直覺電腦 (INTU) 2003 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, my name is Paul and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Intuit third quarter 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 you would 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.

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 at the end of the conference call script and in Intuit's fiscal 2002 form 10 K and other SEC filings as well as the press release issued earlier this afternoon.

Most of the numbers in this presentation will be reported on a nonGAAP basis which will be referred to in the call as pro forma.

The most directly comparable GAAP financial measures and the reconciliation of the pro forma financial measures to GAAP is posted on Intuit's investor relations web site at www.intuit.com/company/investors/earnings.

Thank you and now I'd like to turn the call over to Mr. Steve Bennett, Intuit's President and Chief Executive Officer, please go ahead, sir.

Thank you, and good afternoon, everybody.

Welcome to the Intuit third quarter 2003 conference call.

With me is Brad Henske, our CFO, Scott Cook is on the road today and out of the country so he won't be joining us.

Once again, Intuit delivered a strong quarter.

Revenue of $635 million was up 29% over the third quarter 2002.

And pro forma operating income of $321 million was up 47% over a year ago.

Pro forma EPS of $1.05 was up 52% over the same period last year.

By any measure, these are great results, and we are pleased with our strong year-over-year growth.

At the same time, we are disappointed.

Disappointed because we came in lower than the targets we provided in February.

We take making and meeting our commitments very seriously.

And over the last few years we have consistently delivered on what we said we would do.

We've looked hard at what happened and the key assumptions we made when we provided our earlier guidance.

We've learned a few things and I will share some of the insights on earnings later in the call.

Bottom line, Intuit is a strong, growing, and profitable company.

We have a great portfolio of businesses with tremendous growth opportunities and we are working to improve our execution and getting better every day.

Now, let me turn it over to Brad to provide some perspective and details on the third quarter results.

Thanks, Steve.

As Steve just said, Intuit had a strong third quarter as we continue to execute our growth strategies.

Third quarter revenue was $635 million, up 29% year-over-year.

Revenue growth was driven primarily by strong growth in our Turbo Tax business, as an increasing portion of our consumer tax revenue shifted from the second to third quarter.

We also had strong performance from our small business services growth engine.

Pro forma operating income was $321 million, up 47% from the year ago quarter.

Pro forma EPS was $1.05, up 52% over Q3 '02.

Both of these measures benefited from strong revenue growth in the quarter.

In addition the scale nature of our businesses drove proportionally more profits to the bottom line as revenue increased.

In fact, pro forma operating income grew 1.6 times faster than revenue in Q3.

Now let's look at each of our five growth engines.

Starting with Turbo Tax.

Total paid federal units were 8.5 million this year, up 12% over last season.

According to the IRS, individual returns prepared by software both on the desktop and on the web grew only 8.3%.

So Turbo Tax units grew faster than category.

Turbo Tax revenue grew even faster year-over-year up 28% for the quarter and 24% year to date.

Higher end turbo tax units were up approximately 24% over last year and represent 6% more of the unit mix.

We had slower growth on the web this season with federal paid units up 11% over the comparable period last year.

We face new competitors in this space this season as a result of the free file alliance.

Unlike Intuit, which views the alliance as a philanthropic initiative, many of the other participants used it as a marketing and distribution initiative.

This is something that will have to be addressed at the free file alliance next year.

We had very solid growth in tax despite the fact that the entire industry experienced a slower season.

If fact, the IRS has reduced its estimate for total returns through April 25th by 3.4 million or 2.8% versus last year as a results of lower employment levels.

It is unclear whether there will be any improvement of this level.

All in all it was a solid tax season for us.

We grew faster than the industry and we were successful in having customers choose new higher end offerings.

Professional accounting solutions had revenue of $81 million, up 12% year-over-year, right on track with our expectations.

Accountants remain very strategic to our future growth.

There are over 425,000 professional accounting offices in the United States.

We have a long history of working with this segment.

We understand how they work and believe there is a great opportunity to deliver new offerings to use multiple points of paying.

We have new and broader strategy to help solve these paying points and serve the segment more effectively.

We will talk more about our plans to accelerate growth in this business on our investor day in early October.

Now let's talk about small business services, which continues to have strong growth.

Third quarter revenue is up 41% to about $115 million.

Year to date revenue of $336 million was up 34%.

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

Our payroll business again performed very well with revenue up 43% year-over-year.

Revenue from our do-it-yourself offering was up 30% with growth in the customer base of about 8% year-over-year.

Revenue from out source payroll grew 53% with a 38% growth in the customer pace base.

Revenue and customer growth for out source payroll were aided by the acquisition of CBS Payroll which closed last June.

Moving to QuickBooks we continue to get very good traction as we execute our multi year right from our business strategy.

Revenue of $55 million was up 12% over the same period last year.

Year to date revenue is up 18%.

We are having a lot of success with our high end offerings, especially QuickBook's flavors.

We seeing a solid customer options of these specific industry solutions with flavors representing 8% of the unit mix and 15% of the dollar mix in the third quarter.

We are still in the early stages of introducing QuickBooks flavors with the industry specific functionality that small business owners want.

Today we are announcing some new offerings which Steve will highlight later.

Next, revenue from our vertical businesses were approximately $26 million was up 7% versus the revenues those companies had a year ago.

While growth is slower than we want it to be, all indication are that we are growing faster than the competition.

Onto the balance sheet.

Intuit had cash and short-term investments of $1.5 billion at the end of the third quarter.

Up from $1.1 billion three months ago as we completed the busiest part of our year.

During the quarter we repurchased approximately $75 million worth of Intuit stock under the current $500 million authorization at an average price of approximately $39.

Now let's look ahead to our guidance for Q4.

Starting this quarter we will provide you with more detailed information about the quarter ahead to give you greater visibility to our businesses our assumptions.

We expect revenue of 240 to $250 million, a growth of 28 to 34% over Q4 2002.

We expect the following revenue ranges for our businesses.

QuickBooks, 53 to $58 million.

Small business services, 112 to $120 million.

Turbo tax, 5 to $8 million in the slower part of the season.

Professional accounting solutions 6 to $8 million again in the slower part of the season.

Verticals 24 to $28 million.

And our other businesses, 30 to $33 million.

We expect a Q4 pro forma operating loss of 30 to $35 million.

As you recall, Intuit typically loses money in its seasonably slower fourth quarter when revenue is slower and expenses stay constant as we continue to invest in product development.

We expect other income in the range of 8 to $10 million.

This amount includes an annual payment of profit sharing from our marketing contract with Quicken Loans based on the performance of their business.

We expect a Q4 pro forma loss per share of 6 cents to 9 cents.

Therefore, doing the math, we expect for FY '03 as a whole revenue of 1.65 to $1.66 billion.

Pro forma operating income of 395 to $400 million and pro forma EPS of 1.36 to $1.39.

We've updated our pro forma EPS guidance to reflect the strength of our third quarter results.

Additional details about our expected tax rate and share counts are included in the fact sheets.

Now I would like to provide a first look at our fiscal year 2004 guidance.

We expect revenue of 1.85 to $1.95 billion or growth of 12 to 18% over FY '03.

Remember that Intuit's FY '03 year-over-year revenue growth benefits from acquisitions we made in the prior year.

Pro forma operating income of 480 to $510 million or year-over-year growth of 21 to 28%.

And we expect pro forma EPS of $1.57 to $1.67 or growth of 14 to 21% over FY '03.

We expect lower growth in interest and other income will slow the growth in EPS next year versus the growth in operating income.

Thank you for your attention.

Now, I will turn the call back to Steve for his insights on the quarter and our future.

Thanks, Brad.

Let me start by talking about why we feel positive and our confident in our future.

Intuit is growing, and a profitable company.

Year to date revenue is up 25% over the comparable period last year.

Pro forma operating income is up 37% year to date.

And pro forma EPS is up 38% year to date.

We have five growth engines with large under served opportunities.

We have multi year strategies to attack those opportunities, and we continue to execute better and better to capitalize on these opportunities.

We choose to be in businesses where we have durable advantage and reliable demand.

We choose business models where we have profit leverage, and we expect to grow operating profits as 1.5 to 2 times the revenue growth rate, like we did again this quarter.

As I said earlier, we are pleased with our strong growth in the quarter.

We had a very solid consumer tax season, growing faster than the industry, and we had a great first year with our right for me strategy with more Turbo Tax customers selecting our new higher end offerings.

We are also seeing solid adoption of our new QuickBooks flavors as Brad discussed and today we are building on the this success with the introduction of two new flavors.

A QuickBooks flavor for nonprofit organizations and one for health care practices.

We've also announced new versions of our QuickBooks contractor's edition and QuickBooks enterprise solutions.

We're also excited about our payroll business especially our out source offering that integrates with QuickBooks.

Initial customer feedback tells us we have really hit the mark.

There are also a couple of areas where we under performed in the quarter.

One area was Turbo Tax product activation.

Intuit has a strong heritage of doing right by customers, but some of our customers didn't have the great experience they expect from Intuit.

We didn't attract as many new customers as we had hoped and we didn't get revenue and profit growth we expected.

We have decided to discontinue product activation next season.

We will include end product technology in our marketing versions of Turbo Tax including the my CD offerings to enable users to unlock the product.

I'm also not satisfied with the revenue growth in our vertical business management portfolio.

The four companies that we acquired that provide industry specific business management solutions.

They represented about 4% of the quarter's revenue.

We have made some changes on how we run the verticals growth engine as we move into our second year.

We have created a new job and appointed a senior leader, and all the leaders of the individual businesses now report to her.

We like our strategy and think it provides a great platform for future growth.

Now, I would like to wrap up with a few more insights.

When I look back at the last three-plus years at Intuit, we've made some real progress.

We have adjusted our business portfolio to focus our resources on businesses where we had the best chance for long term success.

We have redefined our markets and identified unmet customer needs to drive faster growth.

We have improved our focus and energy around execution.

And we have strengthened our team while continuing to be a great place to work for our employees.

So what is the difference in how we are delivering on the financial side from three years ago?

This quarter, for example, we had $635 million in revenue, more than double the $302 million we had in the third quarter of fiscal year 2000.

Just three years ago, pro forma EPS of $1.05 is about three times higher than the 36 cents we had three years ago.

And pro forma operating margins for the year are expected to be about 24%, up 700 basis points from three years ago.

In the last three years, our team raised the bar on performance and we've delivered.

The reality of being a leader like Intuit is that you innovate and test a lot of things.

We test and we're vigorous.

We win a lot.

And we miss a few.

That's what leadership is all about.

Our batting average has gone up significantly in the last three years and we are making solid progress.

The best news is we are getting started.

We have a great business portfolio.

We have great opportunities and solid strategies for attacking those opportunities.

We are just two years in to our right for my business strategy to drive growth in QuickBooks and small business services.

We are just over a year into our verticals platform.

We are just one season into executing our right for me strategy to drive continued growth in Turbo Tax.

And we are about to introduce a new strategy for better serving accountants.

There is so much more to come in the future.

From where we sit, the future looks bright, and every day we are getting better.

Now let's open it up to your questions.

Ladies and gentlemen, as reminder, if you would like to ask a question, press star then the number 1 on your telephone key pad.

Again, that's star then the number 1 on your telephone key pads.

One moment, please, for your first response.

Your first question is from Adam Holt with JP Morgan.

Good afternoon.

My first question is on the web tax unit growth.

What can you all do internally to help reaccelerate that growth next year?

I think, Adam, the key thought here is what Brad said in his script is that we viewed the web tax through the free file alliance differently than some of the other people there.

We offered everything for free, federal, state, and even in some cases, local city taxes.

Other people didn't.

If we would have say charged for -- given away federal and charged for state or something else, we would have seen a significant increase we think in revenue and unit growth.

We also actually think we count units different than other people reporting.

We just count federal units.

We think other people count federal units and state units.

They count one return as multiple units.

I think ultimately, we are happy with 12% total growth.

We out performed the total industry which grew around 8.

And we feel good about that and 20% revenue growth.

Is it too early to talk about what a target for unit growth ob would be for fiscal '04?

It's too early.

My sense is we will talk about that as we get closer to 2004.

But my thought on that is look we are just one year into the right for me strategy.

We have got some new things we are working on.

You will hear more about the specifics at investor day.

But we have got new things that we think will help us get at people converting from paper and pencils and other means to self tax software.

The final question on QuickBooks, can you give us any early insight into the product road map for QuickBooks for the next, call it, 12 months?

Should we continue to expect to see, you know, your target be 20 to 30% revenue growth there?

I'm not going to get into forward listen-looking guidance on QuickBooks at this point but I think it's going to be more of the same.

We like the higher end offering, QuickBooks enterprise and premier.

They are both doing well.

We have announced two new flavors today.

We have more coming and we have more accounting solutions coming.

We were only one year into launching this right for my business QuickBooks strategy.

We are getting good traction.

We have 255 applications now in the developer network.

That goes up every month.

We just think we are just starting on a multi year journey.

One thing is building new products.

The other is creating the awareness and demand to help continue to ramp up our penetration.

So, we are just getting started and I think the momentum is building.

Thanks for your help.

Your next question is from Michael Hodes with Goldman Sachs.

Hi.

Good afternoon.

Just following up on the previous question regarding the growth on the web, is it your view that you were able to maintain share in the web?

I'm not quite sure.

And then secondly, just regarding the 8% industry growth figure that you are citing.

That's a data point that's come out of your conversations directly with the IRS?

Yeah, from data right from the IRS on individual federal units filed through software.

Okay.

Because you know, the data that I have seen, for instance, on E file through computer that's self prepared suggest that the numbers were up in the mid 20%.

I realize that's different cut but that compares to your numbers in the upper teens on E filings.

I just want to make sure that we are getting a good read on what happened on the web.

So it looks like if anything the software growth was much stronger than at least I anticipated.

I imagine it was somewhat stronger than what you thought.

Michael, the growth in the use of software and the growth in the use of E file are obviously straight things.

We are seeing not only a growth in soft versus other methods, but inside of that more and more people are E filing.

Catch up with us afterwards and we will point you to the data on the E filing.

And secondly just on QuickBooks it looks like in the July quarter you are looking for a fairly healthy acceleration.

I was hoping you could elaborate on that?

I think it is the launch of these new flavors, plus continued traction on the new version of enterprise.

And it's just kinds of ramping up.

And the comparisons actually versus this same period last year will help us in the fourth quarter.

Just so I'm clear, it is your view that you gained share on the web this year as far as paid units go?

I think that depending on how you calculate that, my guess is we about held share.

But there is a lot of noise on there for instance if somebody else gave away and through free file alliance gave a way a free federal unit but charged for state which, obviously, we didn't do, which is something we have look at for next year.

I don't know how exactly we keep score.

So, I think there is a lot of confusion now in terms of what the data and statistics say.

And that's part of what we will still have to sort out as we get more learning.

What I can tell you is that the way it operated this year will not be sustainable from an Intuit point of view going into next year.

The free file alliance for us will not be us doing it as a philanthropic activity and everybody else doing federal for free and charging for state or other add-ons, that is not a durable thing for us.

So, clearly we'll see a change one way or another next year.

Lastly, embedded in your guidance for next year, are you looking for a comparable -- without getting too specific but just in broad brush terms a comparable contribution from pricing/mix versus unit growth or it's really too early to tell?

It's too early to tell.

And it's different for every business unit.

Okay.

Thanks a lot.

Your next question is from David Farina with William Blair.

Good afternoon.

Steve, can you comment a little bit now that you had some time to look at the [INAUDIBLE] 7 or 8 million illegal copies are allegedly out there.

Any thoughts?

I think the big learning is the data that we shared on how many we got paid for and how many were filed through Turbo Tax software.

We validated, we stress tested and looked at it a bunch of different ways.

I think we got some additional learning in kind of the distribution around how many people do multiple returns.

And I think that while the average data that we shared was right, I think the distribution was more skewed to one end than we thought and I think that's why we didn't get business benefits that we expected.

And Steve, do you think that there is any chance that, you know, this year people were kind of stuffing their Turbo Tax and it will next year when you lose the share in terms of having angered people from all the bad press this year, do you think that's possible?

I think that probably some customers will feel that way.

Frankly, I think more customers -- we got a lot of feedback from customers that were mad about this and switched, went to use another product didn't like the product because it was not as good as ours and came back.

We actually believe what is going to happen here is because we have changed and we said, you know, we are not going do product activation next year.

We think we will have obviously a campaign to communicate to everybody.

I think actually it will turn out to be a net positive for us.

Look at all the noise we had this year and what our performance was.

It's hard for me to believe that we will be worse off next year when we take out something that irritated some customers this year.

Okay.

Thank you, Steve.

Your next question is from Bryan Keane with Financial Securities.

Yeah, hi.

It's Bryan Keane from Prudential My question: Do we have or do we know the exact number of how many units were increased by product activation?

Not really, because it's hard to get the data on what the behavior was beforehand.

But I mean it was -- we believe we got some incremental but didn't get nearly as many as we expected.

Probably on the low end of that 5 to 100% I guess, probably closer to the 5% increase by activation.

I haven't done the math on that but toward the lower end.

Okay.

On the free alliance program it sounds like -- is there a chance you will pull out or are you trying to force everybody to play by the same rules?

Just looking for clarification into that.

Well, it's hard for us to force anybody to do anything since the IRS runs the program, not us.

It is not our decision.

I guess our decision is do we choose to participate or not and we choose under which rules we will participate.

I think it's safe to say -- the only thing I would be willing to say at this point is what I already said is that the current structure is not durable long term for Intuit and we are evaluating our options and what we need do is get everybody on a level playing field.

Clearly, it doesn't make sense for us to giving everything to customers for free while others use it as a marketing and distribution vehicle and charge.

That's not durable long term and we will see as we approach next year what's going to happen.

And we are leaving all of our options open based on how things evolve.

Moving into QuickBooks, the revenue growth looked pretty good.

Was the unit growth -- do we have the overall unit growth in QuickBooks for the quarter?

Yeah I don't have any visibility.

Is it in the fact sheet?

I think it says 321,000 were sold in the quarter.

I don't know what the comparable number is.

I think it's flat to down slightly is our best estimate.

I don't have it in front of me.

Bryan, we'll get the number for you.

Great.

And finally then, on the guidance, the 12 to 18% I think top line and then 14 to 21% bottom line on the EPS side, is the range due to depending on which -- how many acquisitions you might make before the end of this fiscal year or dependent on kind of the mix of business and how it comes out?

That's not inclusive of acquisitions, it is the business as it stands today and the range is driven by the range of actual outcomes in our businesses.

Great.

Thanks a lot.

Your next question is from Cameron Steele with RBC Capital Markets.

Thanks very much.

Just would be interested in some information on the final metrics for the my CD program how that came -- what the numbers look like, how did you feel was the success of that program, and then just the timing of activations, were they heavily skewed towards close to the 15th or were they more spread out than you would have thought?

With respect to my CD, in many cases it did much better than we thought, especially with older -- people that hadn't used the product for the last couple of years.

My CD actually was one of the key reasons why our unit growth out performed the market.

On an NPD basis we were basically flat on a share basis.

But we grew our my CD volume and direct volume much faster than the market.

I think we have some fine tuning to do in that program next year in terms of what we target to and who we mail, but we were very happy with the program overall and think it was a key ingredient to helping us grow the desktop, you know, as fast as the web.

I don't think it dramatically skewed the patterns toward the end.

I think we did have some interesting things happening at the end of the year.

For instance, we actually had people, you know we had a bunch of web tax things file after the 15th, which we didn't anticipate.

And I think that's part of the reason why we had more strength at the end than we expected.

But this is the first year since I have been here we actually had thousands of returns come in after the deadline on the web.

And so that was obviously something we didn't predict in some of the numbers and why we got a little positive surprise, some revenue upside at the end.

And lastly, you mentioned the vertical growth companies that you have acquired haven't really performed up to expectations.

Any sense on terms of future M&A activity or future investment?

Is that going slow it down?

Are you going to take more time to make these work before you further invest or what are your thoughts there?

No, we are absolutely committed to the strategy.

We think it is the right strategy and we think it is a winner.

We think the market, you know, is pretty difficult right now, and every indicator we see says we are out performing the market.

But we are not slowing down.

I don't think it is the end of the world that we haven't made of these for 7 or 8 months.

It doesn't mean we have stopped looking.

But we still expect to have 1, 2, 3 more of these over the next year or two when we can find the right companies and situations.

We are committed to the strategy.

Every day this business gets tougher.

It is a tough market right now.

But we bought these companies for long term revenue growth and we think we are on the right track.

It's just a little tough right now in the market but that's not changing our strategy.

Final question.

Just on the payroll services opportunity, any sense on the new customers you are picking up, are they competitive replacements or fresh new customers that haven't actually used the payroll services before?

I don't have the exact data on that, but I think our number one priority is the 300,000 plus QuickBooks customers that have already chosen to out source their payroll to a third party.

And we believe for a QuickBooks customers the integrated payroll offering as we ramp it up is a better offering than what they would be able to get because -- for a variety of reasons.

So, I think it is a combination of people migrating from other outsourced payroll companies from people moving up from the do-it-yourself product to new people we are acquiring that don't even use QuickBooks.

I think it is a variety of sources.

And remember, we are just starting to roll this out through some of our operations centers that we got from the acquisition of CBS payroll.

We have only been doing it out of Reno.

We are now just starting to expand it to other service centers because we had to train the CBS payroll operation centers on QuickBooks which is new to them.

That's why it's taking a little bit longer, but there is a lot of customer demand.

We want to make sure when we roll it out we are ready to support it operationally.

Thanks, your next question is from Heather Bellini with UBS.

Hi, good afternoon.

I was wondering, Steve or Brad, can you give us some information about when you pre released back in mid-March you talked about how it was all of your business units that were under pressure.

QuickBooks I got the sense that the upgrade cycle might not be going as well as you guys had hoped for.

And I was wondering if you have seen -- if you could give us an update since then.

Is there still weakness across all the different product sku's?

And what is your sense for how strong of a QuickBooks upgrade grade cycle there could be this year?

Thanks.

Sure.

I think, Heather, given we are at the numbers in a we put out in the middle of the quarter, I think we see the market in the same place.

The biggest challenge we saw at that time in QuickBooks was around general sales through retail which primarily impacted the basic products.

Retail is picking up a little bit, as it is for everybody else who is selling product through the retail channels.

So I think we are -- I think we are seeing that pick up.

I think we've continued to see good take rates on the new higher end stuff.

Those -- that set of new things as a whole is basically on its plan for the year.

But I think we continue to see some softness or a little bit of softness in the verticals based on market conditions.

So that's the only thing I would add to what Brad said.

Everything else is pretty much on track.

Great, thank you.

And then, Brad, lastly, it looks like the tax rate is going up for fiscal year '04.

Yeah.

Could you tell us why?

As you think about our business for a second, we start by paying the statutory federal tax rate and get deductions for activities like R&D tax credits and the like.

What we see is our margins are expanding, and the income is expanding faster than those deductions are at a modest rate.

And we are almost entirely in the U.S. a full federal taxpayer in this stream.

Great, thank you.

Your next question is from Gibonny Huff with CSFB.

Thank you very much.

I wanted to go into the terms of where you saw the slow economy impact your business and what you are taking into account for the guidance next year.

And specifically I know a lot of your strategy is to trade your customers up to premium product to higher ISPs.

Do you think that was hurt or tougher this year because of the economy?

And what is sort of the expectation for the economic environment in the growth rate range for next year?

Sure.

So I think the impact we saw this year from the economy and from the geopolitical events over the last few months primarily showed up as I said in products we sell through our retail channels.

Not a surprise retail as a category for all companies was down quite significantly.

Because a lot of the new higher end products are sold directly, we actually didn't see as much impact there.

All of those have done generally as we had expected.

For next year, we don't have anything particularly strong one way or the other in terms of economic assumptions.

We are presuming that the economy continues along basically where it is with sort of flat to very modest growth.

The other thing I would add is that we still get feedback from our customers especially on the QuickBooks side that the products are priced so low and they are such good value that most people don't defer their purchases.

We don't think that will have a huge impact.

I think the thing Brad talked about was people not going to retail.

I think the deferred purchases -- they didn't say I'm not going to buy, I'm not going to spend 250 bucks on something that's going to really help my business improve its productivity.

On the verticals, obviously you are adding more management, but are there other areas where those business units need to be more actively managed than your original intention and any other beyond the economy issues that you see there?

I think the big thing here is that when we buy a company that's a well-run -- because as I said earlier, we don't buy fixer uppers, we only buy leaders, but a well run 15 to $30 million company is not necessarily a well run company by Intuit's standards.

I think that what we are finding is working with the leadership teams that are there, they get better every day, but culture change and new methods and new tools and applying our methodologies take a while.

I think the creation of this new role is going to help them assimilate and adapt and apply these new methodologies quicker.

But I will tell you every one of these businesses gets better every day and we are very confident in the growth opportunities for each one of them.

This is all about helping them move faster.

And this is when we told all of the CEOs after we bought these companies that after they worked for me in an simulation period, we would hire a management layer to help them move faster.

So we are on track.

Thanks.

Your next question is from Greg Smith with Merrill Lynch.

Good afternoon.

Could you comment at all about the operating margin this year and the tax business, and the consumer tax business.

I think it was 61% last year.

What are we looking at for fiscal '03?

Hang on.

Let me get you the year to date stuff.

While they are looking for the data, I'll give you my view.

I'll bet it's higher.

I think it is too.

That's CEO level precision.

In the meanwhile, I guess my second question was going to be to hear comments about the professional tax market your experience this year.

You are going to expand your penetration into the accountant side but specifically on the professional tax anything you are looking to do differently next year?

It grew right in line with expectations.

I think it was 12%.

It is a very steady high renewal rate nicely profitable business with not huge upsides on just the pro tax part or big risks.

The thing that we've found this year, though is that some of our products played very, very well with larger companies.

So we had a large company that had, say, 16 different offices.

About half had been users and half had used a competitor.

And they decided they were going to standardize on one pro tax software, and they chose us.

And about a month ago we actually issued a press release because they said they had a very successful season with standardizing on Lacerte.

The company's name is LaMaster and Daniels.

We are seeing some ability to move up into the higher end pro tax offerings based on good work the team is doing.

The only thing I would really see that we look to kinds of move up a little bit to serve larger companies because we think we can give them a real good value off the existing product platform we have with Lacerte and a few tweaks.

Uh-huh.

Greg, it was 68%.

68, wow.

Okay.

Great.

And lastly, Blue Ocean Software, the IT tracking.

Can you give us an update on how that business is going?

Are you finding cross selling or is it more just organic customer growth at this stage?

It is a combination of a cross selling but frankly most of it is just from the brand is healthy and the team is -- they have got a great team down there and they are executing well and that business continues to perform at a high level.

The key thing for us is 90% of that market is still pencil and paper.

So that market is dramatically under penetrated.

We've got a great team down there that continues to grow organically at a very aggressive pace.

That was one of the businesses that really helped us have such great growth in our small business services during the quarter.

One last one quickly.

Just the acquisition pipeline.

I know you are looking on the vertical business management side.

Any chance you might do something outside of that over the next year, whether it's payroll or --

Yeah, I think we continue to look for acquisitions in all of the growth engines that make sense.

And we are working opportunities on multiple fronts.

And we are not just limited to looking for acquisitions on the vertical front.

And so I -- you know, hopefully we will be successful and get some more great companies that are going to help us drive faster revenue and profit growth and give us growth platforms for the future.

Great, thank you.

Thanks, Greg.

Your next question is from Craig Peckham with Jeffries and Company

Good afternoon.

Steve, one of the things about Turbo Tax that's worked so well in the past has been sort of its ability to price at a premium on the desktop and hold share firm at a very high level.

As you look at the web, do you have the view that the premium price and model may not work as well and what is your flexibility on price as you look out to next tax season?

I think, Craig, it is a real good question.

I think we are learning more and more about the web customer and that it is a little different than the desktop customer.

And so I think it's continual learning like most web companies.

I think we will continue to evolve and think about it.

Brad and I talked with Tom Allison and the team about this specifically on Monday when we were down there this week.

Our view is that we've got a lot of things that we can do better as we treat it more like a separate customer with different offering and merchandising opportunities.

And I think it's something we are going to continue to learn on.

But I wouldn't make any conclusion on pricing power at this point in the difference between the web and the desktop.

I think it all comes up to us as we have to win at the point of decision we have got to put compelling and different offerings.

I think it's different on the web from the desktop but I don't think we did enough to differentiate ourselves from the other people, for instance, on the free file alliance.

You will see us focus a lot more energy on this next season.

If I may follow on, with respect to the top line guidance in 2004.

You have been on the record in the past articulating you think this is a set of business has the can grow 15 to 20% organically.

And I think I understand the reasons why it's being nudged down a bit right now for next year.

Is that a permanent adjustment in expectations, or has the 15 to 20% story still intact?

I don't mean to nitpick about 200 basis points.

I'm actually glad you asked that question.

What I've said all along is that our internal goal is 15 to 20% organic growth every year.

That hasn't changed.

But I separate our internal goal from what is in our provided guidance which is our current view on what we we are going to deliver in the next period.

So, our internal goal hasn't changed.

My goal is still every year deliver 15 to 20% organic growth.

As we sit and look at what our portfolio businesses we believe is going to deliver next year, you see that the range is 12 to 8%.

So, I am a few basis points outside my internal goal.

That's the best view we have at this point based on where we are.

Fair enough.

Thanks.

Your next question is from Jim McDonald with First Analysis.

Can I follow up on Craig's question?

How did you do on your up market web tax units this year?

I think premium units grew on both desktop and web grew 20% year-over-year.

So, we had continued migration to more premium units.

That was a relatively new thing for the web, right?

Well, we had it last year, too.

This was the second year for premier, for instance, on the web and the desktop.

We continue to see more and more people choose the higher end solution.

And we were -- overall we are pretty satisfied with that.

Can you give us a percentage on just the web?

I don't have it in front of me.

We -- do we know?

No, don't know on the web.

The data we gave earlier is in the script talked about both desktop and web combined.

On payroll, can you talk about expanding geographically and where you are on your thoughts there?

We continue to increase the number of salespeople we have.

I think it's just a continued organic evolution.

I don't know exactly how many we have but I know we are over 100 salespeople now and we are still hiring and adding.

And we think there is a big opportunity.

One of the things we didn't want to do is add salespeople out in front of the ability to service them in our operating centers.

It is easier for us now in this market to hire salespeople than it is to train our existing CBS operation centers on QuickBooks so that when we get QuickBooks customers that want to go with the complete payroll system they know how to deal with both QuickBooks and payroll.

That's what is gating our rollout.

And we are rolling out new operations centers as we speak.

The real thing is the rollout to the operations centers we have which are in Texas, Hartford, Connecticut, San Diego, San Bernardino.

Those are our major operating centers.

I think it's safe to say that we will start by building around our existing operations centers.

Just a quick technical question, on the interest income was there some component there other than just interest this quarter?

This quarter there was some small gain on sale on some of the remainder of securities in our investment portfolio.

But that wouldn't be in pro forma, right?

Or would it?

Correct.

And will the mortgage in the fourth quarter will be included in pro forma?

Yes.

It's part of our -- it's money we are paid for use of our distribution and our marketing.

Our brand.

That's our brand.

Was there any of that in the third quarter?

Yeah.

There is a very little bit because it is a complicated arrangement that's got several fixed and variable components, but it was small in the third quarter.

Okay , thanks very much.

The biggest lump is the once a year payment for some percentage of profits.

But the other kind of brand thing is more of an ongoing basis and a lower level.

Next question is from Mike Milman with Salomon Smith Barney.

A couple of questions.

Can you break down the unit revenue for desktop and web?

And also, do you have any breakdown from where the growth may be coming?

Obviously, you've indicated that the growth is greater than the IRS growth, and certainly greater than the total, which was down.

Maybe how much is coming from DIY and how much is coming from paid professionals?

Also, if -- it sounds like you are going to start charging something for state on FFA.

Would you expect therefore to lose market share on FFA?

And then finally, Block has been saying for some time that they thought that the web would be growing faster than software.

Obviously, there is good reason for them to want that.

They have also said that they thought that the demographically, the higher income end was kind of getting saturated and they thought that future growth would be more in the middle income, low income levels, and that might not be to your advantage.

Maybe you can comment on that and the other questions.

Well, I think where we continue to see new customers is from people converting from pencil and paper or moving from a franchise or moving down from a pro to do self prep because every independent study has shown that self prep software people that use Turbo Tax get the best value.

And people are going to communicate based on how they see the world based on their own view of strengths and weaknesses.

I'd rather not get into comparing what one of the competitors says about this or that.

We communicate our message and this they communicate theirs.

You can sort through and make your calls on that but I would prefer not to comment on the "he said, she said" comments.

Could you give us the breakdown, revenue unit on desktop versus web?

I think we look at it as one market.

And our goal is to -- because I think that's what our customers think about is one market.

And we gave you the unit growth on the web and we gave you the total end growth on the desktop.

I think it is in the fact sheet.

I'd refer you to the fact sheet because the data you are looking for I think is there.

I was looking for the revenue for -- you give the unit growth.

I think you can deduct the pricing on that.

But I think that's something we are just going to deal with revenue in total and give you unit growth, and you can do the math.

And on FFA, do you expect that you will lose some absolute or relative share by going to -- charging for state and local?

I think you must have listened selectively to what I said.

What I tried to say -- either that or I didn't communicate effectively.

What I tried say is that we -- this year, we provided everything for free, whether it be federal, state, and in some cases city.

Nobody else did that.

We viewed it as a philanthropic effort, others viewed it as a marketing and distribution arrangement.

What I tried to say is that won't work next year.

And from our options are anywhere from the span of depending on where it goes, pulling out to charges for state to trying to say it ought to be philanthropic for everybody.

So it is a little early to speculate on which of those paths we go and what the impact on share would be based on which of those paths.

When we know what we are going to do, we'll tell you and we will tell you what we think the implications of that are.

Thank you.

Your next question is from Glen Greene, with Equity Partners.

One question.

On the fiscal '04 revenue guidance of 12 to 18%, I was wondering if you would give more color on that talking in segments, which segments might be sort of towards the high end or the low end of that 12-18% range?

Just a little more granularity?

Given that we are still not through this year we will look to give more granularity later on in the year.

Okay.

I'll follow up later.

Thank you.

Your next question is from Scott Kessler with Standard & Poor's Equity.

Thanks very much.

Can you provide some additional details on your vertical strategy?

I know you have talked about it a little bit, but as was acknowledged, I mean, there hasn't been a lot in terms of news over the last 7 to 8 months and the indication was because the market is tough.

But I guess my thought would be perhaps then prices would be somewhat attractive for some of these companies that you were looking at.

And if you could talk a little bit more about that and maybe how, if at all, your process for evaluating companies and your criteria have changed somewhat over the past year or so?

Thanks a lot.

I think the one thing I would say -- well, prices are you know, lower today.

I can't buy a bad company even at a low price and have it work for Intuit and I can pay too much for a good company and make it a bad deal.

So we are only buying companies that are not fixer uppers, we are only buying companies that are well run and by putting our assets together with theirs, our goal is to turbo charge growth.

We continue to look -- there is not an infinite number of these companies out there.

They are very fragmented markets.

So our criterias haven't changed.

The one thing that I have told the board it's unlikely that we would buy any companies that are below 20 or $25 million in revenue.

What we are finding is the ROI on smaller companies is not as good as those that are bigger because the growth opportunities are a little bigger.

As we make any more, it's likely to say we wouldn't buy any stand alone verticals that are less than $25 million.

I think that's the only criteria that has changed.

We had two bigger than that and two that were smaller and I think that's the only criteria that I would say that we've changed.

Thanks very much, Steve.

Your next question is from Eric Winger with Barrington Investment Management.

Hello, gentlemen.

I think you answered all my questions about acquisitions.

I think you answered all my questions about more actively managing verticals.

I guess the only remaining question I have you partially answered, but is there anything else you can or wish to say about how you intend to market out source payroll services in the future?

Well, I think no different, Eric, than what we have done in the past.

We continue to add feet on the street but we also have seen good success at telemarketing by selling out source payroll over the phone.

Part of the reason for that is that we know who the QuickBooks customers are and we have a good relationship and so it's not like a cold call like many other companies have to do.

We continue to see good success by adding feet on the street, good salespeople and telemarketing.

The sales part has not been the hard part.

It's ramping up and getting the CBS operations center to understand and be comfortable with QuickBooks so when we bring these customers up they can service them on both QuickBooks and out source payroll.

Okay, thanks.

One other question.

The impact on tech support costs of the Turbo Tax activation, is there any information you can provide?

It sounds to me like -- I mean, I applaud your decision to rethink it.

I think that's courageous.

But is there anything you can speak to with respect to the effect it had on tech support?

We had to ramp up.

We had to ramp up.

And we provided actually, I think overall pretty good levels of simple I think the numbers on what it costs are de minimus.

And as Brad said earlier, the margins in the business improved quarter over quarter by 700 basis points.

I think the real reason here is we didn't get the new customers and revenue we expected and we -- while most customers, it was a relatively painless experience, there were too many that it wasn't.

And I think that's the reason why we made the decision to discontinue it for next year.

Okay.

Thank you.

Your next question is from Sandy Braun with Gilder, Gadden and Howe.

In your script you say you are going to include end product technologies in the marketing versions of Turbo Tax, including my CD.

Could you explain what you mean a little bit?

Does that mean all the Turbo Tax version has the come direct will have some form of activation?

No.

What it means is that any customer that purchases at retail or directly from Intuit will not have any kind of product activation technology.

But when we do mail my CD, there will have to be some technology in there that unlocks the technology to make it work.

And so anybody that buys it directly will not have product activation.

But if they -- my CD is just an example of a marketing CD.

So just as an example, if I get, my CD in the mail and I give it to three of my closest friends, can they -- do they need some kind of activation or can they just use it, you know?

I think we haven't worked through all the details on that.

But my guess for next season is that once it unlocks, you will be able to pass it along.

Okay.

Thank you.

Ladies and gentlemen, that's all the time we have allotted for questions.

I'd now like to turn the call back over to management for any further comments or any closing remarks.

Thanks.

I would just like to say it was another good quarter.

Again, we are disappointed.

We take making and meeting our commitments seriously at Intuit.

We feel good about the guidance that we have provided for next year, and we feel good about our opportunity to capitalize on the opportunities and the growth engines that we talked about.

We are looking forward to talking to you in August and sharing a little more light on how we closed this year and what fiscal year 2004 looks like.

Thanks to everybody for listening.

Thank you ladies and gentlemen, for participating.

This does conclude today's conference.

You may now disconnect.