直覺電腦 (INTU) 2004 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Intuit first quarter 2004 conference call.

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

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

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

If would you like to withdraw your question, press the pound key.

The presentation you will hear on this call includes forward-looking statements and actual results my 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's posted on the investor relations page and into the 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 the reconciliation of the pro forma financial measures to GAAP are provided in the earnings release which is posted on the investor relations page and Intuit's web site at Intuit.com.

Thank you.

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

Sir, please begin.

Thank you.

Hello, everybody.

Good afternoon and welcome to the Intuit conference call.

With me is Brad Henske, our CFO.

Intuit delivered a solid first quarter and we're off to a good start for fiscal 2004.

First quarter revenue of $243 million was up 14% year-over-year; and we had a pro forma loss of 24 cents per share, two cents better than our guidance.

We launched two new products for accountants QuickBooks Client Manager, and QuickBooks Financial Statement Reporter.

We launched QuickBooks Customer Manager for small businesses.

Our verticals are starting to get traction.

We launched Quicken 2004 and we finalized our products and game plan for the busy tax QuickBooks and payroll season that's just getting underway.

As you all know, Intuit typically reports a seasonal loss in our first quarter as we gear up for our peak season in Q2 and Q3.

We executed well in the quarter, and are on track for the busy months ahead.

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

Thanks, Steve.

Here are the highlights for the first quarter.

As Steve mentioned revenue was up 14% year-over-year to $243 million.

And as expected, we had a pro forma operating loss of $80 million, versus a loss of $75 million Q1 of fiscal 2003.

Intuit typically reports a loss in the first quarter when the revenue from our tax businesses is minimal, but expenses remain constant.

Revenue from Intuit's large TurboTax and ProTax businesses is highly seasonal and occurs in the company's second and third quarters.

Turning to the first quarter results for our five growth engines, first, our QuickBooks strategy is working.

QuickBooks revenue of $43 million was up 11% over the year ago quarter.

We had a 73% year-over-year increase in QuickBooks Premier units sold to end users from 15,000 to 26,000.

This more than offset the impact of lower sales of QuickBooks Basic and Pro.

The average sales price for QuickBooks in Q1 fiscal 2004, was $253, up 17% from the $217 in the year earlier quarter, driven by the mix change to higher value offerings.

Most of our QuickBooks revenue occurs in the second quarter, following the year-end launch of our core products.

And our 2004 offerings will be on the shelves next week.

In addition to the Basic and Pro edition, the 2004 lineup includes several new Right For My Business offerings.

We've expanded our QuickBooks flavors from 5 to 8, with the introduction of new flavors targeting manufacturers, professional service firms, and retailers.

We now have flavors available to meet the industry-specific requirements of nearly 70% of the QuickBooks base.

We remain positive about this business and continue to expect QuickBooks revenue to grow 15 to 25% in fiscal 2004.

Our next growth engine, Small Business Products and Services includes our payroll businesses, as well as other horizontal solutions.

First quarter revenue of $123 million was up 22% over Q1 of fiscal 2003.

We continued to see solid growth in our payroll customer base.

Our outsourced payroll customer base grew by 6,000 year-over-year, and 2,000 from the end of Q4 for a total of 69,000.

Our do-it-yourself payroll customer base grew by 88,000 year-over-year for a total of 753,000.

Our payroll businesses are ready for the calendar year-end selling season.

As we discussed in investor day last month, this season we'll be stress testing our outsourcing payroll operations, determine our ability to perform at a significantly higher scale.

Once we see how we perform, we'll be able to talk about our plans and timetable for accelerating growth in the future.

Our other small business products and services also had solid results in the quarter, with all the businesses up over the prior year period.

Looking ahead, we continue to expect Small Business Products and Services, revenue growth in the 15 to 25% range in fiscal 2004.

Our Verticals growth engine performed very well in the first quarter.

The Verticals had revenue of $26 million, or organic growth of 40% year-over-year and were profitable.

The investment we've made in our verticals over the last 18 months is beginning to pay off with solid strategies, stronger leadership, and better processes we are starting to get some traction in all of these businesses.

We remain confident in our 2004 outlook of annual revenue growth of 15 to 25% for the Verticals.

As mentioned earlier we report minimal revenue from tax products and services in Q1.

For our fourth growth engine, TurboTax revenue was $5 million, about as expected.

Our team is set for the upcoming tax season with products available in the next few weeks.

Looking ahead, we will continue to participate in the free file alliance program this year and are still working out the details.

As we shared at investor day, we will begin to charge for state tax returns in states that don't participate in a program like the free file alliance.

We're still targeting 10 to 20% revenue growth for TurboTax in fiscal 2004.

Finally, our fifth growth engine, Professional Accounting Solutions, which consists primarily of our ProTax offerings had revenue of $7 million, again, about as expected.

Which continue to expect FY '04, PS revenue growth in the 7 to 12% range.

Moving to the balance sheet, Intuit had $918 million in cash and short-term investments at the end of the quarter.

As is typical in our first quarter we spend more cash than we generate.

In Q1 we used cash as follows: $75 million in operations, $21 million in capital expenditures, $117 million for the acquisition of Innovative Merchant Solutions, which closed earlier in the quarter, and $103 million in our stock repurchase program.

Approximately $32 million in cash was generated during the quarter from the exercise of employee stock options.

Under our stock repurchase program, Intuit bought approximately 2.2 million shares in Q1 at an average price of approximately $46.60.

We have approximately $6.5 million left in our second repurchase program, and as you recall, our board of directors authorized a third plan for $500 million in August, which is effective when we complete the second current plan.

Turning to guidance, I will first cover second quarter expectations.

As you know, while many financial analysts have provided estimates for our second quarter, this is the first time that Intuit has provided Q2 FY '04 guidance.

For the second quarter we expect revenue of $615 to $640 million, a growth of 10 to 15% over Q2 fiscal 2003.

And we expect the following revenue ranges for our businesses: QuickBooks $110 to $120 million, Small Business Products and Services $142 to $152 million, TurboTax, $114 to $124 million, Professional Accounting Solutions, $150 to $160 million, Our Verticals $26 to $29 million, and finally our other businesses $67 to $72 million.

We expect Q2 '04 pro forma operating income of $208 to $218 million, and Q2 '04, pro forma EPS of 66 to 71 cents.

Looking ahead to the full fiscal year, we are reaffirming our guidance today.

Revenue of $1.85 to $1.95 billion, or growth of 12 to 18%, pro forma operating income of $480 to $510 million, and pro forma diluted EPS of $1.57 to $1.67.

To sum up, we had a good first quarter and remain positive about the year.

Although we exceeded revenue and EPS guidance for the quarter the upside represents a fraction of the total year.

Give that and the fact that our two biggest quarters are still ahead of us, we are maintaining our outlook for the year.

A couple of final thoughts.

Thanks to all of you who attended our investor day last month.

For those of you who weren't able to, you can find the materials we shared, as well as our audio presentations on our web site.

I also want to call your attention to our new faq sheet which accompanies the press release and includes more business metrics.

With that, let me turn it back to Steve.

Thanks, Brad for recapping the quarter.

As we have discussed in the past, our long-term internal goal at Intuit today is to drive annual organic revenue growth of at least 15%, and annual pro forma EPS growth of at least 20%.

We have a solid strategy that we're focused on executing to deliver against those objectives.

Let's take a minute to look at three key elements of that strategy.

First, we carefully choose the businesses we participate in.

Focusing on small and mid-sized businesses, tax, and accountants.

These are businesses where we have a durable competitive advantage, with markets that are underpenetrated and have large underserved opportunities so we can drive profitable growth.

We took a number of steps in recent years to reshape our business portfolio.

Bottom line, we like the businesses we're in today.

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

In the first quarter we expanded our successful merchant account services business with the acquisition of Innovative Merchant Solutions, which we closed in October.

The second element of our strategy is to uncover additional customer problems we can solve well through customer-driven innovation.

We look for big and important problems not addressed by existing solutions.

We innovate by challenging conventional wisdom to create new products and services that drive profitable growth.

For example, we have begun to launch new products that have come from executing our Right for My Firm, Right for My Client strategy, to better serve the needs of accountants.

Our Accountants Central Organization focuses on identifying and eliminating the key pain points experienced by professional accountants.

And based on what we learned from these customers we introduced two new offerings QuickBooks Financial Statement Reporter, and QuickBooks Client Manager.

While it's too early to report results of these new offerings, we're pleased with the early indicators, as well as the feedback we're getting from accountants.

In QuickBooks we introduced Customer Manager in quarter one.

And as Brad discussed, customer-driven innovation has continued into the second quarter with the launch of our 2004 QuickBooks product line.

And our QuickBooks strategy is paying off in better solutions for customers and stronger growth for Intuit.

In fiscal year '03, QuickBooks revenue grew 24%, in large part because of these new offerings; and we expect annual QuickBooks revenue growth of 15 to 25% for the next several years.

A third element of our strategy is to apply process excellence and operational rigor to deliver great end-to-end customer experiences on a daily basis.

This isn't glamorous work but it is the life blood of a high-performing organization.

It's how we're able to deliver higher service levels at lower costs and it's a key reason why we've been able to improve our pro forma operating margin by nearly 7 points from 17.4% in fiscal 2000 to 24.2% in fiscal year '03.

And why I expect to improve again in fiscal year '04.

Before getting to your questions, I would like to spend a few minutes looking ahead.

As Brad said earlier, we're feeling positive about the year.

QuickBooks is firing on all cylinders.

Small Business Products and Services continue to drive strong growth.

We've made nice progress in Verticals and we like our prospects as we enter the tax season.

As you know, we announced a new organizational structure for our Professional Accounting Solutions business last week; splitting it into two distinct organizations, ProTax, and Accountant Central.

Both parts of PAS will report directly to me, and will continue to report their financial results together.

Similar to how we run our other business units, this change aligns responsibility for the entire ProTax customer end-to-end experience in one group, under one leader.

Accountant Central will continue to work across all business units to drive the overall accountant strategy.

Our ProTax and accountant businesses have made solid progress in the past few years.

And with these changes, we believe they'll be even more effective.

Another reason we're feeling positive is our continued investment in making Intuit a high performance organization; both people and infrastructure.

We've had a big focus on leadership development over the past three years.

We continue to invest in helping grow our leaders to be even stronger through continuous learning and adapting their mindset, better training, coaching and increased accountability.

We're also attracting great new talent to the organization at all levels.

An interesting fact.

Intuit received over 250,000 resumes last year.

We're getting a chance to see more highly qualified candidates and are attracting and hiring the cream of the crop.

This is a key reason we're excited and optimistic about the future.

Finally, we're making important upgrades to our infrastructure.

We'll invest significantly in customer facing systems and enterprise management software in fiscal year '04 to drive a better customer experience and achieve great efficiencies and scalability.

All critical to driving growth in 2004 and beyond.

Intuit has accomplished a lot since we began implementing our strategy three years ago, and we believe the best is yet to come.

Thanks to all the Intuit employees that worked so hard to deliver the first quarter results.

Now let's open it up to your questions.

At this time I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad now.

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

Your first question comes from Gibboney Huske with Credit Suisse First Boston.

Just a question on the tax business, I know it's very difficult to predict, and last year it was very unpredictable.

But since you're now kind of at least giving some initial guidance; could you give us a sense of the way you looked at the basic seasonality of the business, and you talked a lot about trying to really accelerate the performance of the web-based business and that process that would seem to drive more of the business later.

Obviously had you some distractions around tax season last year.

Also you're clearly doing the CD program, that probably has a little bit of an impact as well.

So I guess just give a sense of the general drivers you think will impact the seasonality of that business this year, and what we should be watching out for.

I think there are a couple of things and sometimes they are conflicting Gibiney.

One is that we'll offer some non-rebated SKUs which will pull revenue from the third quarter into the second quarter because we recognize the revenue when we ship them.

Second, is more and more volume goes to the web, on a relative basis.

Whether desk top or web grows faster, we tend to collect that revenue in the third quarter from both e-filing and from when the customers file their returns; because because that's when we collect revenue.

So we've got two countervailing thoughts here.

So I don't know, Brad, if you would add anything; but I don't think we have any additional insight to that.

It's pretty much business as usual, things move back and forth a little bit, and we feel very comfortable with 10 to 20% growth for the whole season I think is the important message from us today.

Okay.

And I guess last year, you know, the web performance was just a little bit faster than sort of core desk top or shrink wrap.

You know, would you expect a little bit more of an acceleration this year since you were focusing in that segment of the business.

Our strategy -- that's a good question.

But our strategy is we're neutral.

I mean if people want to use desk top or whether they want to use the web we believe the best strategy is to offer both ways and let customers choose what is right for them; and we're indifferent whether they pick the desk top or the web.

We'll see what they choose last year.

Every year it's a little different but, again, we're still comfortable with 10 to 20% revenue growth for this business for the whole season.

And one final question.

Just, I guess, had you a pretty nice quarter and I'm just wondering what you are seeing out there in terms of the economic environment and what you are hearing from the customers.

There seems to be some improvements broadly and I'm wondering if you were seeing that in any of your businesses.

Well, you know, we don't believe that we're dramatically affected either positively or negatively by the environment, but anecdotally we had a very strong quarter in Verticals.

I mean I think we sense that things are getting better, but it's hard to assess the impact that will have on our total performance for the year.

Okay.

Thank you very much.

Your next question comes from Adam Holt with JP Morgan.

Good afternoon and congratulations.

If you look at the mix of QuickBooks, you're clearly seeing an acceleration in the Premier units.

Does it -- is that coming, do you believe, out of the Basic and Pro units; and would you expect to see a return to growth within the units on Basic and Pro?

No.

I think as you look across the year, because, you know, one quarter is not the year make.

I think you will see a mix change over time, where proportionally more of our units are coming out of the Premier and Enterprise categories which is explicitly the strategy that we're driving.

We'll see where we end up on Basic and Pro for the year; it's too early to call.

At the same time, we're very focused, Adam, on new user acquisition and Basic and Pro are very important to us, so as you look at the first quarter, our share, at retail actually went up over a point and a half.

So we're still winning in the stores with Basic and Pro.

And so we're very focused on both, though.

I don't want anybody to conclude that we don't care about new or acquisitions and there are things we are working on there too.

At the same time, we're happy the customers are choosing the higher value added, higher priced solutions; but it's not an either or.

We want to win on both fronts.

A key part of the vertical and flavor strategy is the installed base opportunity.

Are you still seeing most of the, you know, Premier and Enterprise units coming out of the installed base?

Yes.

We still see most of it being folks that are upgrading.

We are seeing some new user acquisitions, but the vast majority is still upgrade from the existing QuickBooks customers.

And just finally then on the Vertical businesses, you know, you pointed to reaping the benefits of some of the investments that you have made; but you really did see an acceleration on a year-on-year basis there organically.

Anything in particular that might have been a trigger point in this quarter?

No, I mean, I think the important thing for investors is all of the businesses improved year-over-year and so that all of them are getting better and I think we're just seeing the benefit of applying the Intuit methodology and improving the processes, upgrading the leadership, more focus; and maybe a little tail wind from the economy that has busted loose some more orders, but I think we feel good about the progress we're making and we feel good about 15 to 25% growth for these businesses for the total year.

Great.

Thank you.

Your next question comes from Michael Hodes of Goldman Sachs.

Yeah, hi, good afternoon, guys.

Two questions, the first one is on tax.

I know it's a little early for you to tip your hand, Steve, but I was hoping could you talk at a high level of how you are approaching pricing this year.

I know that you're focused on getting the average price up through mix, but maybe could you put a little bit more detail on that.

And then secondly, Brad, I was wondering if you could just give us the contribution in the quarter from the Quicken loans participation.

Thanks.

The second one is easy.

It would have been -- it's an annual earn out.

So that --

I will find out.

It is a small number.

There's two parts to that.

There's the licensing-- brand licensing agreement, and then there's the annual earnout, where we get a percentage of revenues.

We got nothing on the second part.

The first part is under half a million bucks.

Got you.

On the other one, Michael, actually if you reflect back on what we said at investor day, it's -- our big focus is on new user acquisitions for TurboTax, as well as, retention of our existing users; and I think price and I think up mix are much less important to us as we're thinking about this season, than retaining the existing customers that we had in new user acquisition.

I think that's what we're focused on.

It's more unit games than a price or mix game.

And now that's completely different than QuickBooks where it really is a much more of a mix and upsell and add-on game.

And maybe could you just walk us through some specific initiatives on -- on retention.

I mean you gave us a little bit of a taste at the analyst day but...

It's a secret.

It's a secret.

It's a secret.

Okay.

I guess the secret will be out soon.

We'll let you know at the end of the season because we won't have retention data until then and ultimately, it's basic improvements in the product, in the interview and all those things we continue to focus on; that we learned were reasons customers didn't review -- renew from the very thorough research we did after some of last year's surprises.

We got a lot of learning and it's just going to be basic stuff.

There's no flea flickers here.

Just getting the basics right in terms of reasons that customers defected and addressing them in the product and service.

We'll also spend a lot more emphasis on service when customers call us for service.

So things like that.

All right and as far as intraquarter updates on how the tax season is developing, I know that there was some commitment to do that.

Are you in a position to give us a sense of how that will work?

Mike, it's Brad.

Not yet, but we will shortly.

But we will give interim updates through the tax season.

What are we thinking on that in terms of when we'll be ready to communicate?

Think about it the end of the year.

Given when the revenue starts there's no point in starting until we get into late January.

And we'll clearly make sure everybody knows what we're going to do before then.

Before the end of the calendar year.

Yes.

Terrific.

Does that make sense to you, Mike.

The end of the calendar year.

Yeah it's clearly premature now.

I just wanted to get ready for it.

Okay.

Thank you.

Your next question comes from Pete Swanson with Piper Jaffray.

Hi.

Thanks for taking my call.

I had a question about the guidance within Turbo Tax, the 10 to 20% range, and obviously your retention strategy, you want to keep that secret.

Can you talk about any of the initiatives on the new acquisition of new users and any swing factors that might help you get towards the higher end versus the lower end of the guidance?

I think the factors that we work on are the same factors every year.

It's improving our TurboTax offering.

It's improving our -- expanding our distribution channels and improving our service experience to make sure that if customers need to help in the product, it's -- we are adding a lot of value.

The other thing that's new this year is we're going to spend many money on national advertising.

We talked about that at investor day.

But -- so we'll put some money to create demand.

We think that will be beneficial for our retailing partners and we expect that to have a lift to the season.

We tested that in multiple markets last year with very successful results in terms of raising the awareness.

So the big new thing is advertising but we've got a lot of things we're doing to improve, you know, all three of the areas, the offering, distribution, and also our service experience.

Okay.

Thank you.

Your next question comes from Glenn Greene with ThinkEquity Partners.

Thank you.

A couple of questions on the tax business.

One if you could clarify the status of the free filing alliance, and whether you are expecting a level playing field this year; and what your response has been or likely will be.

We submitted our offer this Monday.

And so we're waiting to see and it's not public information yet.

We don't know how many people will participate and we don't know what their offerings will be.

So we spent a lot of time thinking about our offerings.

We're comfortable with what we submitted and as soon as this -- and as soon as we're able, we'll make that publicly available.

But the bottom line is you -- we don't know anything now that we didn't know at investor day.

Okay.

And on your -- you talked about distribution, obviously, being important.

Anything that you're doing differently this year, whether it's new retailers, an update what you're doing with my CD.

My CD was very successful last year and we're going to continue my CD but we're going to mail less of them, because we are not going to mail to retail customers.

I think that's the right strategy for Intuit in total.

The other thing that I think is important is we looked at -- we had broad distribution last year, especially for he web product but as we really stress tested the user experience.

We found a lot of areas for opportunity where we didn't convert leads at the rate we expected, and so we really spent a lot of time looking at, you know, basic things like what did the landing dates look like when a customer came from one of our partners; and we found that we had a lot of opportunity for improvement.

I wanted to get the basics right.

So we would expect a better customer experience this year from the web, from our distribution partners; and we would expect a higher conversion rate.

That's the kind of stuff that we --it's just basically executing a better customer experience on all elements of the game.

We learned a lot from last year.

Some things that went well, and some things that didn't.

We think we've adjusted and that's why we're looking forward very much to the tax season to see how all the changes, the positive changes we made worked out.

And one quick final question, the small business competitive environment.

A lot of chatter about Microsoft, some of the ERP vendors.

What can you tell us?

What are you seeing?

Well, I think it's basically not much has changed.

You have a lot of people are enterprise companies trying to move down and their definition of moving down is to companies with from 1,000 employees to 500 employees or 250 employees and we're moving up.

We still like our strategic position very much.

Our customer response has been very good to these new products and services we are offering as we continue to grow.

Much faster than the publicly available data I see he from these other companies.

So I think the mid-market will get squeezed and I like our strategic position quite a bit.

Great.

Thanks a lot.

Your next question comes from Heather Bellini with UBS.

Hi guys, it's Dino Diana for Heather.

With regards to the tax SKUs that are not going to be rebated, can you give us an idea for what percentage of the retail SKUs this really encompasses and how does that change from last year?

We didn't have them last year so it's in new.

We don't know what percentage of the mix that will be and exactly all the retailers that are going to take them.

So let's save that until we have some results to talk about versus assumptions.

But it is new.

And it's our goal to be responsive to retailers.

Some of the retailers and we'll see how it does.

The comment we do know is that it does pull revenue from Q3 to Q2, but we don't know exactly how much yet because we don't know how many people are going to buy.

Okay.

And on retention rates.

What -- can you give us an idea what you learned in terms of -- has it been more of a defection towards professional preparers, and does that tie in -- you mentioned that you haven't -- you're not factoring in tax law changes into the unit growth this year; and is that because the code has gotten so complicated that customers view that software can't handle your problem even though it's one of your jobs is to market that it can?

Is that a really a big part of it

That's a good question and the reason we don't factor it in is because the next question you would ask is how much difference will it make and I can never answer in any intelligent way question two, so I defer question one.

That's -- because we just don't know and rather than speculate, I'm leery to offer any opinions or hypothesis we can't back up with facts and that's something we can never back up with facts.

I forgot the first question.

The first question was do we see most of our detections to pros.

We see defections both to pros and to manual.

The ecosystem today is such that, you know, we're seeing a flow back and forth between software in both directions.

And in fact, in our new customer acquisition, we acquired more than 3 million new customers this past year.

More of them came from pros the prior year.

They actually came from doing it by pencil and paper.

There is some migration back and forth between different methods and we learned a lot in the last year.

I think we made a bunch of changes this year that we think will be positive, and I think you will see more changes in the next year offering but it's too early to talk about that.

Some of the things we learned we couldn't get into this year's product and a bunch we could.

This will be a multi year focus for us to really get smart and respond to the things that are causing people to come to us and/or leave us.

Great.

The last one, it's a small one.

But on CRM, I know it's relatively new but what have you seen in the last few months.

We have been in the market for five weeks, and we like the early response.

The distribution is broader than we thought.

But it's too early to share results.

Great.

Thanks.

Your next question comes from Bryan Keane with Prudential.

Yeah, hi most of my questions have been answered.

Just two questions of clarification.

On the TurboTax side, I guess historically in the second quarter that's been growing year-over-year about low double digits and now this quarter for guidance you're expecting maybe 20 to 31% year-over-year growth.

Is this all because of the non-rebated SKU?

Yeah, mostly.

Yeah, almost all.

And do we know which SKUs will not have the rebate in it?

Yo will when we put them in the market, but we're not releasing all the details of that today.

The reason to share that at this point is just so we could share the logic on why we moved some revenue from Q3 to Q2 in TurboTax.

Okay.

Give you the logic on what was different.

That's really the only thing that's different of any size that we could -- and we wanted to share what was going on there.

Okay.

And then the second question of clarification, on the My CD program, you said you are not going to mail to certain retail customers because of some of the pushback from the retailers.

What -- is that just a small percentage?

Or how does that work?

Last year we mailed some 7 million of these, not only to segments that were retail customers, but a whole variety of direct marketing segments.

You know, and we did that deliberately because it's relatively cheap to do and we wanted to learn a lot.

We'll mail a lot fewer this year because we saw which segments where it worked and which segments that it didn't.

The bottom line was it was very successful last year.

We expect it to be quite successful this year, but we expect to be able to do that with less costs.

Yes, less mail and less cost we don't think it will have a negative impact especially when you factor the money that we're going to spend on national advertising.

Okay.

And finally just housekeeping, Brad, the interest income was about $7.5 million.

I think you were guiding $4 to $5 million.

Were there any one-time items in there?

Yeah, we had a modest size positive FX gain in the quarter versus our Canadian business.

Okay.

Perfect.

Thanks.

Your next question comes from David Farina with William Blair.

Yes, hi.

First a clarification.

The actual flavors, do they actually go inside the QuickBooks, the numbers you gave us there on the fact sheet, Brad.

Yes.

So if you subtract them out, the actual core QuickBook numbers are some of the lowest numbers we've seen in a number of years.

Obviously you are doing a great job of selling, getting the revenue up there.

Are you concerned that the actual unit numbers of the core QuickBooks are one of the lower numbers than we've seen in a few year, I know there's some seasonality in terms of releases and all that too.

At least for this quarter, off of our fact sheet, the core units are slightly up from where they were in '02 and down from where they were in fy '03.

Part of it is also just a function of when product is out and when promotions run in the quarter as well.

We had a sunsetting program in the first quarter of last year that related to DIY payroll that had some impact on moving revenue into the first quarter.

But the bottom line is we gained unit share at retail, so it's a category question and we're working on some things to try to spur and drive the category but it's something clearly we have our eye on.

We're not just focused on moving people up.

We care about total units still.

Will you give us a rough idea of how many flavors units you guys did?

Or do you have any ideas?

It's actually in the numbers.

The bulk of the Premier units were flavors.

Okay.

Sorry I missed that.

And -- sorry about that.

Lastly, you didn't say much about Innovative Merchant Solutions;

I know you just closed it.

Any kind of early thoughts on the plans and rolling out new products or what have you with that acquisition?

Very -- very positive.

Good marketplace reaction.

Good employee reaction.

But it closed on October 4th.

So we'll have some good insight as we go through the year.

We like the business and we're off to a good start.

And this is an industry that's been growing 10 to 12% a year organically, so we like buying companies that are in growth industries; and we believe we'll be able to, again, combine their strengths and position with our strengths, and we would expect them to gain share in this market that's growing and we like the business so far.

And I think, David, the strategy there is less about new products for their customers, but rolling out their products to our customers.

Thank you very much.

Your next question comes from Craig Peckham with Jeffries and Company.

Thanks for all the new metrics Brad and Steve and Linda.

The question pertains to IMS.

I wonder how much revenue in the October quarter came from IMS.

$2 million.

Like 2 million bucks.

$2 million?

Yeah.

Also in the selling and the marketing line, a pretty substantial year-on year increase on that expense item.

Can you give us a little color as to what that relates to?

I wondered whether it had anything to do with the TurboTax acquisition or retention strategies.

No, it's adding outsourced payroll salespeople and gearing up for the new QuickBooks products and services to make sure that we get off to a fast start.

With about -- by my calculations about 22% year-over-year growth in the quarter, is that the kind of growth rate we should expect in that line item over the course of the year or should that taper off as the year progresses?

No, it should taper off some as the year progresses.

That's also considering some of the national branding campaigns.

Yeah, and it clearly would be front-end loaded because we need to spend the money out ahead of launch.

Okay.

Okay.

You alluded to this earlier Steve, but I wonder if you might be able to give us a little bit more color as to where you're getting particularly strong response or traction on the verticals.

I guess I'm also curious if there's any kind of seasonal element in the nice results we've seen this quarter.

The answer is all of these businesses have a bit of a season, and they can be all different, but the seasons have maintained year-over-year.

So the quarterly comparisons are still the same.

The answer is all of them were stronger than last year.

And relatively consistent growth across the board; and so we don't like to get into a bunch of details on all the individual, the core businesses that we acquired that you know about; but all of them are on track to have strong years and we're not talking a lot about verticals now.

We're just going to work hard to put points on the board and build a track record and that part of our company, because talk is cheap and the numbers will speak for themselves.

The good news here is we had a good quarter.

The new leadership team, and the new leaders in some of these businesses are really making progress, and it's across the board.

It wasn't one or two of them had great quarters.

All four of them performed.

They exceeded expectations.

Okay.

Thanks.

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

When do you see the Enterprise QuickBooks product line kicking into gear?

Will it be next quarter or is this going to take more time?

I think we have a new version of Enterprise coming.

We don't have the exact time yet but I think sometime in the -- you know the third quarter, most likely, we'll have a new version coming which I think could help us quite a bit.

I think this will be a slow and steady race.

We sold 1,000 units that was about flat year-over-year.

There are some things that we're working on and I think it will be V3 that we believe will help us, but I think there won't be any huge ramp up.

It will be slow and steady over a multi-year period and as we continue to improve the product, I think that will meet more and more needs and -- so I think we have the early adapters now and we keep working on improving the product and we'll see how it goes.

But the stuff we're working on, we're quite excited about.

And if you think about it from scratch, we still have sold over 5,000 units of this; and that's a lot better than other people who played here.

We think we're scratching the surface on the opportunity, but I don't want to oversell how fast it will ramp up.

We'll continue to update the product and the service.

And hopefully more and more people will choose this for their business.

Secondarily you announced a couple of new small business services last week- HR benefits and workers comp.

Can you give some details on pricing and go-to-market strategies, and when should we expect them to kick in and impact results.

We announced them part of really the QuickBooks 2004 launch, and I don't have the information in front of me on that.

We'll get the pricing for you.

Are they priced separately from the core --

Yes.

They are add-ons to the core QuickBooks product.

And is it the plan to sell those services in the complete payroll installed base?

Yes.

Yes.

Thank you.

Your next question comes from Jim MacDonald with First Analysis.

Yeah, good quarter, guys.

I don't want to beat a dead horse but on the new non-rebated SKUs is that more of a retailer strategy or a SKU by SKU strategy?

You don't want to beat a dead horse but you are going to anyways?

It's more retailer by retailer strategy than a SKU strategy at this point.

Okay.

And then on small business, that seems quite strong, is there any pricing reason, or any other reason?

Was Blue Ocean particularly strong.

That was across the board.

Okay.

Thanks very much.

Your next question comes from Eric Wanger with Barrington Research.

Hi, gentleman.

How are you?

Hi, Eric, how are you.

Very good thanks.

Most of the questions I have had, are pretty well handled.

Is there anything else you guys can or want to say about the status of payroll outsourcing?

I think we shared pertinent fax facts.

We're up 6,000 year-over-year, up 2,000 quarter-over-quarter.

We're going into the busy season.

And as we said before we love this business.

We think it's a large opportunity.

It's -- it's underserved and unpenetrated, and we have a lot of QuickBooks customers that have chosen to outsource their payroll to somebody else, but we are slow and steady here.

That will win the race.

We're going into the busy season and we want to make sure that we stress test, as Brad said, our infrastructure and service levels at scale before we decide how fast to step down to drive growth.

This is something we want to get right before we get too fast and get out ahead of ourselves.

So I want to be -- I want to be the tortoise on this one.

That said, I expect this to grow in line with the company's organic growth this year.

So we're still performing at an acceptable level but we would like to go faster but we want to do it the right way.

Got you, no, that makes good sense.

One other minor question.

Innovative Merchant Solutions.

If you sell to their pre-existing customers that can be considered core or acquired growth?

What we would do is -- the way we we do this on all acquisitions is we take the 12-month revenue for the company when they were stand alone and use that as the acquired growth and then any growth above that after we acquire them, we consider to be organic.

Okay.

So you just take -- you just take their revenue from last year --

Yeah, we take 129 months prior to the acquisition, and then the growth -- you know the growth a year later, either up or down was the organic growth rate.

We've applied that consistent logic for all the acquisitions we have made.

Okay.

Good.

Thanks.

That's all of my questions.

Thank you.

Your final question comes from Bart Ware with Winslow Capital.

Yes, thanks, Steve.

I just have two quick questions.

One is what is the penetration rate of the QuickBooks installed base for flavors?

And then I have a follow-up.

It's 100,000 out of, you know, $2.6, $2.7 million.

Okay.

So it's still very, very, underpenetrated and as we shared at investor day, awareness is still relatively low both for Premier, some of the Premier flavors and for Enterprise.

So we've got a big job to do to work on awareness because as people become aware of these products and value they have, we think that will help us improve our penetration rate.

So we're just starting on a multi -- it's like Enterprise.

A multi-year journey.

We sold 100,000 roughly out of $2.5, $2.6 million dollar base.

We believe we have a lot of room to still go.

Have you seen the sales cycle shorten at all?

I mean obviously it is a better value proposition to the customer.

I think the key thought there is since these are upgrades they are existing customers.

The whole cycle is a lot less -- shorter than a new customer acquisition.

Do you have any thoughts on that, Brad?

It's also that the products are sold either at retail or direct or off our web site.

So it's hard for us to tell what the, quote sales cycle is, the customer simply buys it.

On Enterprise, one of the things we have learned it's two or three call telephone contact, as opposed to a single contact.

So the cycle is a little longer to your point; but it's not like it's gone from, you know -- it's still, I would guess, 30 days or less.

Okay.

And then my second question is, can you just provide a little strategy on the separation and the pro accounting solutions, and I would assume you did that to -- to inflect some revenue growth there and if that's the case, then why wouldn't we see a little bit stronger revenue growth out of that, or can you help me with that?

Well, the revenue growth in that is really ProTax, it's ProTax revenue growth, because the Accountant Central Organization is really more of a functional organization that works across all of the Intuit products and service businesses from ProTax to Payroll to QuickBooks.

So Accountant Central is never going to have a bunch of revenue.

Most of the revenue growth from these new products and services we're selling to accountants is going to come in QuickBooks or Small Business Services.

So I would never expect the ProTax revenue to get a huge lift from our accountant efforts.

It will show up in the other two areas.

So the reason we split them and had them both work directly for me is we think it will allow Accountant Central to have more clout working as a peer across all of the business units, as opposed to have been buried in one of the individual units and that's why we made the change.

Okay.

And then I guess the last question, do you guys anticipate completing the expansion of your share repurchase program this fiscal year or what is the time frame for that.

We have not given any explicit guidance on that.

The recent history has suggested that we move through them pretty rapidly.

Okay.

Thanks very much.

Thanks, Bart.

Are there any closing remarks for today's conference call?

Yeah, the only thing I would say to everybody is we feel good about the first quarter, but the big game is still ahead, quarters two and three.

We go in feeling confident, and positive about the opportunity.

I hope the new fact sheet that we have given to you and this update that Brad talked about during tax season will help give you additional visibility into how we're doing and where we're going.

We'll continue to work at providing these insights and we're excited and optimistic about the year as we enter the busy season and we'll talk to you next quarter on the second quarter conference call.

Thanks for joining us.

This concludes today's conference call.

You may now disconnect.