直覺電腦 (INTU) 2004 Q3 法說會逐字稿

Good afternoon my name is Cody and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Intuit third-quarter earnings conference call.

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

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Mr. Bennett, you may begin your conference.

Thanks Cody.

Good afternoon everybody and welcome to the Intuit third-quarter conference call.

With me today are Brad Henske, our CFO and Scott Cook.

Once again, Intuit delivered strong results.

Revenue of 713 million was up 12 percent year-over-year and was the first time in Intuit's history we had quarterly revenue above 700 million.

Pro forma EPS of $1.20 was up 14 percent.

QuickBooks revenue rebounded in the quarter and on a year-to-date basis is up 15 percent better than what we expected three months ago.

And finally, we just finished another strong consumer tax season with TurboTax revenue up 16 percent year-to-date.

Another year of solid growth.

As we enter the final quarter of fiscal 2004, we're on track for another strong year.

Now Brad will go through more details about the quarter then I will a come back to provide some perspective on our growth going forward.

Brad?

Thanks Steve.

Here are the highlights from our third-quarter.

The largest quarter in our fiscal year.

Revenue was up 12 percent year-over-year driven by strong performance from our consumer tax and small-business portfolios.

As in the past, while some our businesses delivered more and some less than projected, the strength of the total portfolio enabled us to deliver consistently solid results and deliver on overall expectations.

Third-quarter pro forma operating income increased 11 percent over Q3, 2003, driven by unit growth, mix improvement and expense management.

We've had pro forma operating margin improvement of 119 basis points for the first three quarters of fiscal 2004 and expect to be up over 100 basis points for the full year.

Pro forma diluted EPS was up 14 percent benefiting from a better operating margin plus lower share account.

On a GAAP basis, Q3 2004 GAAP results include the benefit of a $36 million tax reserve that was reversed.

Q3, '03 GAAP results include a onetime gain of $71 million or 34 cents per share from the sale of our Japan operations.

And both include the usual charges for amortization to intangibles.

Now let's look at the results for our businesses.

Here we have the quarters revenue came from TurboTax where Q3 revenue grew 10 percent year-over-year to $345 million.

Year-to-date, TurboTax had revenue of $480 million, up 16 percent over the first nine months of fiscal 2003.

Slightly better than the preliminary forecast of 14 to 15 percent that we provided a month ago.

Solid unit growth, shift to higher end offerings, and end of the season price increases all contributed to revenue growth.

We also gained share and drove unit growth in TurboTax.

TurboTax unit share fiscal year to date through the end of the season was 72 percent, up 1 point from last year, according to NPD.

Total federal paid units increased 8 percent fiscal year-over-year to date, higher than the 5.9 percent growth the IRS reported for self prepared computer-based returns.

Looking ahead we remain very confident in our consumer tax business.

We brought some fresh thinking to the entire business which will begin to impact our offerings next season.

Turning to our professional accounting solutions business which is primarily professional tax, third-quarter revenue of $83 million was up 3 percent year-over-year.

Fiscal year-to-date revenue of 246 million was up 4 percent year-over-year.

Both the quarter and the season came in slightly lower than expected as we lost some customers to lower priced competitive offerings.

We're now working on a plan to regain that ground next season.

Our Small Business portfolio, which includes QuickBook software and small-business products and services continues to perform very well and is our fastest-growing business.

Year-to-date, total small-business revenue of 623 million was up 19 percent.

In Q3 '04, revenue of 211 million was up 23 percent year-over-year.

In addition to QuickBook software, Intuit small-business portfolio includes QuickBooks branded offerings like Do-It-Yourself Payroll, Merchant Account Services, technical support and supplies.

It also includes non QuickBooks brand offerings like tracking software and premier payroll.

As you know, our primary small-business customer acquisition vehicle is QuickBooks.

We have more than 2.5 million QuickBooks customers.

We consistently do a good job in acquiring new QuickBooks users with new user acquisition levels fairly consistent over the past several years.

Once we have the customers on board, we've then work to sell them a range of other products and services from product upgrades to beyond accounting like Payroll, Merchant Account Services and supplies.

The challenge we're facing this year is the decline in annual upgrades for the standard QuickBook's basic and pro units.

At the same time, we've had continued success in upgrades to the higher end versions of QuickBooks, Flavors targeted to specific industries and enterprise offerings targeting the larger or small businesses.

High end units were up 69 percent year-over-year in Q3 and 68 percent year-to-date.

We've just begun to penetrate the opportunity for our higher end offerings.

The merchant account solutions business continues to see strong growth and opportunity with both the QuickBook's attached offering and the business we acquired from Innovative Merchant Solutions.

We continue to be pleased with the acquisition.

The business contributed to the overall growth in our small-business portfolio and is ahead of where we planned.

Overall, Q3 organic revenue growth from our combined merchant account solutions business is up 27 percent year-over-year and the results of the acquisition are included in both periods.

We remain optimistic about the opportunity to further penetrate the QuickBooks space.

Payroll is another service that's very important to small-business owners in an area where we continue to make solid progress.

As you know we offer customers a number of options for handling their payroll, from Do-It-Yourself Payroll, which enables them to calculate and run their own payrolls to outsource offerings where Intuit does some role of the work.

Intuit's total payroll business which includes all these offerings continues to perform well the customers up 13 percent and revenue up over 20 percent over Q3 of '03.

Our Do-It-Yourself Payroll offering had good growth in Q3 with customers up 13 percent and revenue up 30 percent year-over-year.

Revenue was driven by unit growth, and increase in attached services and the rolling impact of price increases instituted last December.

We expect DIY to continue to provide a steady revenue growth stream for Intuit.

The total outsourced payroll business had decent year-over-year growth in Q3 with both customers and revenue up 9 percent.

Year-to-date, outsourced payroll revenue is up 6 percent.

For a variety of reasons that I will talk about this is roughly the aggregate annual revenue growth rate we expect in our total outsourced payroll business over the next couple of years.

To better understand what's going on, let's take a second to click down a layer to look at the two components of our outsourced offerings.

The Intuit branded offerings which are growing, and the un-branded premier offering which is in fact shrinking.

We're pleased with the progress we have made in growing both customers and revenue in the Intuit branded outsourced offerings which includes both complete and assisted payroll.

We've added 9000 customers, up 22 percent compared to Q3 of '03.

Revenue increased 18 percent year-over-year, and even more importantly, we expect that the branded outsourced payroll offerings will continue to be accretive to total company growth rates going forward, although not as high as we had originally anticipated, due to time it takes to build out and execute on technology infrastructure and robust sales and service capability.

In contrast, the premier businesses shrinking.

As you recall, we bought the premier customers 16 months ago from Wells Fargo to end an unprofitable contract.

The historic referral contract has now expired and wasn't renewed.

Our plans remains to focus all of our efforts on growing the Intuit branded outsourced offerings.

So while we have a strong Intuit branded outsourced payroll business, the attrition in our Premier business is continuing to have a negative impact on the total outsourced payroll base and is depressing our overall outsourced payroll growth rates.

Lastly for small-business, we continue to see solid performance in our supplies, technical support and IT solutions offerings.

To summarize, we have great assets in the small-business space which represents the largest part of Intuit's total portfolio.

As evidenced by results this year, we are confident in our ability to drive continued growth by acquiring new customers and solving an ever-increasing array of customer needs.

Our vertical portfolio businesses continued to have a solid year reversing the slow start we saw last year.

Third quarter revenue of $27 million was up 7 percent over the prior year quarter.

For the first nine months, verticals revenue increased 17 percent year-over-year.

The verticals are profitable fiscal year-to-date posting segment operating income of $1.5 million, a $12 million year-on-year improvement.

Finally, our other businesses had revenue of 48 million, up six percent over the third quarter of 2003.

Our Quicken business is having a great year and doing better than planned.

For the first time since fiscal 2000, Quicken will have year-over-year revenue growth in FY '04.

And Quicken's unit share at the end of April was 73 percent, nearly six points higher than a year ago according to NPD.

Somewhat offsetting Quicken's performance was lower-than-expected results from Canada.

A final technical note before I move to the balance sheet, we changed where we report some of the ProTax and TurboTax e-file revenue from product, the accounting category product to service.

In keeping with our best current view of the appropriate split we've reclassified prior periods to conform and we will post the reclassified numbers on our IR website.

Moving to the balance sheet, Intuit had approximately 1.2 billion in cash and short-term investments at the end of the third quarter, up approximately $200 million from the end of Q2.

In the third quarter, we generated approximately $488 million in cash including 470 million in operating cash and 18 million in proceeds from the exercise of employee stock options.

We also spent cash during the quarter including $39 million in capital expenditures and $250 million for our stock buyback program.

Under our stock repurchase program, Intuit brought approximately 5.89 shares in Q3 at an average price of $43.33.

This leaves us with $99 million in the third repurchase program.

Today we announced that our Board has authorized the fourth program, another $500 million repurchase plan.

Turning to guidance, I will first cover the full fiscal year '04 expectations and talk about the fourth quarter.

For fiscal 2004 in total, we expect revenue of 1.85 to 1.87 billion or growth of 12 to 13 percent over fiscal 2003.

This puts us on track to meet the expectations we set when we originally provided FY '04 guidance last May.

We expect the following revenue ranges for our businesses.

QuickBooks, 270 to 277 million, or growth of 11 to 14 percent.

Better than the zero to 10 percent growth we had projected three months ago.

Small Business Services 536 to 546 million or growth of 18 to 20 percent;

TurboTax 486 to 489 million or growth of 15 to 16 percent.

Professional accounting solutions 250 to 252 million or growth of 3 to 4 percent; verticals 109 to 112 or growth of 15 to 18 percent.

And finally, our other businesses 198 to 203 million or growth of 3 to 6 percent.

We expect corporate operating income of 465 to 475 million or growth of 16 to 19 percent and we expect pro forma diluted EPS of $1.63 to $1.67 or growth of 17 to 20 percent year-on-year.

The fourth quarter obviously represents the difference between the actual results for the first three quarters and our total fiscal year guidance.

In Q4 we expect revenue of 258 to 278 million, a pro forma operating loss of 30 to 40 million.

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

And finally, we expect Q4 pro forma loss per share of 6 to 10 cents.

Q4 revenue guidance for our business segments is provided on our fact sheet and Steve will talk about FY '05 a little bit later in the call.

Before I turn the call back to Steve, though there's one final piece of news that I would like to share.

Linda Fellows has decided to retire from Intuit after a very successful seven-year career here.

Most of you worked closely with Linda over the years as she has led our investor relations function.

In addition, she has had responsibility for Intuit's treasury function.

She has earned a great reputation in both areas and we will miss her.

We will begin to search for a replacement immediately and Linda has agreed to stay on with us for a smooth transition.

I am sure you will be joining me in wishing her the best.

With that, I'll turn the call back to Steve.

Thanks Brad.

Before we get to your questions, I'd like to spend a few minutes talking about our near and longer-term growth.

Let's start with where we've been.

If you look back over last five years you see a company that has had solid growth.

In fiscal year '99, Intuit had revenue of 801 million; in fiscal year '04, we expect at least 1.85 billion.

That translates into an average annual growth rate of 18 percent.

Pro forma EPS was 45 cents a share in fiscal year '99.

In fiscal year '04, we expect it will be at least $1.63, up an average of 31 percent per year.

Very solid performance for the past five years.

Intuit has delivered these results by consistently executing our three point growth recipe.

We've carefully chosen the businesses we're in, focusing on Small Business, tax and accountants.

Within those areas, we choose businesses where we have a durable advantage and that have large underserved opportunities.

We have made a number of dispositions and acquisitions in the past three years to adjust our business portfolio and position the company for stronger performance and better future growth prospects.

Second, we broadened our definitions of the markets we serve and look for additional customer problems we can solve well to apply a customer invention.

We've launched many new products and services with more on the drawing board and in process.

And third, we've applied operational rigor and process excellence to drive both better customer experiences as well as operating margin leverage.

Four years ago many people thought Intuit's small-business portfolio had run out of gas.

We took a hard look at the situation and challenged ourself to think beyond a one size fits all accounting product.

In doing so, we found a lot of new opportunities to meet additional customer needs and drive new growth.

We launched our right for my business strategy in December 2001, to aggressively pursue the expanded small business opportunity.

And that strategy has paid off delivering roughly 250 million in revenue growth since then.

This is exactly the mindset and focus we're now bringing to execute our growth recipe in consumer tax, outsourced payroll, and professional tax.

We’re making progress in all three of these businesses with new thinking and leadership teams focused on doing a better job for customers and driving profitable growth.

We will talk to you more about our strategies for each as they evolve.

So how does the current outlook translate financially?

Over the next couple of years we expect annual revenue growth to be in the high single digits as growth flows in some of our large businesses.

At the same time, we will rev up our customer driven invention and issues on a broader basis to add future growth levers.

Intuit, Inc. has grown a lot of large oaks out of tiny acorns in the past and while we're excited about the longer-term potential of some of our newest initiatives, they are still too small to significantly move the needle at this point.

We expect to continue to grow EPS faster than revenue.

In fiscal 2005, we expect to deliver pro forma diluted EPS growth of 15 to 20 percent.

We're putting even greater emphasis on running a tight ship so we can generate more funds to invest in innovation for future growth while also expanding our margins.

We still think we can achieve pro forma operating margins higher than 30 percent, so while we add new growth levers to drive higher top-line growth down the road, we plan to continue to deliver margin expansion near term.

We are feeling good about how we're positioned for the future.

We like the businesses we're in.

We continue to uncover additional customer problems that we can solve well through customer driven invention and we're applying operational rigor and functional excellence to execute even more effectively.

The net result it that we believe we can continue to deliver solid top-line growth with margin expansion and EPS leverage.

To sum up, we have bad three very solid quarters this year.

We are on track for another strong year and we're feeling positive looking ahead to FY '05 and beyond.

I would like to thank all of the Intuit employees who delivered such a good quarter and now let's get to your questions.

Are you ready to take questions?

Yes.

(OPERATOR INSTRUCTIONS) Heather Bellini with UBS.

Thank you.

Steve, I was just wondering if you could give us an idea of what segment is impacting the decline in your organic growth target that you just talked about -- the high single digits for the next couple of years?

And then how confident are you in these new target that you put out given what's been going on over the past couple of years and the guidance actually not coming in in your favor?

And then I have a follow-up.

A couple of thoughts.

First, we are delivering in line with the guidance we provided last year and this fiscal year.

So and second, we will provide segment guidance as we've always done in the August conference call after the year is closed.

The bottom line is I think most of our larger business' unit growth is slowing and I think that's just the natural trend of where we are.

We are working on a lot of new initiatives as we mentioned to turn that around.

But we don't know how much impact some of these new things will have next year and we don't want to overestimate the impact of new things.

That's why we provided revenue guidance levels that we have.

So you would look at it as setting -- you certainly don't want to be aggressive with these forecasts given that I think June is when you go through your internal planning process?

Is that how we should take it, Steve, so you want to set something that's reasonable?

I think we have been through part of our planning process.

We don't have all the details done.

But we provide guidance for next year at this every time we say what we believe it's going to be based on our current view of the opportunities and our plans and the things that are in the pipeline.

We will have more details again in the August call.

But for now, this is our best insight in terms of what we think next year is going to look like and we feel good about the guidance we just provided.

The follow-up would be -- you are talking about growing earnings 15 to 20 percent for next fiscal year off of a high single digit growth rate.

Can you just talk about a little bit of the things you are going to do on the cost side to help drive that type of earnings growth?

Thank you.

We are going funds aggressively and invest them in things that are going to deliver value for our customers, both short and long.

Are there headcount reductions planned?

I think the answer is if you look at our performance over the last four or five years, you see the these same kind of operating profit leverage that we're forecasting in next year's plan; so I think it's pretty much doing what we been doing.

If you look at the track record over the last four or five years as the kind of performance we have had with operating profit growth relative to revenue growth.

Great.

Thank you.

Bryan Keane with Prudential.

QuickBooks did a lot better than I had expected and I think you had modeled.

Was there something in the sales cycle that the enterprise versions or the Flavors all of a sudden picked up?

Can you just describe what happened there?

I think Bryan, the big change was as we mentioned in the last call, we rebalanced our direct marketing efforts back to focus on upgrades for the four basic end pro units instead of putting all of our direct marketing dollars on the upgraded Flavors which had caused the miss in Q2.

And we are seeing customers that it was out execution miss as opposed to a customer demand miss and that's why QuickBooks came back much stronger than we originally planned.

The Flavors continue to stay strong.

Our higher end stuff up 68, 69 percent.

That seems to be the trend those have been on.

What really turned around is we got many more upgraders for both basic and pro because we remixed our direct marketing effort.

Okay.

Just switching gears to the professional accounting.

That is the first time I have seen really in years that you guys have seen some competitive pressures there?

Can you just describe what happened there and maybe what -- how you rebound from that next year?

We're working on -- the first thing is on a total basis, customers were relatively flat year-over-year for ProTax.

So we lost a few on the low-end ProSeries.

The price, we are working on some new offerings next year that we're excited about that we think will better meet the needs of that segment and we will tell you more about that as our plans emerge in the fall.

Okay.

I just noticed in tax you said you got some things in the fire, maybe some new ideas to grow the consumer tax business.

Can you give us just some possible ideas of what you are thinking about there?

I'd prefer to wait until we have more specific details, but I think at a very high level, what I would say is the same logic we had in QuickBooks where we're moving away from a one-size-fits-all mindset to better understand the needs of different customers.

It's worked very well.

We're doing that in all of the businesses I mentioned, whether it be ProTax, consumer tax or outsource payroll, and moving to more right-for-me solutions really in these other businesses, I think that's as far as I'd go at this point.

I would tell you we're excited about getting back to our roots on customer-driven invention and building new offerings that are more tailored to different customers.

Our one-size-fits-all products have done well, but we think by moving away from that, to continue to do that for some customers and find different solutions that better meet the needs of other customers, we're going to be able to get back on a double-digit growth pattern long-term.

I think one thought I'd add to that is while, as you know, we've got north of 70 percent share certainly in retail for the existing tax product, we today have about 6 percent share in the total dollars that U.S. individuals spend on tax preparation.

So at some level, we're just beginning to scratch the marketplace.

We're a very high share in 6 percent of the dollar bucket for tax prep.

So I think it's similar to QuickBooks; we're re-examining how we define our markets and looking at, are there some different things that we can do better.

And we will have new offerings in the market in most of these businesses next year that are vastly different than what we have now.

We just don't know how successful they will be in the version 1 frame.

But as we said, Intuit's grown lots of big oak trees from acorns, and we expect to get back on that track in other businesses beyond QuickBooks.

Okay, that's helpful.

Thanks.

Adam Holt with JP Morgan.

Good afternoon.

I also have a couple questions about QuickBooks.

Given your commentary about upgrade activity in the quarter, where would you expect upgrade activity to end for the season?

And looking forward, given what you learned this year, what you've done in the sunsetting front and the natural placement cycles within QuickBooks, would we expect upgrades to be flattish going forward or even improve?

I think, Adam, it's a very good question, and I think I'd rather defer answering that to -- until the time we provide segment guidance for QuickBooks for next year.

I think we'll have a more detailed view of that three months from now.

Brad, do you have a thought on that?

Would you add anything to that?

No, I think it's exactly right.

Obviously, the upgrade rate has improved based on remixing our direct marketing.

But I'd rather not speculate at that at this point.

I think there is still plenty of opportunity for us to improve the product and some other things we're doing that we think will help us on this front, but I think details to follow probably in the August conference call.

On the guidance in QuickBooks for the fourth quarter, it's towards the lower end -- well, particularly the low end of the range below what we've seen the last several quarters, even Q2.

Is that just being cautious?

How would you characterize that guidance for the fourth quarter?

I think that -- firstly, it's what we see today, is all of our guidance.

But firstly, you know it's a seasonal business, but then secondly to compare sort of year-over-year for that quarter is pretty tough, because in Q4 of last year, we launched a handful of new products.

There's not a set of new product launches that will have any substantial impact on this Q4.

So I think that's why you're seeing a tougher compare.

Most of it is compare as opposed to market demand.

Just my last question relates to the Premier customer base.

Could you remind us how big the Premier customer base is currently?

And where you might think that attrition baselines?

If you look on the fact sheet we provided, the Premier customer base you can add all these up but my kind of eyeball puts it north of 200,000,

No, Premier payroll I think he is talking about.

Premier Payroll?

Premier payroll.

I guess I'm -- is that the total install base?

I was answering the Premier QuickBooks units.

Premier payroll at the end of this quarter 22,000.

That is the one that is shrinking where the assisted and complete is growing.

You would expect that to continue to decline -- is there a notional level that you have or do you think we are getting pretty close to a baseline level for that business?

I think it is going to decline and at some point we are going to try to convert those customers over to Assisted or to Complete.

So we will just keep our eye on that.

But bottom line in total is as I think we will see continued dilution or that number will continue to go down some of which will convert, some of which will have attrition problems just like normal outsource payroll companies do every year.

Yes, but that portfolio has absolutely no new acquisition into it.

It will affect zero ultimately.

The question is how many will convert over.

We haven't begun the conversion yet so that is something we are still working on.

Great.

Thank you.

Greg Smith (ph) with Merrill Lynch.

Along the lines of the Premier.

Why did you not renew the referral agreement with Wells Fargo?

When Wells was bought by Norwest, they had a very different management philosophy in terms of branch independence versus centralized direction.

What we found is that the whole dynamics changed.

When we signed the deal originally, it was with a company that had much more centralized direction to the branches.

Their mode of operation changed to where branch managers had much more autonomy; that changed the whole dynamics, Greg, for us in terms of dealing with them.

We had a month to month that ran out I think in February or March of this year.

I think it was mutually agreed that it didn't make sense economically for either one of us to renew and I think that's what's happened with Premier Payroll.

Shifting gears on TurboTax, this year you had a particularly wide gap between the unit growth and the revenue growth.

Should we look for that same type of gap going forward?

And how should we think about those two growth rates relative to one another?

I think the two things that drove the 8 percent unit growth and 16 percent revenue growth is we had a wonderful year at Deluxe (ph) so we had 9 or 10 bucks a unit more, if your mix shifts, it really makes a big difference in terms of revenue growth versus -- and we also had some late-season price increases on the Web that created some additional revenue growth.

I think it is too early to speculate.

Let's see -- we've got a lot of new things we're that we are going to be doing next year that we're pretty excited about.

I think it would be not correct to just project what happened this year onto net season because we have a lot of new things that were talking about doing.

So let's save that for going forward.

Last question, although a two part.

Can you talk about what happened in Canada?

I assume that's your tax business there.

And then also any changing on the international aspect of the business?

I think you launched a version of the MRI in international version, any changing in the thinking about international opportunities across your business?

On a global basis no changing in thinking at all.

We are still mostly a North American Company, although some of the companies that we have acquired do have global products.

But that's a less than 2 percent of our revenue and I wouldn't expect that to change.

In terms of -- what was the first question again?

Canadian business.

I think answer is we've had great growth in Canada over the last few years.

It's relatively small.

That's why it's in the other category.

I think basically what's happened of the market has matured up there, much like some of the trends we are seeing in the U.S., and we need to get back on the growth trend and come up with some new innovative things which we're working on.

I think it's really pretty much the same trend as the U.S.

The good news is it was offset by strong performance by Quicken.

Great, thanks a lot.

Glenn Greene with ThinkEquity Partners.

Thank you.

Just a couple of questions.

The first one relates to QuickBooks and sort of your thinking relating to fiscal '05 and thinking about the mix of the units between the core and the higher end offerings.

How would you think about the growth in those various components?

And obviously it was disappointing in the January quarter for the core Quick books, and it seems to have come back in the April quarter here.

What sort of a reasonable sort of longer-term growth trajectory for the two components there?

I think it's far too early for us to speculate on next year frankly because we haven't come to a point of view yet on what the mix is going to be across units.

That will be more of a discussion for August.

I think though what we have proven is there still is juice in the core basic upgrade and that a big part of the turnaround as you mentioned, Glenn, in Q3 was the remix of our direct marketing effort and so I think we will continue to grow high end users faster but I think its -- do you have a perspective on this one?

I would add to that.

I think the other thing we've proven is that we can by applying strategies that Steve described, drive new growth.

New growth that we and the competitors weren't getting and get new sales in revenue and our fastest-growing parts are the QuickBooks business by far are the newest parts that we've added over the last few years.

Using the same strategy we're now applying to Tax and ProTax.

I think the last one I would add, Glenn, is that at some point you saw what we did is look at Small Business in total this quarter because ultimately because of our popularity with QuickBooks, it's going to be very hard for us on year-over-year basis to get double-digit unit growth and core QuickBooks.

So a big part of it is continue to attract new users and then add on products and services to help them solve more of their needs.

As the results show, up 23 percent in the third quarter, and I think 19 or 18 percent year to date, we continue to do a good job of executing a Small Business growth strategy and I think investors are very focused on QuickBooks units but our share is still in the mid-80s on a unit basis at retail.

And we are doing a much better job of adding on other revenue.

I think this is very good news for investors that QuickBooks had 31 percent growth in the third quarter.

It shows demand is still there.

And I don't see from where I sit that that demand is going away as we look into the future.

The real question is how do we continue to acquire the users and then add on products and services which we have been doing for the last three years quite successfully if you look at the results.

I'm sort of coming to a similar conclusion.

And I guess I am sort of coming up with I'm not sure why you wouldn't have double-digit growth in QuickBooks next year at least on a revenue basis.

And perhaps similar logic it shouldn't be incredibly difficult to get double-digit revenue growth on TurboTax.

And that is a large part of your business.

I guess I am struggling a little bit with this sort of high single digit revenue growth expectation.

I think we will have more details by segment in the April call or August call.

And as Brad said, this is our best thinking given how the roll up looks like at this point and we will share more details in August.

One final question.

Sort of your thinking about getting to your 30 percent operating margin growth goal?

As we've said all along, we're not solving for operating margin; we're solving -- because of the scale nature of our businesses and the high fixed low variable cost, the more unit growth we get, the more margin leverage we get.

I think the thing we want to continue to do is to invest in a lot of exciting new customer driven growth initiatives and we have many more of those on the plate now that we're investing in.

As a matter-of-fact, we're investing in some new things in the fourth quarter that we hadn't originally planned.

And so I think we've got a balance investment and new great growth opportunities with delivering margin enhancement short-term until we can work harder to get back into double-digit growth.

So I think we are doing a balancing act, but if you look at the track record again this year we're up 119 basis points on operating margin through three quarters.

I think because of the scale nature of our businesses, we believe we can both invest more in growth and deliver increased operating margin.

And that's been the track record.

Thanks a lot.

David Farina with William Blair.

Hi Steve.

A quick question on the payroll front.

Clearly it's an area that's not performed up to expectations.

Is it -- are you happy with the way the operations are improving?

Is there any competitive issue there?

Or is it a matter of getting your specific execution to where you needed to be to kind of be a world class payroll company?

I think if you look at outsource specific, because we continue to do great on DIY --

Specifically toward the outsource.

I think the answer is there is good competitors, the market is still underpenetrated.

I think execution is much slower both on a technology infrastructure and building a scalable sales and service operation.

It's a great business with great fundamentals but it clearly is a scale business and there is very strong entrenched competitors.

We are going through a strategic relook of our outsource payroll business to make sure that we have a winning formula just like we are with ProTax and just like we have recently done with TurboTax from the 90 days I was down there running that.

So I think the answer here is we continue to reassess how do we have a winning strategy in outsource payroll and if we're in a process of sorting through that, we are pleased with the growth on a branded and we're trying to figure out what can we do to grow it faster and we're in the process of trying to figure that out.

But I think until we have something more tangible, I think it is prudent for us to provide the direction we did that says we expect outsource payroll to grow in the next couple of years in I think high single digit range.

Fair enough.

Thank you very much.

John Mahaljevik (ph) with Thomas Weisel Partners.

Good afternoon.

Just a couple of questions here.

A follow-up on the EPS growth guidance going forward.

Given that the top-line growth seems fairly cautious and the scale nature of your business, why should we have confidence that EPS can still grow 15 to 20 percent?

Does that assume additional share repurchases, just a little more color on that.

A couple of thoughts, John.

First, if you look at our track record over the last five years, you would see a very similar pattern of EPS growing faster than revenue growth.

Because of the scale nature of our businesses; because of how we put our excess cash to use to deliver value to shareholders, so look at this year, we're talking about revenue growth of 12 or 13 and EPS growth of 17 to 20.

It's roughly the same ratio, so I think this is really business as usual for us.

Brad, do you have anything you would add?

No.

I think that is exactly it.

It will continue to have leverage on the operating line.

We will continue to use our excess cash appropriately to return to buyback shares.

Okay.

And then on TurboTax, you guys mentioned that the revenue there benefited from some late season price increases on the Web, I believe, you had moved the date for the price increases from April 1st to March 22nd.

What was the rationale for that and given that I think it was the first time in the history of that product that March 22nd was the date.

Do you see any impact from that for next season?

I think the rationale is simple.

We went out and looked at the market and as soon as I got down there, we found out that we were priced below our competitors.

And said gee -- that doesn't seem right to us so we said what should we do and we decided to raise the price earlier to be more at the market price for our major web competitor.

Okay.

Finally, on merchant services, you mentioned that that acquisition is tracking well.

Can you give us a little bit of a sense for what's driving that, are you having some early success in leveraging QuickBooks customer base there to sign up additional merchants?

Payments and credit card payments and Small Businesses is a growth market.

It is one of the reasons we bought IMS.

Our market data says its growing double-digits every year so what we bought is we think its a great platform that can participate and grow faster than the market in a growing business.

Because of the synergy in QuickBooks base, I think that's just what we're seeing happening; combining what we had in our leverage with a great operation.

I think there's no magic to this; it's fundamental blocking and tackling which is good execution in a growth market.

We're starting to see the benefits of that.

I would say a lot of it is very good execution on that team because we are just beginning to see the benefits of bringing the two together.

Do you guys use ISOs in that market at all to acquire merchants?

Yes.

Thank you.

Michael Hodes with Goldman Sachs.

A few quick questions.

First off, in the Small Business products and services segment, could you tell me what the organic growth was if you strip out the merchant solutions business?

It would have only impacted it a point or two. (multiple speakers) A point of so.

Okay.

And then just regarding the reserve that you have for rebates and returns.

Was there any unusual activity in that, in the balance sheet that may have impacted the revenue numbers that we see?

No.

This is as you know we reserve upon sell in and do a pretty exhaustive analysis across all of our products at the end of every quarter.

To see where the appropriate rebate and return reserves should be.

Its a thing we've done for many years and at some level we have the advantage of because our products are seasonal, we find out for sure in a few months how right we were.

And have for many years.

We've got a very good track record of setting this in the right spot.

The 31 percent growth is reflective of sell-through strength.

Just lastly, I know it's been asked a couple different ways.

In terms of the fiscal '05 guidance, the little counterintuitive with revenue growth decelerating that you would that you have a greater than normal expansion in operating margin, I assume Big Ten (ph) .

Maybe you could just clarify would the EPS growth guidance would the net income growth guidance be very different from that or --?

I think at this stage, we don't want to get any more granular than EPS.

But I think as we talked about a couple of times, we've clearly got operating opportunities here; we've clearly got sharecount opportunities, and as Steve mentioned, volume leverage.

We've got -- we have track record of doing this.

Clearly, if we weren't comfortable, we wouldn't have said it.

Okay.

Thanks a lot.

Adam Waldo with Lehman Brothers.

My questions are entirely around the allocation capital in the business.

Over the better part of the last three years, you put now about 1.65 billion of capital into share repurchases at a weighted average price of about $45.

Obviously quite a bit above where the stock is now.

You put about $800 million in new capital in the business through acquisitions.

Given the high single digit organic revenue growth that you are counterintuitively signing up for for the first fiscal '05 which I think is surprising many people on the call.

Can you give us a sense for in hindsight would you have allocated the surplus capital of the business the same way you have?

And then going forward, in terms of the $500 million share repurchase authorization increase, how should we think about the appetite for using surplus capital for acquisitions versus share backs versus potentially an inaugural dividend given the target growth rate you just signed up for FY '05?

A couple of thoughts.

One is, we think about capital if you will on a hierarchy of needs.

And (indiscernible) amount of cash to run the business particularly given our seasonal nature.

Secondly, as we see time to time, there are attractive acquisition opportunities that we continue to pursue every day although we do not pursue them with money burning a hole in our pocket.

After those two our view is that we should return the surplus to shareholders to be affectively redeployed.

We've continued to do that.

We will continue to do that in the future.

I think as a practical matter, the methodology we have chosen at lease stayed through share repurchases in large measure because that's been the overwhelming sentiment among our shareholders as to the best way to do it.

Just a follow up there.

Getting back to the first part of my question around the capital investment in acquisitions versus buybacks given the growth trajectory you've been on organically the last couple of years.

If you look back in hindsight, do you think that the valuation that you paid for some of the acquisitions in the outsource payroll area and also in the vertical area are consistent with the growth that has actually been delivered subsequent to acquisition in terms of earning acceptable returns for your shareholders?

I think the answer is, yes, we'd do the same thing all over again.

It depends on your time horizon.

We are not going -- I think it would be a mistake, Adam, to conclude -- because next year we -- our guidance is high single digits that the company is going to only grow at high single digits the rest of its life.

I think that's one-year guidance.

Our internal goals are still double-digit organic growth every year.

We just share what we think next year is.

We've got a lot of new things that we're working on, and the acquisitions we have now are all accretive that we've made other than outsource payroll in a short term are all accretive to our growth rate.

I think from where I sit, I am comfortable with what we've done and we're working hard to make every one of these businesses better and I think in the longer it will turn out to show that they were good decisions.

And if for some reason some of them don't, then we will deal with that on the portfolio basis.

That's kind of my sense on the decisions we've made in allocating our capital.

And finally in circling back to longer-term growth rate, you've articulated that 20 percent earnings growth rate on a sustainable intermediate term basis as your goal.

Are you still comfortable with that goal, Steve?

I think what we've always said which may have been a mistake on my part, but our goals are still the same.

Our internal goals are double-digit revenue growth with profit leverage.

Those are still our goals.

Thanks very much.

Eric Wanger with Barrington Research Associates.

Most of my questions have been answered at this point.

I guess -- I guess one question is, given that the dividends benefit a different constituency than share repurchases, i.e., option holders, do you think that ultimately may affect any decision long run whether or not to pay a dividend?

I think Brad said it well.

We at the Board level every quarter talk about the best way to deliver excess cash to our investors and up to this point, as Brad said, based on listening to investors and our own view as a Company, as a Board; that we believe share repurchase has been the best use of excess cash.

That doesn't mean we're wedded to share repurchase versus dividends; things change and I think it's a continuous evaluation based on this new $500 million authorization that the Board approved.

I guess what we are saying now is we still believe share repurchase is a better alternative in the short-term.

So we will see how evolves over time.

We may change our position but the path we are on now we think is the correct one for our Company.

Will there be any rebalancing of the different segments from a management perspective?

One of the things I noticed is Small Business Services and Consumer Tax are now lording over the rest of the segments in terms of size.

Would there be any time to reallocate those?

I think we continue to look at this on an annual basis.

Last -- I think the rebalancing for size, but to make sure that we've got the things grouped together that makes sense to group together.

We will keep looking at it.

We will certainly look at it at the end of the fiscal year.

I think its unlikely we would rebalance or do something with Consumer tax because Consumer Tax is Consumer Tax.

It's a big business but it's one business. (multiple speakers) All Business services, we will continue to look at that.

I think that is the question and it is something Brad and I have been talking about.

Just about all my other questions have been addressed.

Thanks.

Jim MacDonald with First Analysis.

If I may I want to circle back on TurboTax.

You had several new service offerings as part of TurboTax.

Any -- and some older ones as well -- any impact of some of the other offerings like (indiscernible) and IRAs and talk to a preparer?

We did not (indiscernible) this year.

We got out of offering (indiscernible) because we didn't think that was the right thing to do for our customers.

We offered live tax advice on a pilot basis.

There was a bunch of stuff we did to try to and do new things.

I would say that the impact on total results was negligible and the results that you saw, the 16 percent growth was driven by unit growth in TurboTax and mix and price.

On DIY, you raised prices significantly a year ago.

Any -- will that continue to have impact for how long?

I think the answer is we continue to look -- we still think DIY is a great value for customers but we continue to look for ways to add more value to the product and it's a great area for customer driven invention.

So I think it is an area where we have some new things on the drawing board that we will share with you as we get closer to market.

We think there is some opportunities to do a better job for customers and create more value for customers that we would then be able to charge more.

Thanks very much.

Michael Newman (ph) with Newman Research and Associates (ph).

I am not necessarily trying to put words in your mouth but regarding '05, is your assumption that some of these initiatives will in terms of the guidance you've given us, will contribute virtually nothing and where you hope there is some upside or have you assumed some mix of improvement, some mix of contribution from these?

And I have a couple other questions.

Michael, it's two things.

Firstly, there are some things we've done in the last year or two like the POS product, the Flavors, that we continue to expect good revenue growth and good contribution.

There are others that our initiatives that literally aren't in the marketplace yet where we have very little basis to sort of definitively come to a point of view about revenue next year particularly in the short term.

Most of our businesses the thing we compete with is not some explicit competitor.

Its actually nonconsumption (multiple speakers) or some other message accomplish the same result.

And therefore, despite all the good research we might do, they tend to be unpredictable until we see what happens.

So we want to try not to bank on that kind of stuff in the short term.

You seem, at least on a quarterly basis during the year when you've had for example disappointing in one quarter; you've seen the judicious use of promotion advertising marketing to be able to juice it up.

What is the assumption for next year?

Are you assuming kind of maximum juice if you will, or something different than that?

I think the thing Steve referred to is useful here.

It wasn't an attempt to juice the market.

What we were doing is correcting execution mistakes that we had made in QuickBooks in November in our direct-mail program.

When we corrected that mistake, we got back to on average more normal demand levels and that's what you saw this quarter with the strong rebound in QuickBooks.

And we didn't spend more on direct marketing to get the 31 percent growth.

We just redeployed our existing spend to focus on upgraders for Basic and Pro as opposed to using that money for mailers on Flavors.

And looking at next year also are you assuming that your revenue growth is going to be much more in line with your unit growth and was the case this year?

No.

So you are assuming just to be clear that you might have the same kind of leverage on revenue versus unit in '05 as you had in '04?

I think you get a different answer as you go business by business and we will talk about this more in August.

On the QuickBooks, could you give us the breakdown in Premier between Flavors and I guess non-flavored Premier?

Premier in total in the quarter did 60,000 units.

We don't break it down any farther than that.

Okay, because I think you -- last quarter you said there were 35,000 Flavors?

Flavors we can't say and we've said this consistently, is we expect the Flavors part to be the faster growing and ultimately to eclipse what we call plain vanilla Premier.

Because Flavors offers superior solutions for the specific industries now that we have more of those industry Flavors out.

Thank you.

Gibboney Huske with CSFB.

Thanks.

Most of my questions have been answered as well.

I was just wondering obviously you got a big portfolio of products and some are easier to project than others and you have had a lot of areas where you got it right and areas where you haven't gotten it right in the short term.

I guess as you look to the portfolio and look at optimizing the business, are you doing anything in terms of your process for testing the individual units and trying to be predictive of where you might have problems or issues?

Any change in that basic forecasting process?

Well, Gibboney, we continue to put more rigor into our forecasting process year-over-year.

As I mentioned earlier, particularly for the newer things that we are doing, they are very early days.

Flavors as we talked about has grown 68 percent year to date.

When you've got a phenomenon like that where its very early on, you're competing non-consumption or substitute methods, the reality is you are going to have some bigger range of error in it than you will on a product that's been around for ten years.

I think the second thing is -- this is part of the advantage of your first point which is we do have a broad array of products and services, much more so than most software companies in the sense that if we have some weakness versus what we expected in one product or another, it tends to be outweighed by strengths elsewhere.

Its a much more stable business than most.

Let me just add that we were not happy with our forecasting accuracy earlier this year.

So we have moved to make changes in how we do the forecast.

And maybe just one other follow up question.

Obviously in terms of the Premium versus the QuickBooks did quite well and continued to do quite well.

Could you give us a little sense of where you feel the Enterprise edition is in QuickBooks relative to the Flavors and the next one maybe a little bit earlier in development, sort of how Version 3.0 has been going and what you see for that side of the business?

We are still working on some of the things that would continue to deliver an even better customer experience.

We are delivering more value but not as much value as we think we need to do yet to get this product even at a much higher scale number.

We keep working on different parts of that and I think we believe it's the right path but there's not going to be a big short-term hit on it.

It’s going to be continuous growth, continuous steady growth as we correct some of the opportunities for a better performance that we've been working on for the last couple of versions.

So it is just more the development of the product as opposed to the marketing plan behind it that you are focused on?

Yes.

I think that's a good insight.

I think that's a good way to see it.

Okay.

Thank you very much.

We have reached the end of the allotted time for a questions-and-answers.

Mr. Bennett, are there any closing remarks for today's call?

I think the bottom line is we finished a strong quarter.

I was very pleased with the QuickBooks turnaround.

We were pleased with the TurboTax growth.

We feel comfortable with the guidance we provided for next year.

We have a lot of exciting new things to that are going to be in the market next year that we think will be well received by customers.

The conclusion I think investors shouldn't make is that we're satisfied with single-digits growth.

We're working on lots of things to try and get back into double-digits growth.

But next year looks like what we provided is our best view at this point on what the performance of our Company is going to be.

Thanks for attending.

Thanks for your questions and we will talk to you next quarter.

That concludes today's conference call.

You may now disconnect your lines.