直覺電腦 (INTU) 2003 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Intuit fourth-quarter fiscal year 2003 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.

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 described in the press release issued earlier this afternoon.

At the end of the conference call script that is posted on the Investor Relations page of Intuit's website and in Intuit's most recent form 10-Q and other SEC filings.

Most of the numbers in the presentation will be presented on a non-GAAP basis, which will be referred to in the call as pro forma.

The most directly comparable GAAP financial measures and reconciliation of the pro forma financial measures to GAAP are posted on the Investor Relations page on Intuit's website at www.Intuit.com/company/investors/earnings.

Thank you.

Now I will turn the call over to Mr. Steve Bennett, Intuit's President and Chief Executive Officer.

Please go ahead, sir.

Thanks, Derek and hello, everybody.

We finally made it through the long intro.

Welcome to the Intuit conference call.

With me is Brad Henske, our CFO, and Scott Cook has joined us by phone.

Let me begin with a quick look at our fourth-quarter and then move on to fiscal 2003.

Once again, Intuit delivered a solid quarter.

Fourth-quarter revenue of $245 million was up 31 percent year-over-year with every business segment hitting its guidance range.

And pro forma EPS of a loss of 5 cents beat First Call consensus estimates by 2 cents.

As you know, Intuit typically reports a seasonal loss in our fourth-quarter when we invest across all of our businesses that have very little revenue from our tax businesses.

Turning to the year, fiscal year '03 was another great year for Intuit with revenue up 26 percent to $1.65 billion, pro forma operating income up 46 percent to 400 million, and pro forma EPS up 51 percent to $1.39.

We are pleased with these results, and as I step back and reflect on the year, I would like to share some perspective on what we said a year ago.

Last August we provided the following fiscal year '03 guidance.

Revenue between 1.7 and 1.8 billion.

Pro forma operating income between 400 and 425 million.

And pro forma EPS between $1.30 and $1.36.

We met or exceeded both profit targets and after adjusting for the sale of our Japanese business in the middle of the year, we met the low-end of our revenue target as well.

So while there were some ups and downs during the year, we still delivered on what we originally said.

Now Brad will go into more details about the quarter and year, then I will come back to talk about Intuit's recipe for driving sustained profitable growth.

Thanks, Steve.

Before providing more details about the full fiscal year, here are a few highlights for the fourth quarter.

As Steve discussed, revenue was $245 million, up 31 percent year-over-year with every business segment hitting the revenue targets we provided three months ago.

We had particularly strong performance from QuickBooks with a 48 percent increase in revenue where growth resulted both some new offerings and strong sales of traditional products.

Small-business services revenue grew 34 percent, driven by strong performance in the IT solutions and payroll businesses.

The vertical segment had $26 million in revenue and was profitable during the quarter.

Moving on to fiscal 2003, as Steve mentioned, Intuit had very strong performance for the year.

Revenue was up 26 percent over fiscal 2002, to $1.65 billion, as we continued to drive strong growth both through internal developments and acquisitions.

Pro forma operating income grew 46 percent to 400 million and pro forma EPS grew 51 percent to $1.39.

We achieved this by working to improve our performance in each of our businesses through applying a combination of the levers volume, mix, price, and cost.

For example, in QuickBooks and TurboTax, we continued to get substantial profit leverage as we drove better mix from new higher featured products with higher prices and lower incremental development costs.

In addition, a 12 percent increase in TurboTax paid federal units which was greater than category growth also contributed to profit growth.

As a result, our pro forma operating margin grew 340 basis points in fiscal year 2003 to 24.2 percent from 20.8 percent in FY 02.

In the past five years, Intuit has more than doubled its pro forma operating margin.

Turning to the results growth engines, our four largest segments, QuickBooks, Small-business Services, TurboTax, and Professional Accounting Solutions, performed well in fiscal 2003.

QuickBooks revenue of $243 million was up 24 percent year-over-year in the middle of its 20 to 30 percent growth target.

This performance resulted from executing our Right for My Business strategy as we introduced new versions of QuickBooks, all with greater functionality and value for customers and higher prices to reflect that value.

We look at QuickBooks in three groups.

Our traditional products, basic and pro, which are our core of offerings, flavors designed to meet specific needs of different industries, and up market Premier and enterprise offerings for larger and more complex businesses.

Intuit offered five QuickBooks flavors in FY '03, accountants, contractors, health care, nonprofit, and point-of-sale.

And sold 71,000 units combined.

This represented 13 percent QuickBooks revenue, up from 3 percent in FY 02.

Our QuickBooks contractor addition did particularly well, selling approximately 35,000 units during the year.

We sold 54,000 units of our up market QuickBooks enterprise and Premier products in FY '03.

This represented 11 percent of revenue in FY '03, compared to 10 percent in fiscal year 2002.

And we sold approximately one million units of our traditional products, flat versus FY 02.

For fiscal 2004, we expect QuickBooks revenue to grow 15 to 25 percent as we move into the third year of executing strategy.

Our next growth engine, small-business services, include our payroll, supplies, QuickBooks technical support, and information technology solutions.

Fiscal 2003 revenue of $455 million was up 35 percent year-over-year as we saw the benefit of unit growth, mixed shift and price increases in these businesses, as well as our acquisitions of Blue Ocean and CBS payroll.

As you recall a year ago, we set a target of 30 to 40 percent growth and we met that target.

Within small-business services, our total payroll business, which includes do-it-yourself and outsource payroll, continued to perform well, with revenues up 35 percent over FY 02.

We are seeing very strong growth in our outsource payroll service.

We added 7000 new customers organically to the 48,000 we had a year ago.

We also added 12,000 new customers when we acquired CBS payroll, for a total of 67,000.

This strong and growing customer base drove a 43 percent increase in revenue year-over-year.

We expect to continue to grow faster organically than our competitors in FY 04.

Our IT solutions group, which we created with the acquisition of Blue Ocean software last September, had organic revenue growth of 27 percent in fiscal 2003 versus the revenue they had in the comparable year earlier period.

Looking ahead, we expect revenue from small-business services to grow in the 15 to 25 percent range in fiscal 2004.

Now let's talk about our TurboTax growth engines.

TurboTax revenue of $423 million was up 20 percent over fiscal 2002, at the low-end of our 20 to 30 percent growth target.

TurboTax federal paid desktop units grew 12 percent for the year, faster than the 10.8 percent category growth now reported by the IRS @IRS.gov.

We tried a lot of new things in TurboTax last season.

Some worked better than others, and we learned a lot and incorporated our learnings into our plans for next season.

We are targeting 10 to 20 percent revenue growth in TurboTax in FY 04.

Next, Professional Accounting Solutions had revenue of 243 million, up 8 percent over fiscal 2002, right about where we expect it.

Growth was driven by stronger add-on module purchases as accountants bought software for the new season, as well as by price.

As we discussed last quarter, accountants play a key role and are very strategic to our future.

We have begun executing against a new right for my firm, right for my client's strategy.

This multi-year strategy is targeted to help accountants better manage and serve their clients by addressing multiple payment points.

We expect this will result in selling additional products and services directly to accountants, as well as driving stronger growth in our QuickBooks and small-business services businesses because of the power of account referrals.

We will talk more about this strategy at Investor Day.

Going forward, our Professional Accounting Solutions growth engine will continue to primarily reflect pro tax software sales.

We are expecting FY 04 revenue growth in the 7 to 12 percent range.

Finally, Intuit's verticals had revenue of $95 million in FY 2003, up 5 percent from the revenue those businesses had in the year ago period.

While this growth is slower than we'd like or expected, our vertical businesses continued to grow faster than their competition.

And as we enter FY 04, we're seeing some positive indicators in verticals with backlog orders up 40 percent versus this time last year.

We are looking for revenue growth in the 15 to 25 percent range for fiscal 2004.

Turning to cash, in fiscal 2003 Intuit generated significant cash as we continue to drive profitable growth.

At the end of the fiscal year, Intuit had $1.2 billion in cash and short-term investments, essentially flat with last year.

During the year, we generated significant cash, including $569 million from operating cash, $79 million from the sale of our Japanese subsidiary, $246 million from the final repayment of the bridge loan to Quicken loans, and $156 million in proceeds in the exercise of employee stock options.

We also spend cash during the year, including 814 million in our stock repurchase program, 214 million in acquisitions, and about $85 million in capital expenditures.

The key takeaway, we self-funded 26 percent business growth, multiple acquisitions, and our stock buyback program, all from cash we generated in FY '03.

On the equity front, we are serious about minimizing dilution from our employee stock option program at Intuit.

In FY 02, we reduced our annual net grant from 4.7 percent to 3.2 percent of shares outstanding.

In this past year in fiscal 2003, we reduced it again to 2.9 percent and we are targeting approximately 3 percent or less in FY 2004.

And into our stock repurchase program Intuit repurchased approximately 7 million shares for $316 million in Q4 at an average price of $44.90.

For the full fiscal year, we repurchased nearly 18 million shares, for more than $800 million.

Since we instituted our first repurchase program in May of 2001, Intuit has repurchased more than 25.5 million shares for total of $1.1 billion.

With approximately $110 million left in our existing program at the end of the year, our Board has authorized a third program, another $500 million repurchase program effective immediately.

Now let's turn to guidance.

Today we are reaffirming the fiscal 2004 guidance that we provided three months ago.

We expect revenue of $1.85 to $1.95 billion for organic growth of 12 to 18 percent.

Our pro forma operating income of 480 to $510 million for year-over-year growth of 20 to 28 percent.

And pro forma EPS of $1.57 to $1.67, our growth of 13 to 20 percent over FY '03.

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

In FY '03, interest and other income included a 10 million in payments related to our ongoing business relationship with Quicken loans.

Because of the current interest rate trends, we expect those payments to be significantly lower in FY 04.

A final thought on next year's fiscal guidance.

Intuit has committed to meeting our annual growth targets.

We will stay focused on delivering the year regardless of quarter to quarter fluctuations.

Therefore, even if we experienced upsides in the early part of year, we may decide to maintain the total year guidance we are reaffirming today.

This is because of the disproportionate amount of revenue and profits in our third quarter, which can magnify the impact of variations within that quarter.

Moving to the first quarter of FY 04, we expect revenue of 225 to 235 million, a growth of 6 to 10 percent over Q1, 2003.

And we expect the following revenue ranges for our businesses.

QuickBooks, 42 to 47 million;

Small-business Services, 110 to 125 million;

TurboTax, 3 to 5 million;

Professional Accounting Solutions, 6 to 8 million; recall that Q1 is also a low quarter for our tax businesses; and verticals of 20 to 25 million.

We expect the Q1 04 pro forma operating loss of 85 to $90 million versus a loss of $75 million in Q1 '03, and we expect a Q1 04 pro forma loss per share of 26 to 30 cents, versus the loss of 21 cents in Q1 '03.

Thanks for your attention.

Let me turn it back to Steve.

Thanks, Brad.

Now I would like to share my perspective on the results we have discussed.

Intuit has accomplished a lot in the past several years.

We have proven that you can take a great company and make it even better by consistently executing a proven recipe.

Let's spend some time talking about that recipe, its results, and why we believe the recipe and results are durable.

The recipe starts with applying strategic rigor to the portfolio businesses we choose to be in, businesses were we have a durable competitive advantage that are underpenetrated and have large, underserved opportunities so we can drive profitable growth.

You have seen Intuit make significant progress in reshaping our business portfolio over the last few years.

We made decisions to exit some businesses that did not fit our screen, like Japan and Quicken Loans, and acquired others that did to create new growth platforms, like Blue Ocean and CBS Payroll.

We like the business and don't expect to make any major dispositions in the next several years.

Our focus is on driving organic growth, selectively making add-on acquisitions to existing businesses, and acquiring new growth platforms.

The second ingredient of the recipe is getting the basics right.

Utilizing process, excellence, methodology, tools and resources to execute more effectively on a day-to-day basis.

Our focus is higher service levels at lower costs, and we're delivering.

Let me give you a couple of quick examples.

In QuickBooks technical support, we launched an initiative to see how we could handle customer calls better and faster.

We found it was taking too much time to diagnose the customer's problem.

Frustrating for customers and expensive for Intuit.

By applying process excellence and dig into the data, we identified the root cause and developed a step-by-step process to correct it.

In doing so, we have improved overall handle times by one minute per rep and improved the customer satisfaction level, with annual savings of over $1 million.

We redesigned our supply chain to deliver better service at lower cost by locating manufacturing, warehousing and shipping ops single physical locations, we reduced transit times and trade expenses.

By doing so, we achieved a 99 percent on-time retail delivery for QuickBooks, TurboTax, and Quicken products at launch up significantly from previous years.

We also shortened the replenishment cycle by as much as five days and reduced our cost of goods sold by 5 percent for these products.

The third ingredient of our recipe is rigorously expanding our core competence, customer-driven innovation.

We look for big new customer problems and innovate by challenging the conventional wisdom to create solutions that drive profitable growth.

Our Right for My Business QuickBooks strategy is a great example of this.

We have accomplished a lot since we launched the first wave of our new offerings in December, 2001.

We launched two upmarket QuickBooks products, Premier and Enterprise.

We have launched five QuickBooks flavors, with more to come.

We have introduced new horizontal add-on services like our QuickBooks Merchant Account Service with a limited offering, this business grew from zero a few years ago to 9 million in annual revenue.

And we see many ways to drive new growth by adding additional horizontal offerings.

We went from a one size fits all technical support offering to multiple offerings at different price points, and have grown the business nicely.

And we opened our APRs to third party developers and today there are nearly 300 applications adding value to customers and helping developers through the integration with QuickBooks.

So in fiscal year 01, before we began executing our Right for My Business strategy, we had QuickBooks revenue of $164 million.

By executing our growth recipe, we have grown 48 percent to $243 million in just two years, and there is more we will do.

Equally important, this Right for My Business strategy has also driven tremendous growth in small-business services.

In fiscal year '01, Small-business Services had revenue of $290 million.

We have grown 57 percent since then to $455 million, and again there is more we will do.

Now the fourth and final ingredient of our recipe is to identify new, adjacent markets and acquire companies that have synergy with our small-business and tax businesses.

Our goal is to create new growth platforms.

We saw an attractive market opportunity for end to end business management solutions designed for specific industries, and we made four acquisitions to build our verticals growth engine.

We also expanded our new small-business services offering to a couple of horizontal acquisitions, Blue Ocean and CBS Payroll.

We are pleased with the progress we have made with our acquisition despite slower than expected growth from verticals.

We are executing better, driving solid growth, and continue to look for additional new growth platforms.

So now let me recap.

Intuit is executing a powerful recipe to drive sustained, profitable growth.

It involves being in the right businesses, executing effectively, expanding customer-driven innovation and platforms.

Let's wrap up by looking at what this recipe has delivered in the past three years.

Intuit's revenue has grown 68 percent to 1.65 billion.

Pro forma operating income has more than doubled to $400 million.

Pro forma operating margin increased from 17.4 percent to 24.2 percent up nearly 7 points.

And pro forma EPS has doubled from 69 cents to a $1.39.

But we are not resting on our laurels.

We continue to work hard to get better and better every day.

The durable power of this recipe is that if you get great assets and consistently execute on its ingredients you continue to get better and generate improved results.

Thanks to all the Intuit employees that work so hard to deliver these great results.

Now let's open it up to your questions.

(OPERATOR INSTRUCTIONS) Adam Holt with J.P. Morgan.

My first question is about QuickBooks.

The guidance for the year represents slightly faster revenue growth than the guidance for the first quarter.

Could you give us a little bit of a preview for the product roadmap for next year that is going to drive accelerated growth throughout the year in QuickBooks?

I think there's a couple things, Adam.

First, we've got more new products coming.

Second, we have full year of some of the products that we've already recently announced that have -- we just announced a couple new flavors in July where we only had partial-year revenue.

And I think it is continuous improvement in the core offerings across the board, so it is ramp-up and new product launches.

A couple questions on the verticals.

Could you explain how something gets into backlog in the verticals and also what your underlying assumptions are for the out-year growth expectations there?

Thanks.

In verticals, things get into backlog a couple of ways.

Some of those products from the time that they are assigned and the customer commits have got multi-week or multi-month installation cycles.

In other cases, the customer is committed and we haven't delivered the product as of yet because some of the products are sold actually with the hardware that we order on an as-demanded basis, so that generates backlog.

In addition, we carry deferred revenue there for the maintenance streams on all of the businesses actually.

Okay, just for the guidance for the year, is your expectation that the demand environment will remain relatively flat, improve, or what is underlying that yearly guidance?

I think we expect it will stay pretty much where it is today.

David Farina with William Blair.

Good afternoon.

Steve, when we look at the flavors, the 71,000 units sounds like a great number, but 35,000 of them are from the construction.

That would imply 10,000 for each of the other four verticals.

Is that a number you're happy with, or I don't know what to expect there.

It doesn't sound like a huge number in terms of units sold, or is there more room for improvement there?

David, I think it is a good question, but remember two of them just launched in July.

So you've got 71,000 units really with 3,000, because the numbers we gave you are sell through and not sell to the channel.

So you really have three units -- or three SKUs for the year.

I think the answer is we like the results.

Construction was particularly positive.

I think we have more coming, and the answer is we continue to get great feedback.

There is a lot of people that aren't aware of these new skis, so I think as we continue to work with accountants, as we continue to improve our direct marketing and continue to do a better job in getting our message out to the trade press and through advertising, I think we will get more and more full.

Feedback we've gotten from the people that are buying these products have been very, very positive, and I think a lot of case now we have to switch our energy away from just building great new products and having them sell themselves, to continuing to improve our telesales capability, our direct marketing capability, which we have been working on in the last couple of years.

So I think you'll see us focus much more on customer acquisition as we move into next year.

So we're pulling the levers on customer acquisition even harder next year than we maybe did in the past.

Okay, Steve, thank you very much.

Gibboney Huske with Credit Suisse First Boston.

Just looking at sort of the guidance for the tax business you give a pretty wide range, 10 to 20 percent, which given the strange tax season we had last year it makes sense.

Could you just talk about some of the drivers that would get you from the low-end of the range to the high-end of the range?

In addition to that, maybe some of your discussions in terms of the free file alliance and what your assumptions are there in terms of how that alliance plays out over the next few years?

I think the biggest fluctuation will generally tend to be category growth, of which we will participate in creating some of the category growth, so I think unit volume will be the biggest lever in the 10 to 20 percent range.

I would argue that is the majority of it.

There is probably not that much going on in our assumptions in price.

There is probably a little bit in mix, but it is mostly unit growth that is going to drive the wide variation.

We don't have anything new to announce in the free file alliance.

Last quarter I said that the free file alliance and the way we played last year where everything was free, everybody and other people used it as a marketing opportunity.

Our strategy for that has not changed, but the government, the free file consortium is still in negotiations with the IRS and as soon as we know something we will let you know.

But what we did last year, which we think disadvantaged us, we will not go into next tax season with the the same disadvantage that we did last year.

So on a relative basis I would expect our position to improve.

And just one follow up question on the verticals.

Could you give a little bit more color in terms of the variance of performance?

Obviously you got multiple businesses with multiple end markets in that group.

Is the performance trends meaningfully different or is there some major laggards and some leaders?

Just trying to get a sense of -- its a portfolio what are the variances in terms of performance?

I think on four or five percent of our total revenue it doesn't isn't a good use of everybody's time to go into great details on that, but I think the bottom line is that all of them had relatively the same performance we had -- we didn't have any big disasters in terms of growth, and we didn't have any big homeruns, so I think as we go into this year we're expecting to have better results based on a year of working to make everyone of these businesses better, and as we said earlier an assumption of market conditions doesn't change much.

Right.

Thank you very much.

Your next question comes from Heather Bellini with UBS.

Hi, this is actually Dino for Heather.

With regards to payroll, are there any metrics you can give in terms of cross balancing QuickBooks and your successes or in that area?

Dino, obviously the DIY data that we provide our customer base, I think it went up some 670 to 738,000 is all a cross sell from QuickBooks.

People don't buy that unless they are a QuickBooks user.

In terms of outsourced payroll, of those 67,000 customers, I don't know exactly what -- a lot of that includes the Premier customers that may or may not have been QuickBooks customers, so we don't have any specific data on that.

The bottom line is we're growing that organically and its a big focus of ours.

We think it's a big opportunity, so that is something we will look at to see if there is something we should be sharing there, but I think we have given you a lot more data that we didn't have in the past on payroll to help you evaluate how we're doing.

Okay.

Let me just add that the penetration of outsourced payroll offerings the onces we offer into the QuickBooks space remains very small, around 4 percent.

Okay.

And with regard to the verticals, I know that it such a small part now.

Are you basically maintaining that you remain cautiously optimistic in terms of acquisitions?

Are you going to wait until what you have now starts performing up to par before you move ahead, or how is that looking?

I think we have been continuing to look for more great growth platforms over the last year, we just haven't found any, we walked away from a couple on price.

Companies, we walked away from one because we didn't think it had strong enough management experience, so we continue to look for great companies, but I think our current view is we said originally five to ten.

I would say that it is most likely now that the range is five to six or seven.

I don't think we will buy -- I don't think there's 10 verticals that we would enter either because of the size or the companies that are available, so I think we would probably be at the low-end of the range.

But I still think there is one or two or maybe even three more that we could enter over the next couple years.

Last question on tax.

With regards to free file lines, it seems there are three scenarios.

One, you charge and make other people don't charge, other companies don't charge, and the third one is then you pull out of the alliance.

That one seems to be -- I'm not fully understanding what the impact to you would be.

How would you view that?

In that scenario, how would that play out?

I think it wouldn't be played on three different options at this point in the year.

I think it is unlikely that we would pullout for the upcoming season.

We will see what happens as we continue.

The big part of what we do is going to be based on what the consortium and the IRS decide to do.

The only thing I would say is it is unlikely that we would pull out for the next tax season.

And the best way for us to monitor that would be, the (inaudible)?

As soon as the IRS announces the IRS and the free file alliance announces they have reached some agreement, we will issue a press release.

Okay, thank you.

Cameron Steele with RBC Capital Markets.

Thanks, just a couple of questions.

Steve, with just some time to reflect on the tax season, do you have any comment on the online business?

What did you learn I think since you last spoke to us on this topic?

Was free file really an impact?

Was there something else that maybe impacted the result there?

I think that is a great question.

Free file had some impact and I think what we have learned is that we have less retention on the web than we do on the desktop, and that is something that we are trying, the team is working hard on to try and figure out why.

And we think free file is probably part of that and part of it was that we had the work to deliver better web experience for customers, so I think we still had nice retention, but it wasn't as high as the desktop.

So I would say that is the big learning on the web and why it didn't grow as much as we thought.

We also think that my CD, which was a -- worked very well for us, could have had some impact on the web filing, but those are the insights from the last time we talked.

Okay and you've assumed the guidance for growth for small-business services about 15 to 25 percent.

Can you give us a sense of what contribution is coming from do-it-yourself versus complete and is there going to be a leader as part of that growth and how do you think about that going forward?

Remember that is a 500 plus million dollar growth engine and do-it-yourself payroll is probably a little more than 20 percent, so there is a lot of other stuff in there too.

So rather than speculating on the growth rates for all the elements, I think we view them as small-business horizontals and we think 15 to 25 percent growth is another year of very, very healthy growth consistent with what we've done the last couple years.

It will be a combination of outsourced payroll, DIY, technical support, Blue Ocean, which you see had great growth.

About the only part of that portfolio that is not growing very fast, and actually significantly depressing the growth rate, is our supplies business, which is a nice, big, healthy business, but it's growing in single digits and so that actually hurts us on the growth rate (technical difficulty) if you get a sense for how much the other parts of that are really growing.

And final question, is the do-it-yourself payroll business part of the Quicken division and if so, is that going to be -- are you going to report results there differently or are you going to continue to report them as they have been?

No, Do-it-yourself (technical difficulty) that's much more related to QuickBooks than Quicken -- excuse me, I meant QuickBooks.

It will stay in small-business services.

The QuickBooks segment is just QuickBooks software.

All the add-on QuickBooks services are in small-business services.

Glen Greene of ThinkEquity Partners.

A couple questions, first one for Steve.

Just your two to three years operating margin goals, what you are thinking at this point.

I know previously you talked about 30 percent and it will probably be 26, 27 looks like this year.

I want to give you an opportunity to update that thinking on the 30 percent?

I think it has not changed, Glenn.

I would start again with what I'm solving for, what Brad and I are solving for, which is revenue and EPS growth.

I think based on the profit leverage in our businesses, we would expect to see continuous profit leverage, although I don't expect 340 basis points a year like we have seen in the last couple years.

I think at some point here we're going to start reinvesting more and more of our profits in organic growth and so I think a target of 30 is over the next couple years, the next three years, is probably reasonable, but I would tell you if I could invest that extra one percent of operating profit to drive faster organic revenue growth, I would do that.

So I'm not solving for operating margins if that makes sense.

I'm solving for revenue and EPS growth, but I think even with that investment I think over the next three years its reasonable to expect us to be in the 30 percent range.

And just on your guidance for this upcoming year, it looks like the skew is even further for to the 3rd and 4th quarter.

Maybe that's just a function of your further upfront investment in the first quarter.

Just some commentary around or anything we should read into it?

I think the revenue skew, that is when we launch a lot of the products and that is when tax season happens, so those businesses grow by definition if they only grow in Q2 and Q3, it is going to skew it.

So I think it is just math.

There's nothing going on now in terms of business mix shifts other than the biggest businesses are growing and they tend to grow the most in Q3.

Okay and one final question on the outsourced payroll.

Correct if I'm wrong, but it looked like you added about 1000 customers on the outsourced payroll this quarter and I was wondering if that was sort of a realistic expectation quarterly going forward?

I think the answer is it would be dangerous to conclude that.

A lot of people change their payroll service at the beginning of the year when they go into a new year, so I think this is again a seasonal program, just like a lot of people if they're going to change their other products change at year-end.

So I think it would be an error to conclude that our organic growth rate is 1000 new outsourced payroll customers a quarter.

Okay, thanks.

Brian Keane of Prudential.

Hi, nice quarter.

First question on TurboTax, do we have or some color for the unit breakout of what to expect for paid web and just TurboTax desktop?

No, not really at this point, Brian.

But I guess the mix just depends on the channel mix and that is going to be determined by the consumer?

I think our strategy on this is we have said all along is we offer two products, desktop and web.

We are indifferent.

We want to offer customers choice and let them pick what is right for them, and we continue to work to make both products better every year.

And every year, customers vote with how they spend their money and so it's easier for us to predict what we think the category is going to grow, based on tax law changes and everything than it is to try to predict mix from channels or web versus direct.

We have a lot of analytics around that, but if we answered, then you would ask us -- give us the data that supports that, and we wouldn't be able to share logic that would hold up.

So I think we will just stick with total guidance and keep it at that.

On QuickBooks, the growth of 15 to 25 percent, this year it grew 24 percent.

A lot of that came from the non-traditional flavors, hence traditional product units were flat.

Is that the kind of same expectations we should have to look at the flavors contributing to most of the growth?

No, I think that would be a mistake too.

We have a new version of Enterprise coming that we are excited about.

We have some new products that we haven't announced yet that are coming.

We have more flavors coming and we have an additional year of penetration of Premier in the existing flavors.

We have a full year of health-care and not-for-profit.

So I think we continue to execute better and get more penetration into the base and have some new products coming, so I think it would be a mistake to conclude QuickBooks growth is going to come mostly from flavors.

I guess I was also thinking of Enterprise and Premier that looks like an added attraction this year.

(technical difficulty) got a product coming, our new rev, our new version which we think would be a nice step up from the existing one and we have some new products that we haven't talked about yet that you should hear about probably around Investor Day, I would guess.

So we have some new things coming too that are even different than our traditional QuickBooks software.

Okay, great.

Finally, just any update on if you are hearing anything on Microsoft's strategy to be aggressive in Small Business, anything they're doing that is putting competitive pressures on you or nothing abnormal?

The only thing we hear is we expect some kind of announcement in the fall and we are not sure, but -- and launch may be next summer is the only thing that we hear.

But we don't hear too much.

We just hear secondhand information, obviously.

A launch inside of Small Business?

We are continuing to work on what we would do to respond to any launch for anybody, Microsoft or other people, but nothing specific other then some rumors about Small Business Manager.

Okay, great.

Thank you.

Greg Smith (ph) of Merrill Lynch.

Hi, good afternoon.

Could you give us update on the integration of the Complete Payroll offerings with QuickBooks and where you are at as far as training the former CBS salesmen on that product?

Actually, I think it is a good question and it has gone a little bit slower than we thought.

The bigger challenge is not training the salespeople.

It's actually training all the operations people in the CBS operations centers because they have to support Complete Payroll, they've got to be able to understand QuickBooks, so we (technical difficulty) in the process I think we've rolled it out in San Diego and maybe San Bernardino at this point, so we have got Hartford to come and Fort Worth, so we continue to ramp up the operational capability and the rollout, but the gaining (ph) factor has been training the operational people more than the salespeople.

So we'll have more details for that in October at Investor Day and where we are on our our full rollout of Complete Payroll across all of the former CBS geographies.

Okay, and then a high-level question, you mentioned in your guidance you are assuming the status quo of the economic environment.

I am just wondering if you can point to specific areas that you feel like the economy is still weighing on your business and you'd see some upside if we do see a real nice sustainable uptick in the economy?

For the last three or four years we basically said one of the strengths of our portfolio of businesses is that we don't see a huge economic swing one way or the other.

We don't think there is a big, how many TurboTax units are sold is directly correlated to GDP growth or employment.

So in a big way.

I think the only part of our company where we think there has been some significant effect is with the verticals, and so we think that the 15 to 25 percent growth we gave this year is based on some of the things Brad talked about in the progress we've made in the businesses, not any turnaround in demand for those kind of solutions.

And then just the last question, can you comment on the formation of the office, the CEO and kind of the thinking behind that was?

I think the biggest thought here was so that we could put all of the pieces of our QuickBooks group under one leader that owned all their core processes and the organizational layer that QuickBooks and Quicken used to report into was a transition layer that Lorrie Norrington ran for a couple years and to simplify, and she did that for a lot of good reasons, simplify the business unit ownership for their own customer experience, we transitioned to have Dan Leven (ph) who now runs the QuickBooks group, has responsibility for all of the core processes related to running QuickBooks.

At the same time, as we have become bigger and more complicated as a company, we needed more bandwidth and capacity in the office of the CEO, because I have got 22 direct reports.

And they are all terrific, but I need Lorrie's help and Scott Cook's help, who is also in the office of the CEO.

We all focus on integrating strategy and operations across the company, and so we needed more bandwidth at the top, and that is why we created the office of the CEO.

All right, thanks a lot.

Craig Peckham with Jefferies & Company.

Most questions answered, but Steve and Brad, Brad gave a bit of a teaser about some strategies on professional accountant side.

Can you maybe give us a little bit more color as it were with respect to sales strategies there, ASP implications and maybe as an extension growth market implications?

I think the strategy there is really -- if you go talk to accountants, it is a perfect example of our third element of our four ingredient recipe, the third element which is expanding customer driven innovation.

If you go out and talk to accountants today, what you find is they have a bunch of disparate point solutions that don't work very well to help them run their practice or serve their clients, and so what we have done is stepped back, had teams go out and observe accountants, and identify the pain points they have in running their practices and serving their clients.

By looking at it more on a holistic end-to-end basis, and so you are going to see a bunch of new things that we are doing and new solutions that are helping accountants (technical difficulty) serve their clients.

Now some of those things will show up in products and services we sell directly to accountants, but a lot of them will show up in QuickBooks or Small-business Services because accountants will be more prone to recommend into a products and services.

So it is hard to break it down to answer your questions specifically, on ASP impact, because I think we will have some new products and we will sell more of existing ones faster.

That is kind of my -- Brad, do you have anything you want to add to that?

No, I think that absolutely says it well.

Craig Peckham And just one more question.

Can you give us a sense for what the management retention has been on some of the vertical acquisitions here?

Some of them are at least a year now under your belt.

We've had one person, one of the four that was running the company had left, and the other three are still on the payroll and a key part of the Intuit team.

Okay, thanks.

Michael Hodes with Goldman Sachs.

Most of my questions have been addressed already, but I do have a couple for you.

First, just on tax, it seems like if we look at last year, that unit growth was slightly ahead of the category.

I am curious as you think about this coming tax season, is your forecast kind of predicated on roughly category growth for Intuit?

I would say that is a safe assumption.

Secondly I notice on the fact sheet there is a line item here organic revenue growth and it is 15 percent for fiscal '03.

I just want to make sure that that is calculated by taking out any of the revenues from the businesses acquired either late last year or early this year.

Yes.

And then just a numbers question for Brad.

I noticed that there was a gain on the vacant facilities.

I assume you are able to lease some of that space?

No, actually we have just concluded negotiations to sign new leases for our facilities in Mountain View.

We had been of the view last year that we were likely going to have to move from the facilities we are in today kind of (indiscernible).

We are actually staying here for the next at least for the foreseeable future, and as a result of that, one of the buildings that we had up for sublease, we're not planning on occupying.

We will actually occupy over the next year or two.

Gotcha and just another numbers question.

In the interest income line, is the pickup in the quarter, is that just we showed more cash at the beginning of the quarter or did I hear you say that there were some kind of contingent performance payments on Quicken loans that flowed through there?

There was a performance payment from Quicken loans as a result of using our brand and distribution, they paid us both a fixed fee and essentially a percentage of their revenues and profits.

As you know, this year the mortgage business, the mortgage industry has done very well, so we had quite good performance out of that.

Thanks a lot.

Jim McDonald of First Analysis.

Most of my questions are also answered, but on Payroll could you talk a little more about where you are on expansion and there were several acquisitions recently and what your thoughts are on acquisitions on the Payroll side?

There is not a lot of acquisitions left and as we looked at all of the companies that were purchased by some of our competitors, we (technical difficulty) were too steep for us and we bowed out of prices that were well below the prices other people paid for those.

But I do not see a huge amount of additional acquisitions.

I think now we've got to earn it the old-fashioned way with an organic growth thrust and we're investing in that business heavily, new sales force.

We are ramping up our sales force.

I'm not going to give you the specific numbers, but it's a significant investment in additional sales force and upgrading leadership team.

So we just think this is a great long-term business and -- but the nature of revenue growth and payroll, as you know as you acquire new customers and then you get revenue a month at a time, so you build a big recurring revenue stream.

So we like our position with the complete product integrating with Payroll and we are investing in that business.

We think it is a long-term big growth opportunity for Intuit.

Speaking of management, can you talk about how it will report in and where we are on that?

It will report -- leader of our outsource payroll business will report directly to me.

Thanks very much.

Eric Wagner of Barrington Research Association.

Eric Wagner with Barrington Research in Chicago.

Great quarter.

As well, most of my questions have been answered, however, there is one strategy question that I would still love to hear some discussion on, which is the decision to use a direct sales force model.

I think the number I heard at one point was 100 direct reps for selling small-business outsourced payroll.

What is the philosophy behind using a direct sales model on that?

Paychecks has 1300 salespeople, so the philosophy is that you need a direct sales force to close some of the larger customers with 25, 30, 50 employees, and that is part of our mix.

Now we think our sales force is going to be much more efficient and effective because we have 300,000 QuickBooks customers that we think have already chosen to outsource their payroll to a third party, so we think we can focus our sales people both on the phone and on the street much more rigorously to get better productivity than the other folks do that can make a lot of cold calls.

So we just think that is a part of the customer acquisition model.

We use direct marketing.

We use telesales and we use feet on the street.

Okay, that's all my questions, thanks.

Michael Newman with Newman Research.

Two questions.

Could you give us some idea of how you see tax law changes as a range of the effect of tax law changes this year on the business?

Secondly, could you talk about the demographics, the changes in demographics you are seeing in your desktop business?

We find it hard to speculate on how changes the tax code will affect category growth for our business.

It used to be truer in the past.

It's harder to predict now and with respect to demographic changes I don't know exactly what you mean, but if I interpret, I would say that we come out with more higher end QuickBooks units that are tailored more to larger companies, it improves our position with companies that have twenty-five or more employees.

I was thinking specifically on TurboTax.

The TurboTax, we don't look at our customer demographics because we are not allowed to.

In terms of privacy and security rules for TurboTax, we don't analyze, we don't (technical difficulty) data mine the information.

Michael Newman.

Okay, thank you.

Heather Bellini with UBS.

Hi, Dino again on a follow-up.

With QuickBooks Enterprise I think this is the first year you have had it out, in terms of contracts, which I guess is a service regular maintenance renewal, how is that been going and is that a pretty good -- should that be a pretty good indicator of customer satisfaction?

Dino, I haven't seen data on that recently but the last time I looked the attach rate for that was north of 75 percent, so it's a very high attach rate for the annual service plan.

And so it's a whole different business model than what we had with a much higher attach which I think is a pretty good surrogate for satisfaction in terms of people that are using that product.

And so is it kind of lie, it works when you upgrade the next version of QuickBooks Enterprise, these customers now become entitled to the free upgrade?

Is that how it works?

Are there additional modules to cross sell as well?

If you are on the service plan you get the upgrade protection as part of the program.

At this time, there are no further questions.

Thanks, everybody.

Thanks for listening.

I think we shared for the first time I think this four ingredient recipe for driving sustained growth at Intuit and profitability.

We have been executing it for the last three years.

You've been able to judge the output for that.

As we sit here today and look forward, just think about all the new things that we are doing today at Intuit that we were not doing three years ago and what the resulting performance has been.

I would venture to say that as we step back and look at where we will be three years from now, you'll see an awful lot of new stuff too as we continue to execute this recipe to deliver profitable growth for our investors.

So thanks for listening and we will see many of you at Investor Day in October.

Goodbye.

This concludes today's Intuit fourth quarter and fiscal year 2003 conference call.

You may now disconnect.