same period last year.

This consists of federal units both on the desktop and paid web.

As of February 11th, over 3 million desktop units have already been activated and 98.3% of customers have used our easy self-service process to activate their product.

As of February 1st, TurboTax share of retail units is 69.3% this year, versus 69.5% a year ago.

Basically, flat.

So while it's too early to declare victory for the season, despite the noise level the year to date result and trail signs are all-positive.

When all the dust has settled we expect another great consumer tax year.

QuickBooks, let's shift to QuickBooks.

We're in the second year of multiyear Right For My Business Strategy and our QuickBooks growth engine has performed well.

Second quarter revenue of approximately $94 million was up 11% over the same period last year.

And user purchases or products customers have bought and paid for both at retail and directly from Intuit were up even higher with sales up 26%.

This is a good indicator of the actual demand for our products.

This data again demonstrates that the QuickBooks Right For My Business Strategy is on track and we continue to work on new offerings we will announce in the future.

Once again we saw strong growth in Small Business Services with second quarter revenue up 33% to about $121m.

This growth engine includes or payroll, supplies, QuickBooks technical support and information technology solutions.

We love the growth in revenue and profitability coming from these small business services, and believe we're just scratching the surface.

There are many additional solutions our customers are asking us to provide.

We strengthen our services focus and expect continued strong performance in this growth engine.

We're also getting great traction in the vertical business management growth engine though it's still only about 6% of total revenue.

Revenue of $24m was up 22% versus the revenue those companies had in the year-ago quarter.

With this level of growth we're growing faster than the competition and we're pleased with our performance in a difficult market.

We like our strategy and believe this remains a large underserved opportunity.

We continue to invest in each of these companies we have acquired to strengthen our market positions and we continue to look for additional acquisitions that will become new growth platforms.

We still expect FY '03 revenue growth in the 10% to 30% range.

Our fifth growth engine Professional Accounting Solutions, had revenue of $151m up 9% year over year and on track with expectations.

Accounts remain very strategic to our future growth.

There is a lot of potential in this area and we'll talk more about this in our strategy for accelerating growth later in the year.

Now let's shift gears to talk about our other business segment which is primarily Quicken and Canada.

Revenue from other businesses was about $74m, about flat with Q2 last year.

We continued to see strong growth from our Canadian business.

Revenue was up 45% year-over-year.

And we're on track for revenue growth of 30% plus for the total year and profit growth, 1.5 to two times the revenue growth rate.

The Canadian team continues to deliver consistently great performance.

While Quicken revenue has declined year over year it's important to note that it is due to a shrinking category.

Quicken still maintains close to 70% unit share at retail.

Now I'd like to talk about the action we've taken with our two under performing businesses, Japan and Premier Payroll.

I'm pleased to announce we have achieved great outcomes in both situations.

Last week as Brad said we closed the sale of our Japanese business.

This was a win-win for all parties involved.

With respect to Premier Payroll, we just closed a business with Wells Fargo.

Basically we structured the transactions that eliminated into its payments to Wells Fargo, which significantly improved our bottom line.

This allows us to control our own destiny with more attractive economics as we work to become a larger and more profitable pay payroll supplier.

Let me summarize what you heard today.

Intuit is right on track and we're updating our guidance for total year revenue growth between 30% to 35% and pro forma operating income growth between 53% and 59%.

I'm pleased with our Q2 results.

I'd like to thank all the Intuit employees who worked so hard to deliver another great quarter.

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

At this time I would like to remind everyone in order to ask a question please press star then the No. 1 on your telephone key pad.

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

Your first question comes from Bryan Keane (ph) with Prudential securities.

Hi, good afternoon, solid quarter.

Just a question on product activation.

I guess a clarification.

The February 11th you had 3 million desktop units act activated.

Is that all from the forced activation product?

Yes.

How much of the tax revenue expectation are you expecting from the product tax activation, like for the third quarter, is that in the number already or is that going to be upside or how do we think about the mix there?

It is like I said last quarter; it's between 5% and 100%.

It is in the numbers.

We don't know.

But I would tell everybody an interesting story I got a call -- one of you are our employees got a call from a friend of his in Chicago.

He said you finally caught me.

He said what do you mean?

He was a guy that we hired just a few months ago.

He said it use to be we buy one copy of TurboTax and then all the neighbors would pass it along and share it.

Now I just activated my copy and all the other ten are going to do the same thing, that's exactly what we're trying to do.

And the guy told our Intuit employee said wonder what took you guys so long to do this.

But of that mix I guess 5 to 100, you're not, I guess you're not breaking out for us exactly what mix do you expect to get, I guess just because in our numbers as we model should we include a certain amount of tax activation, should we try to run a run rate off what you've done so far this year or look more historically over the overall number?

That's what you have to figure out.

That's why we provide guidance.

We don't know exactly what the number is going to be.

We don't know how many of those 10 million returns were from pass along versus legitimate copies from the same PC.

But all the trail signs are positive.

I think our performance despite the noise has been right on track.

We think we're going to have another record season and we think product activation is going to be a contributor to a record season.

And then switching gears over to QuickBooks, how much of the revenue was from the flavors and which flavors are doing better than others, I guess just if you can give us some color on how that's tracking?

I think we're not breaking out the revenue from flavors but I think we did break out the units in the fact sheet.

I think there were 38,000 of the units in the quarter out of 364,000 were premier product.

So a little bit more than 10%.

I think every one of them we've launched we're doing well on and we've got more coming.

I said 364, it was 346, so it was about 10%, we think that's pretty good performance for flavor and everything we've seen in building industry specific versions of QuickBooks products so far has been positively by the marketplace.

Anything in particular about QuickBooks enterprise I know your trying to go upstream with that, does that gain traction, anything in particular?

Continues to do very well.

Well thank you.

Thanks Brian.

Your next question comes from Michael Hodes (ph) with Goldman Sachs.

Hi, good afternoon, solid quarter.

Two questions.

First, on the tax side, I notice in the fax sheet that the web units so far year to date are up just under 50%.

I'm somewhat curious, does that typically correspond with the increase that you see throughout the year, I remember last year I think over the course of the year you were up 85%, so that's my first question.

And then my second question is probably more for Brad, just given the elevated return rate or slightly elevated return rate, could you just update us on what's happening with the reserve line?

So on the seasonal pattern for web, last year the total season was up for paid was up 85%.

So we don't really have any good way to know at this point, whether it's going to finish plus 50 or plus 80 or plus 150.

But the at this point of the year to be 50% ahead of last year we're pretty excited about.

On the reserve thing I'll just cover that.

The answer is we think we're comfortably reserved for the returns we anticipate, the higher level we anticipate.

Any returns that actually happen from retail.

And Steve, perhaps I could ask the first question in a different way.

What was the year-over-year increase in the January quarter last year on the web, paid web units?

I don't know, Michael, somebody will let you know.

I don't know.

Okay, thanks.

Your next question comes from David Farina (ph) with William Blair.

Good afternoon.

Steve, do you have any idea, you know, how effective the My CD program is being?

Can you tell if people are using it, or not going to the store, can you get any early read on that?

Yeah, we can and the trail signs we see on that are positive.

We don't -- in some case cases what we've seen from the research is that they get the My CD and they still go buy at the retail store.

It triggers a purchase.

In some cases they decide to activate and use the product.

But I would tell you that it's tracking ahead of our expectations with retail being a little bit soft, both the web and our strength direct the software is what's driving 11% unit growth year over year.

My CD is one of the key contributors to our strong performance so for in tax.

That sounds good.

Also, with your increasingly high percentage of direct dollars at TurboTax, you know, this is a big retail product.

Are you starting to get anything back from your channel complaining about -- obviously there is no growth, obviously it's not too terrible for them but what's happening here?

I think ultimately, we are -- our expectations with all the activities that we've done that we're going to expand and grow the channel and grow the category so that there's more in it for everybody.

So let's wait for the end of the season when activation kicks in and has its impact.

All said and done the retail channel will be very happy with their TurboTax performance for the season.

Even if we grow faster than retail this will be a good season for them, like it has been the last few years, even after many years the shift happening, retailers like TurboTax and it's been a good seller for them, much better than most of the other products selling for them these days.

Hypothetical question for you Steve as you think about the impact of activation can you see a scenario where you have a big year this year, couple million people act activating with illegal copies but then they realize that perhaps next year are you actually losing shares, as people realize they can go to, block and get something different, may this year they don't want to do it because they already saw the returns but --

I think that's purely hypothetical.

I mean there is some risk that some people will do that.

What we have found in most of our businesses when we have uncovered people pirating copies, the loyalty is higher than people who have paid.

There is this kind of adverse thing I've been using it for a long time you caught me but I'm still going to use it because you've given me a good deal here.

So I also think that remember we'll be in the second year of our Right For Me TurboTax strategy .We are working on exciting new products that we're going to launch next season.

I think next season is better than this season but little early to look that for ahead.

Thanks very much.

Next question Craig Peckham (ph) with Jeffrey's company.

Just curious can you discern any trends at this point with regard to product activation as it pertains to the specific types of TurboTax, basic, deluxe, premier?

No Craig we're seeing a nice mix shift and I just go back and one of the things I think is important here for all investors to understand is despite all the nervousness you hopefully see what we see is it's not having much if any impact on our business.

There are a lot of people out there that have agendas that are different than pure consumer agendas.

So I think one of the things we're looking at hard is who are some of these people who are saying these things about product activation.

And it's not just all-straight consumer feedback.

So there is some good consumer feedback and there are people who have other agendas on these boards.

So I think it's important for investors to see through this and understand what's really going on.

We think that our numbers that we presented today and the confidence that we have in the tax season show that this is only a big issue for very small people or people with their own agenda.

And my follow-on might be for Brad here.

I'm curious, to what extent does the change in the payroll model with Wells Fargo play into the increased guidance here?

It doesn't.

It's the minimums this year.

The impact this year is de minimums.

Okay, thanks.

Your next question comes from Adam Holt(ph) with J.P. Morgan.

Good afternoon.

Sorry to nickel and dime you with a couple of numbers questions here but I was hoping I could get a little more detail on the enterprise edition of QuickBooks.

Do you have a breakout of what that was in terms of how many units enterprise actually represented?

I think we shared on the last call that we had sold about 2,000 units.

I think sales continue being at least at the similar track record or even with a little bit more acceleration over the past.

But we're not -- we're not focused on that level of detail Adam.

And then another question on the services side, what is sort of the rough mix of the Small Business Services at this point, with particular interest in the payroll business, and the integrated QuickBooks and outsource payroll offering?

Payroll is growing at similar rates to last year.

If you think about the whole category grew, that whole growth engine grew 33%.

Supplies which is a large business for us, you guys know about the size of that, is mid single digits growth so the rest of those businesses had to grow pretty significantly for the whole category to grow 33%.

And then just a final question on the buy-back.

Historically you've bought back stock primarily to cover options.

Where the stock is now do you the potential to accelerate the buybacks?

Actually we bought back the stock because we thought it was a good value at the price we bought it back.

And a side benefit of that was you know we minimized dilution.

So we just finished the $750m authorization, as opposed to a lot of companies that announce them and don't do anything, we announced it, spent our money.

We're going to continue to look at what's the best way to maximize value of shareholders from acquisitions to share buy-back.

That continues to be on our agenda as we go forward.

But we have spent our money and we are not announcing a new buy-back at this point.

Great, thanks for your help.

Your next question comes from Cameron Still(ph) with RBC capital markets.

Couple of questions on the tax business, with the change in distribution, to more online, more direct via the CD distribution programs any change on assumptions on retail channel inventory this year versus last year?

No, and we have radically changed Cameron our supply change to make it much more flexible to ship to many, many more stores directly, so we think we have a much more efficient supply chain with higher service levels without any more inventory.

So we feel very comfortable that we have better service at lower cost in our supply chain and inventory positions and we think for any returns we're reserved appropriately for at the end of season.

Okay and then just two additional.

Just curious on you've opened it up TurboTax to the grocery channel.

Just was wondering how that was going and also some of the new units that have come out with Spanish language and others how those have done relative to your expectations.

Both of those we didn't really start shipping the product in until late January-February and the other retail channel so it's too early to comment on that same as Spanish.

We didn't start the same as we did with traditional TurboTax.

We'll have more -- there will be a lot of interest in them, I'll share, there's a lot of interest, a lot of positive feedback on the Spanish for instance we've had many more retailers that wanted to stock that than we had initially planned for.

So we think when all said and done we're going to have a strong nice year in Spanish and we think the other outlets will help but too early to share data on that.

Great thanks a lot.

Next question Heather Bellini(ph) with Salomon Smith Barney.

How successful you've been with cross selling QuickBooks customers into your payroll base especially that percentage of your customer base that might be using say a paychecks or maybe a ADP low end product if you've seen any success transferring those customers over?

Thank you.

Good question, Heather.

Remember we just launched it at the end of October on a pilot base; we are only handling it in our Reno center.

As oppose to broad expansion which we think is going to happen in the March- April Time frame.

So the initial responses have been very, very positive both from accountants that refer their clients in and also directly in, we think a big reason for our nice payroll growth is our new product integrated with QuickBooks is starting to get momentum but it's too early to share.

I tell you personally I think this is a big home run for the company, but we don't go to full launch until 30 days to six weeks from now.

Scott, do you have a head on this one?

Leading indicator it we are surprised and delighted it is working so well.

That is a fact effectiveness of our inside sales team.

Typically full complete payroll sold by expensive outside sales force.

We have that in some parts of the region.

The real advantage that Intuit has is we have a built in customer base of QuickBooks users and we are finding we can very effectively sell to them with inside telemarketing sales force, and sell them full payroll at very high productivity rates.

This means we can do national expansion and rollout rapidly because we can relate nationally with a low cost high effectiveness telemarketing force.

I would also add that there's a positive based on the recently announced Wells Fargo deal is this will now give us the opportunity to convert those premier customers over to the technology platform that we acquired when we bought CBS Payroll, that will allow us to provide an even better customer experience at lower cost to those premier customers.

Thank you very much.

Your next question comes from Glen Greene (ph) with Fink (ph) Equity Partners.

Couple of questions.

I don't know of you provided the actual tax unit growth in the quarter is it simple as adding up the web units and desk top units that are in the fact sheet?

We actually in the script that we shared this time.

Hopefully investors found beneficial we shared our script so you could see exactly what we've said, first time we've ever done that nice addition by Brad coming in.

As of I think February 8th Glen or February 10th in the script we said units, total units, retail, direct web, and direct desktop were up 11%.

And so I don't think that is in the fact sheet but it is in the script that we shared.

Do you have an expectation at this point what the tax unit growth would be for the season and the potential mix from TurboTax for the web versus the core TurboTax product?

No, and -- but I will tell you that the momentum feels like it's building.

Towards the web you mean?

No in total.

Second question, last quarter you broke out an organic revenue growth number and sort of gave an expectation for the full years.

What are your thoughts at this point and what is the organic growth in the quarter?

Our thoughts are that we are going to communicate the total growth performance for the company and we're not going to split out as much organic, because we think investor are buying a total package of businesses and my job is to deliver and Brad 's job is to deliver total growth and total profitability in the portfolio and frankly in some of these area like payroll.

We can't keep track of what was organic and not.

The vertical growth which is mostly new was of the 24 million about 21 million was from acquisition or from -- was you know from acquisition and the rest was the 22% organic growth.

And then the one question Blue Ocean soft way Blue Ocean Software which I think you're calling information technology solutions, am I correct in the Small Business Services?

Small Business Services like all the other, horizontals.

Payroll is in their Blue Ocean and technical support as well as supplies.

What are the early indications from that acquisition?

Very strong growth.

Think about it, supplies is a mid single digit growth and a big part of that $121m, all three of those other pieces had to have very significant growth to get 33% growth in total.

Thank you.

Your next question comes from David Joseph from Morgan Stanley.

Hey, guys, I think most of my questions have been pretty much answered.

I have one general question maybe even two.

With regard to QuickBooks, what are we thinking for the year?

For the year growth is generally driven by ASP growth.

What are we looking in terms of unit growth, relatively flat on a tough comp from last year?

I don't know exactly.

When we went into the year we thought units, we planned for units being flat and obviously we're performing better than that.

So I think we don't forecast units but we seeing good traction on that Scott do you have a thought on that?

Unit growth is up.

On top of that, there's growth in the average sales prices.

People are trading up to more expensive products.

But unit growth is up.

And with regard to Blue Ocean, you know I know it's ERP's service.

How is -- I know it's little early in the game but how has that integration been going and have you been cross selling that service and generally how has the cross selling of services been to your QuickBooks clients base?

I'm not sure what you mean by an ERP service.

It's really a stand alone horizontal where we sell IT asset tracking, IT management, help desk incident tracking software to companies, the integration has been we've given them the QuickBooks customer list of between 25 and 250 employees and they're now directly marketing to that customer base and they're growing very, very nicely.

So there is no real integration there into anything we're doing.

I meant just mainly cross- selling.

Mainly cross selling to the base, what's giving them the name of the QuickBooks customers and having them market directly to them.

At some point in the future we might include that in the user interface but that is not in this year's QuickBooks.

Is there any the customer relationship way to go to CRM software like we've seen competitors doing into your target audience?

We continue to look at the need that our customer base has and we continue to work on new products and services both the additional acquisitions or from home-grown or home-grown solutions.

But it would be pretty premature for us to speculate on any particular space.

Lastly with regard to TurboTax, I know people are focused on activation.

What about those filers who are not using any software now, do you have any clarity on how you have been able to eat into that opportunity?

Not really, because we really don't know, you know, last year whether it was -- whether it was, you know whether those extra 10 million returns we talked about were from pass-along or from, you know, legitimate use of the license.

I think at the end of the season we'll have a feel for how many unlocks come from the product and when we have the facts we'll show them.

Scott.

Category growth that we've been seeing tax is a growing category that continues to grow comes generally from manual filers switching to using a computer.

And so that's the source of growth we've been experiencing and it continues.

Great.

Thank you very much.

Thanks David.

Your next question comes from Jim McDonald with First Analysis.

Yeah, good quarter.

Can you give us some more details on other parts of the Wells Fargo deal; will they still be actively selling your product, for example?

We just negotiated the deal we announced today, and we're working to figure out what to do on any kind of future referral program.

But that's not something that's been solved at this point.

Okay and just one question.

Do you believe personally that there's any real report -- real performance issue with the product activation feature?

In other words crashing computers or CDR drive problems, and if you did or even if you don't, do you expect any changes for next year on product activation?

Absolutely no performance issues.

We've done multiple independent tests.

There's a new test coming out, Extreme Tech just did another test.

One of the editors that wrote a scathing article up front just bought TurboTax, despite writing these negative articles.

We have independent software labs releasing tests talking about the fact that this has no negative impact on performance.

There is no spy wear in the product.

Frankly this is people on the chat boards with a very specific agenda to try to get an advantage and very few customers have been affected by this.

Thanks.

Your next question comes from Scott Kessler (ph) with Standard & Poor's equity.

I have another question about product activation.

Can you respond to some of the noise as you termed it with respect to what extent the feature itself changes the consumer's PC in terms of the ability to burn CDs or memory consumption?

I agree with you a lot of it has been noise and coming from people that have maybe some less than objective interests.

But I was just kind of wondering, what those users who have been returning the software for this particular reason are saying?

Well, number 1, we have not been able to replicate or even get a hold of anybody that has posted these issues with -- we've not been able to replicate it or get a hold of anybody to learn from people that have had problems with CD burners.

Everybody that's posted we tried to contact them and duplicate their experience.

We have not in eight weeks found one issue that we could replicate.

Which tells you something about where this noise is coming from.

With regard to it -- when you load the program it does take up memory on a computer, as would any program you load on your computer.

But it does not affect computer performance.

And we have had a couple of situations on things we did that had caused the negative user experience, which we fixed quickly.

But other than that you know for 98.3% of our customers that have activated the product in less than a minute either through web or the IVR it has been a relatively insignificant impact on their user experience on the product.

And the feedback we are getting on the product, on this year's TurboTax product if people focus on that it's spectacular.

It's faster, it's easier to use, simpler and cleaner.

And some of the features we put in, with remembers me functionality has been getting rave reviews from customers.

Something must be going right with our share; despite that Block is $10 cheaper than us a $20 product.

Customers using it like the product and as you can see from the results, all the impact has not had a material impact on our strong performance.

Just to follow up, I guess I was wondering if Intuit plans on kind of making some of this information available to the public, that apparently is I would say extensively misinformed on this subject.

Because I think that there definitely is kind of a disconnect maybe between what the perception is versus the reality.

We've responded to thousands of customers that have called us and sent us e-mails, to on an individual basis to clear up the facts.

You'd be amazed.

We're getting thousands of messages back from customers that say thank you from clearing this all up.

I feel comfortable, I am glad you got the response.

But we decided to deal with this on an individual customer basis because we think it is an issue for a very, very small group of people and that seems to be working.

We have posted tons of information on TurboTax.com.

You go to TurboTax.com there's a big bug on the screen that says questions of product activation or [inaudible], click on that, there is information a lot of FAQs so we are very public with a rich FAQ set describing this in detail.

And on Intuit.com we have a big pop up on activation.

Frankly I would also say the amount of incoming questions and mail we have gone dramatically down in the last week to ten days.

So we'll see what happens as we go forward through the season.

This is Scott let me add, Steve is correct, that for the variety vast majority of customers this is not an issue.

They want their taxes to be done accurate.

TurboTax is more accurate.

They want their taxes done fast so we don't have to do this long than they need to do it.

We put in special things that accelerate the tax project and that's where the TurboTax is the leader.

It sounds like someone there or elsewhere needs to write an informative letter to the Wall Street Journal.

I'll close with that.

Thanks a lot.

Next question comes from Steve Ruston with (ph) Glen capital.

I don't have a question about activation.

Can you talk about how your relationship on premier is changing both operationally and in future years financially?

Thank you.

Basically Steve, what we have eliminated is the revenue share or the commission that we paid to Wells Fargo for originating new customers.

And we now get to keep that.

We get the revenue.

We have the customer base and so the economics for us are going to be much more positive.

And we think that's going to improve the performance of the business for us, the premier business now we think will be that customer base will be as attractive as our previous deluxe base or the CBS base that we acquired.

That's great.

And can you go into a little bit more detail about the launch of the full launch of the integrated product, and how you're going to sell that and the prospects for that?

We think the prospects are really good.

We're going to launch it full launch probably in April.

We have ramped up the size of our sales force relatively significantly over the last three, four, five months and as Scott said what we're finding is that we are getting great results, having our large telesales force selling this product.

So this is a big organic growth story for us.

There's a lot of demand and positive reaction from customers that have seen it and from accountants who believe it will save their clients time and energy, their QuickBooks users time and energy.

But this is going to be an organic growth story.

We add people and resources and it is execution now and based on our performance in payroll over the last three years I hope investors are comfortable that there is demand out there, and we can execute, even better than we have in the past and we can capitalize on a very, very large opportunity for Intuit.

Steve Ruston;

As you look on how you're rolling out the sales force and comparing the sales force to sell this, Scott said the telemarketing force was very effective but I also know you've been building up the field salespeople.

What do you expect the mix to be in terms of dollar sales through each of those channels?

We don't really know.

And right now we have more feed on the street, life feet on the streets than we have telesales people.

We are going to continue to hire and grow and we think there's a lot of demand and we're aggressively growing this business.

There will be things we learn as we move forward but let's not speculate on what we might not do.

Let's get the product out there.

We'll learn as we go.

The important thing for me is there's lots of demand, the customers like the product.

We are gearing up our sales and service so we can handle the demand.

Thank you very much.

Your next question comes from Tim Galbreath (ph)with Bear, Stearns asset management.

I wondered if you would hint a little more on professional tax.

You said later in the year you with will talk about accelerated growth.

You whetted my whistle.

Can you give us a taste of what you are thinking?

No.

But the fact of the matter is the way I would think about this is think about the changes we made in QuickBooks where we redefined the market to be much larger and more broad based.

We changed our One Size Fits All strategy this year on tax to One Size Fits All to Right For Me.

The thing I would share is we are thinking about this more from a accountant's point of view how they manage their clients and serve their clients.

More a accountant based holistic approach than the point solution approach, and we think there's an opportunity to make their lives better for running their practice and serving their client and that's the direction we're moving.

One follow-up if I may.

The 7 million CDs that you mailed out, I know it's early in the process but based on what you're seeing now, are you thinking that next year you would do the same, and would you change the number?

Would you make it bigger or smaller?

Based on the initial feedback we like what we see but it's too early to speculate on next year.

All right, thanks.

your final question is a follow-up question from Craig Peckham with Jeffrey's and company.

I'm curious, can you compare the relative cost of the old mailing model for TurboTax as opens opposed to My CD?

It is cheaper with higher response rates, it's cheaper to mail the product out, plus there is a consumer benefit too, instead of getting six e-mails you get one.

So it costs us less and we're getting higher response rates.

So we get the win on -- and customers like it better so we think it's a win-win-win.

Okay. 98.3% activation rate if that's the right term.

What happens to the 1.7% fallout rate there?

We have a live person work through it on the phone.

So they still activate.

We just have a live person help them, 1.7% are live contacts that we help them through it on the phone.

That's clear, thanks, Steve.

At this time, there are no further questions.

Do you have any closing remarks?

Well, first thing I have to say is nobody asked me anything at all in verticals.

We grew 22%.

That's all anybody wanted to know about last quarter.

This was the product activation quarter.

I summarize by saying what you are seeing is another down payment by another 7,000 employees at Intuit.

All the trail signs and five growth engines are positive.

We believe every part of the company gets better every quarter and we are capturing and getting at these large underserved opportunities that we've been focused on for the last couple of years and we expect to have another terrific year in fiscal year '03.

Thanks for listening and we look forward to talking to you on the next conference call.

Thank you for participating in today's conference.

You may now disconnect.