直覺電腦 (INTU) 2004 Q4 法說會逐字稿

Good afternoon, my name is Patty, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Intuit fourth quarter and fiscal year 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 you would like to ask a question during this time, simply press the No. 1 on your telephone keypad.

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

The presentation you will here on this call includes forward-looking statements, including statements regarding revenue and earnings guidance.

Actual results may differ materially.

Risks that could impact these statements are described in the following documents that are available on the Investor Relations page of Intuit's website at intuit.com.

The earnings Press Release issued early this afternoon, this conference call script, supplemental financial information, and Intuit's most recent forms 10-Q and 10-K, and other SEC filings.

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

The most directly comparable GAAP financial measures and the reconciliation of the pro forma financial measures to GAAP are provided in the earnings Press Release, which is posted on the Investor Relations page on Intuit's website at intuit.com.

Thank you.

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

Thank you.

And good afternoon to everybody.

Welcome to the Intuit fourth quarter and fiscal year 2004 conference call.

With me today is Brad Henske, our CFO, and Scott Cook is joining by phone.

Let me begin with a quick summary of our fourth quarter and fiscal year 2004.

I'm very please with the results Intuit delivered for the quarter.

Fourth quarter revenue of 276 million was up 13% year-over-year, and at the top-end of our guidance range.

Pro forma EPS was a loss of 6 cents, also at the good-end of our guidance range, which you will recall was minus 10 cents to minus 6 cents.

As you know, Intuit typically reports its seasonal loss in the fourth quarter when revenue from our tax businesses is very low, but expenses remain relatively constant.

Now, turning to fiscal year '04, Intuit delivered another strong year of good growth.

Revenue was up 13% to 1.87 billion, pro forma operating income was up 19% to 477 million.

This translated into an operating margin improvement of about 130 basis points over last year.

In pro forma EPS was up 20% to $1.67 at the high-end of the $1.57 to $1.67 range we provided last May.

With that brief introduction, I'll turn it to Brad for more color on the business.

Thanks.

As Steve mentioned, fourth quarter revenue was 276 million, up 13% over Q4 of '03.

All of our segments delivered within or above the targets we set 3-months ago.

Turning to results for the fiscal year, revenue was up 13% year-over-year, in line with the guidance we provided in May of 2003.

Growth was driven by strong performance in our Small Business Products and Services, and TurboTax segments.

While some of the businesses delivered more and some less than originally projected, the strength of the total portfolio enabled us to drive consistently solid results and deliver on our overall expectations.

Moving to the bottom line, pro forma operating income increased 19% over FY '03, driven by unit growth, mix improvements, and to a lesser-extent price.

We also benefited from continued expense management efforts.

Intuit's pro forma operating margin of 25.5% was up about 130 basis points from fiscal 2003.

We have shown that by solving for revenue and profit growth that we drive margin improvements.

We believe that this trend should continue, and our target operating model continues to have a pro forma operating margin of over 30%.

Pro forma diluted EPS was up 20%, benefiting from better operating margin and lower share count.

We came in at the top of the guidance we provided in May of 2003.

On a GAAP basis, fiscal year 2004 EPS was $1.58.

This compares to FY '03 results which benefited from a one-time after-tax gain of $71 million, or 34 cents a share from the sale of our Japan operations.

Now, let's take a deeper look at the results of our individual businesses.

Intuit's small business portfolio of QuickBooks and Small Business Products and Services performed very well in FY '04.

Aggregate revenue of 817 million was up 17% from FY '03, driven by strong growth in Do-It-Yourself Payroll, Merchant Account Services, and the new higher end QuickBooks offerings.

FY '04 QuickBooks revenue was up 12% over FY '03, and Small Business Products and Services revenue was up 20% over the prior year period.

Strong growth in small business resulted from our success with our 2 key initiatives.

One is acquiring new customers, and then, two, selling a more broader array of solutions.

QuickBooks continues to be our primary vehicle for bringing new customers into the small business franchise.

The new user acquisition has been fairly consistent over the past several years, and FY '04 we estimate that we added about 370,000 new QuickBooks customers, which is good, but we have some new initiatives around the corner that could make this even better.

We will talk to you more about this in "Investor Day" on September 29th.

Once we have customers in the franchise we will work to sell them a broader array of other small business solutions to meet their needs.

This includes upgrades to newer versions of QuickBooks: Basic or Pro.

It also includes upgrades to higher end QuickBooks offerings like the Premier Flavors targeted to specific industries, and Enterprise Versions designed for more complex, small, and mid-size businesses.

In addition, it includes such products and services that offer functionality beyond accounting like Point of Sale, Payroll Services, Merchant Account Services, Supplies, and Technical Support.

We've seen real success in cross-selling and up-selling QuickBooks customers.

For example, in FY '04 QuickBooks Premier and Enterprise units were up 57% year-over-year.

Our Do-It-Yourself Payroll Business also had strong growth with customers up 9%, and revenue up 32% over FY '03.

And our Merchant Account Services revenue was up 22% year-over-year when results from the acquisition are included in both years.

These results, coupled with our efforts to drive stronger new customer acquisition give us confidence that we are on the right track to drive continued solid growth in QuickBooks and related Add-Ons services.

Next in tax, as we discussed last quarter, TurboTax had a strong year with solid revenue and share growth.

Revenue of 490 million was up 16%, driven by unit growth, as well as price actions and an increase in attached products.

Our ProTax revenue of 252 million was up 3% over fiscal 2003, somewhat lower than expected as we lost some customers to lower-priced competitive offerings.

We have a new product in the market today to regain that ground and early orders are off to a good start.

Again, we'll talk about this more in our upcoming Investor Day.

Our verticals portfolio performed well, with revenue up 15% over fiscal 2003, to $109 million.

The vertical segment and pro forma operating income of 4 million in FY '04, a $12 million improvement over FY '03.

In the past quarter, we announced a new Corporate Real Estate Management Solution and a new release of our Eclipse Distribution Management Software.

Today, however, we're announcing our decision to sell IPSS, our Public Sectors Vertical.

In FY '04, IPSS had revenue of about 13 million, about flatter year-over-year, its 3rd year of relatively flat growth.

As you know, we're rigorous about managing our portfolio, so we're focused on the right growth opportunities for Intuit.

A combination of industry dynamics, our competitive position, and the other better investment opportunities we have make this the right decision for Intuit.

We remain committed to our vertical strategy where the opportunities meet our growth and profit objectives.

We like our other vertical businesses and are pleased with the solid revenue and profit growth they're delivering.

Without IPSS our verticals portfolio had $17 million in revenue growth, and 5 million in operating profit in FY '04.

Finally, other businesses which includes Quicken and Canada had revenue of 200 million up 4% year-over-year.

FY '04 was a good year for Quicken, which had year-over-year revenue growth for the first time since fiscal 2000.

Quicken's retail share through the end of June was 73%, 5.5 percentage points higher than year ago according to [NPD.] In the past year, we've shifted our focus in Quicken to make the products easier for new customers to use, a good example of how we are successful in enhancing existing products.

To sum-up, Intuit has a portfolio that enables us to consistently deliver solid results, regardless of ups and downs within the individual businesses.

One of the reasons for this is that Intuit in the businesses that they are in are fundamental to how people run their businesses and manage their personal lives.

Many of our products are ones that people buy every year, like TurboTax, or even more often, like their company's payroll processing.

As a result, we estimate that about half of our annual revenue is actually recurring from year-to-year.

It's not something we're solving for, but it's a natural outcome of the businesses we're in, and provides predictability to our revenue stream.

Moving to the balance sheet, the Company had approximately $1 billion in cash and short-term investments on the books at the end of fiscal 2004.

During the year, we generated significant cash, including 574 million in operating cash, and 119 million in the proceeds from the exercise of employee stock options.

We also spent cash during the year, including 118 million in capital expenditures, 124 million in acquisitions, and 610 million in our stock repurchase program.

Under the stock repurchase program, Intuit bought approximately 2.5 million shares in Q4 of '04 at an average price of 39.73.

For the fiscal year Intuit bought 13.5 million shares at an average price of 45.01, for a total dollar value of about 610 million.

We completed the third repurchase program during the fourth quarter and as you recall, our Board has authorized a fourth program, another $500 million repurchase plan, and we expect to continue our repurchases in FY '05.

Before I turn to guidance, there are a few housekeeping details to cover.

We've made a change to our business segments going forward to align our reporting with how we've organized and run our businesses.

As mentioned over the last few years Intuit is focused on tax and small business.

Within small business, there are 2 segments.

The first is QuickBooks related, which includes QuickBooks, plus the products and services people Add-Ons to QuickBooks, like Do-It-Yourself Payroll and Merchant Account Services.

The second segment is other small business, which do not carry the QuickBooks brand and include offerings that don't require the use of QuickBooks, this includes our Information Technology Solutions and Outsource Payroll Businesses, as well as our solutions for Construction Companies, Wholesale Distributors, and Real Estate and Property Managers.

Details on each of these new segments are on our facts sheet.

Within tax, we'll continue to have 2 segments, Consumer Tax, which is our TurboTax Business, and Professional Tax, which includes our certain ProSeries brands for Professional Accountants.

And then finally, our 5th segment other businesses continues to include Quicken and our non-U.S. businesses, the biggest being Canada.

For your convenience we have provided you with the 3-year historical revenue data for each of these new business segments, and our FY '05 guidance will be provided in the new segments.

Again, the fact sheet has more details.

One final note before we turn to guidance.

While performance from our IPSS business, our public sectors vertical, is included in the results we're reporting today, and will be included in our upcoming form 10-K.

All right, in the future it will be treated as a discontinued operation in future financial declines, which is what's required by GAAP.

As a result, we did not include IPSS's past or future results when we developed our pro forma FY '05 guidance.

Now, let's get to a more detailed look of the year ahead.

For FY '05 we expect revenue of 1.97 billion to 2.02 billion, or growth of 6 to 9 percent, which is consistent with what we told you 3-months ago.

Looking at how our total revenue breaks out by quarter, we expect about 12 to 14% of annual revenue is going to be included in Q1, about 29 to 34% in Q2, 37 to 43 in Q3, and the remaining 14 to 16% will occur in Q4, as we look through the seasonality of our business.

Looking at segment guidance.

First, within small business we expect QuickBooks related revenue to be 687 million to 719 million, or year-over-year growth of 5 to 10%.

In other small business revenue of 275 million to 291 million, or year-over-year growth of 6 to 12%, again excluding IPSS.

Within tax, we expect Consumer Tax revenue of 514 to 539 million, or year-over-year growth of 5 to 10%.

And in Professional Tax, 252 to 264 million, or year-over-year growth of 0 to 5%, and then finally we expect our other business revenue to be 199 to 209 million, or year-over-year growth again of 0 to 5%.

We expect pro forma operating income of 535 to 559 million, or year-over-year growth of 12 to 17%.

This implies that our pro forma operating margins would expand by about 140 to 160 basis points again next year.

And we expect pro forma diluted EPS of $1.93 to $2.01, or year-over-year growth of 15 to 20%, and we expect GAAP EPS to be in the range of $1.82 to $1.90.

Turning to the first quarter of fiscal 2005, we expect revenue of 251 to 263 million, or growth of 5 to 10% over Q1 of 2004.

We expect Q1 pro forma operating loss of between 85 and 75 million.

As you recall, Intuit typically loses money in its seasonally slow first quarter when revenue is lower, but expenses stay relatively constant as we continue to invest in our business.

We expect a [Q4] pro forma loss per share of 29 to 25 cents, and on a GAAP basis we expect a loss of 32 to 28 cents.

GAAP EPS includes the impact of IPSS as a discontinued operation.

As we've discussed, Intuit manages its businesses as a portfolio and deliver on our overall growth targets.

Going forward, a quarterly guidance will only cover total Intuit revenue targets versus targets for individual segments.

Before turning the call back to Steve, I would like to introduce Jessica Kourakos, as our new Vice President of Investor Relations.

Jessica joins us after having served as the V.P. of Investor Relations at [Synopsis,] and prior to that as Vice President and a Wall Street analyst at Goldman Sachs.

As you know Jessica is replacing Linda [Fellows] who is retiring this week.

I know you will join me in wishing Linda all the best, and welcoming Jessica to Intuit.

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

Thanks, Brad.

I'm proud of the strong growth Intuit has delivered over the past 4 years.

So while we expect revenue growth to be in the 6 to 9% range for fiscal year 2005, I believe we're on our way back to double-digit growth at some point in the future.

Let me share some of my thoughts on why.

As most of you know, Intuit is a market leader in big, established, and proven businesses, like Small Business Accounting with QuickBooks, and Tax Preparation and Filing with TurboTax.

These are strong and stable businesses for us and they're continuing to grow and are nicely profitable.

What is also important to note is that Intuit's business and market position are unique.

Many might think our QuickBooks and TurboTax offerings are competing primarily against Peachtree and TaxCut.

While they are both good competitors the reality is that we're competing against something much larger that offers much more opportunity for growth, nonconsumption, and alternative ways of doing things.

These alternative methods include Spreadsheets, and Pencil and Paper for Small Businesses as an alternative to QuickBooks, and Pencil and Paper, Franchise Tax Preparers, and On-line Solutions as an alternative to TurboTax.

Intuit has done a great job in successfully defining and then penetrating markets by creating new and innovative offerings like TurboTax, QuickBooks, the DIY payroll, ProSeries, Financial Supplies, and Quicken.

So to continue to grow we need to continue to think more broadly and expand the definition of our markets.

Like in the past, we're working hard to continue to uncover additional customer problems we can solve well with new solutions.

Two key areas of growth are emerging across multiple businesses.

First, we're innovating upward.

Adding new functions to meet more customer needs, and then pricing accordingly for those solutions.

And second, we're focusing on non-users.

These are large segments of the population who are not buying commercially available solutions today because the industry hasn't effectively targeted their needs.

We're targeting new offerings for these unserved segments, the first of which we'll show you at Investor Day.

This new mindset in strategy is vastly different than the one-size-fits-all approach we've used in the past, in QuickBooks and TurboTax, and the two-sizes-fit-all product strategy we had in ProTax.

We've shown that this new approach works.

Since we launched our QuickBooks right-for-me strategy in December 2001, we've generated 288 million in cumulative revenue from our new higher earned QuickBook's offerings, and new offerings that attach to QuickBooks.

A number of these businesses like Merchant Account Services and QuickBooks Point of Sale have had great early success.

They're growing nicely, and we're excited about their potential to have a longer term impact on our growth rate as they become larger in scale.

Looking ahead, this is the strategic right-for-me approach that we're taking to drive new growth in TurboTax, ProTax, Quicken Payroll, as well as all of our other businesses.

We're working on a number of exciting new initiatives, both to acquire new customers, and expand our relationship with existing ones.

While we're excited about many of these new things they are all multi-year initiatives that may not impact results materially in the next couple of years.

So in my mind the question isn't whether Intuit is headed towards stronger growth, but when it will occur.

We have great assets.

We have lots of opportunities for new growth across our small business and tax businesses, and we're excited about our prospects, and look forward to sharing some of these initiatives with you at Investor Day on September 29th.

With that I want to thank all Intuit employees who helped deliver a very good year, and are working toward delivering solid results in FY '05, and beyond.

Now, we would like to open it up for your questions.

Thank you.

Ladies and gentlemen, if you would like to ask a question, please press the No. 1 on your telephone keypad.

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

Our first question comes from Glenn Greene of Think Equity Partners.

Thank you.

The first question relates to QuickBooks and sort of the outlook.

I was wondering if you could sort of just give us some granularity in terms of your unit growth assumptions for Basic and Pro, and for Premier, as well as your aggregate ISP growth assumption?

I think, Glenn, what we're working on some new things that we're pretty excited about that we're going to share.

And I think the best forecast that I feel comfortable giving you is the guidance we gave you for the year for QuickBooks.

Because of some of the new things that we're going to be focused on, it may change some of the numbers.

So giving you numbers now would provide a bad context.

So let's talk about that after Investor Day on this 29th of September.

Okay.

Let's try a question on the TurboTax side.

Heading into the year, customer retention, I know, is a focus of yours, and you had alluded to that at the last Investor Day.

I was wondering if you could share with us sort of how that worked out for this past tax season, and if you're sort of at this stage whether you're satisfied with that or what you could do to further improve it?

I think to be honest with you, I haven't seen the numbers yet.

I think we are still working on them for the year.

My guess is from the initial preliminary expectations it's relatively similar to what it was the year before.

So that's a good follow-up for us to have.

We should have that data by Investor Day.

Brad, do you have any thoughts on that or Scott do you have any thoughts on that?

So I have one thought, which is we spent a lot of time in the last year before this past tax season working on initiatives that would help customer retention.

Those initiatives, many of them played out, and were in the customer experience this past year.

So we'll tend to see the results actually next year as we see the customers we impacted this year coming back at a higher rate.

Okay.

Thank you.

Our next question comes from Heather Bellini of UBS, Union Bank Suisse.

Hi, thank you.

Brad or Steve, I was just wondering if you could give us an idea of what your views are of your pricing power in your different business segment?

And if you could give us you're current thoughts on where you might take pricing?

I'm not looking for percentage changes, but do you feel like you could actually put through price increases in most of your business segments things year?

And then I just had a follow-up on QuickBooks sun-setting, if you will do a double sun-set again for the new release?

Heather, I think the -- you know, it's hard to take a macro look at pricing, because everyone of our businesses is so different.

For instance, in TurboTax, our view is that unit growth in growing the category because of the economics and the high-fixed low-variable cost-net business is we would rather price to get more units, and be competitive in that market.

So we have a completely different strategy for pricing in TurboTax than we would on, say, QuickBooks.

I think the important thing for us is that as we go forward, you're going to see us move away from even more than we have in the past, from one-size-fits-all products and services that helps us hit different price points that may be above where we are today or below where we are today.

And so I think that's really the more relevant.

How, are we going to grow by producing new products that are not one-size-fits-all, and so to me, that's my view on how we're going to grow revenue.

That will be more of it.

I think price will not be a big factor.

I think price has been a big factor the last couple of years.

It's been mixed, and new offerings that are going to help convert customers to be users into products that haven't used our products in the past.

So Steve, should we assume then that some of these new offerings that aren't one-size-fits-all could mean that you would have a blended ASP that could potentially be above the blended ASP you had in the past year?

And I think, Heather, I think it's a very good point.

And I think if you look at the facts in the data we've shared on the average ASP for all of QuickBooks over the last 3 years, you've seen the ASP go dramatically up.

Now, we're not solving for ASP, and as we get more aggressive potentially in going after new users you may see some things that might have moved the ASP down.

That's why it is ultimately important that we're solving for revenue and EPS growth, and working all the different levels to do that.

And I would argue that mix is going to be more of a factor than price as we figure out how to best meet customer needs and continue to grow at Intuit.

Okay.

And then just the question on the sun-setting for QuickBooks?

Yeah, just one -- go ahead.

Do you have it?

Yes.

So we are similar to FY '04, we're effectively sun-setting 1-year in FY '05, that will affect modestly more customers in FY '05, and hence, be a modestly bigger opportunity than it was in FY '04.

Great.

Thank you.

Our next question comes from Greg Smith of Merrill Lynch.

Hey, good afternoon.

On the payroll business, 2 questions there.

First, where to do you stand, as far as really more aggressively rolling out the full-outsource offering at this point?

I think, Greg, the answer to that, as we said last time, payroll is a business that is a very long-term investment and the people that make the long-term investment end up with very, very good reoccurring revenue and highly profitable business models.

So we are still in the process of ramping up our DIY product, which we think is a great offering, as you can see from the growth rate there.

And on full-outsource we are in the process of continuing to make the business better as we investigate alternative ways to better serve the market.

So that's one of the things we're working on.

And, when we have those things sorted out, we will share them with you.

But in the mean time I would not put a big assumption for fast revenue growth in outsource payroll until we sort out strategically which path we're going to go down.

Should we still think about it growing consistently with the small business segment overall?

Yeah, I think that's probably in the right zip code.

Okay.

And then on the Premier payroll.

I know that's a trade-in, but you talked about it last quarter about maybe an opportunity to convert some of those clients over.

Any update there?

I think that has -- I don't know exactly where we are in that conversion.

But, yeah, I think that's something that has just started or we're in the process of starting as we convert them over to our complete payroll.

We believe we'll deliver a better customer experience for them.

Uh-huh.

Okay.

And then lastly, just switching gears to the Professional, the Professional Tax Business, where you've come out with a lower-priced offering.

Is it as simple as that, you think, to maybe reuniting the growth somewhat there or is there kind of a broader competitive issues there?

I think we had been a bit asleep at the switch on my watch in ProTax, and let people -- you know, we came in with good products that we continued to raise the price on, and I think we left our low-end flank empty or exposed some other competitors to -- had come in there with a radically different value proposition.

With the new products we already have in the market you see that we've already addressed that.

We'll talk more about this at Investor Day specifically, but the think you should realize, it is not the same product at a lower-price point, it's a new offering.

Okay.

I wish Scott might add to that.

Lower price and better meets the needs of that customer.

So we -- while we were disappointed in our ProTax season in FY '04, we're excited about, and have already responded to some of the issues that caused us to miss our guidance, and we'll see how well these new products play in the market, but so far the initial signs are positive.

Okay.

Thank you.

Our next question comes from Jim MacDonald, First Analyst.

Hi, guys.

Could you talk a little bit more about how you expect to get the operating margin improvement, what expense management areas you're going to be working on this year?

I think if you look, Jim, -- I'll give you a quick thought and then see what Brad wants.

And if you look at our performance over the last 4 or 5 years, every year we've delivered operating profit growth faster than revenue while investing in a bunch of new products that we've been launching, and there's a couple of levers.

No. 1; we still are in business models that are high-fixed low-variable cost, and as we drive unit growth, which we're still seeing in most of our businesses, the incremental profit on those units drops right to the bottom line.

So we have large fixed profit leverage.

We also have become much more stringent at managing expenses and eliminating waste efficiency -- inefficiency and redundancy.

So we've also had higher-mix products, higher-price point products that give us higher margins.

So I think it's that culmination of things that we've been doing for the last 4 years that we're going to continue doing in the outgrowth of which is that we continue to get operating margin leverage.

What would you add, Brad?

I think the one observation I would make is it's not fair to characterize it as a cost-cutting exercise.

What we are doing in practical reality is growing our expenses just modestly, not quite as fast as we're growing revenue, and that's where the margin improvement is coming from.

And switching gears, give us your thoughts on repurchasing more stock here at these prices?

Well, I think the answer is the Board -- I think the answer on that is if you look at the year, we spent about $610 million in the fiscal year, and since we announced this first repurchase in May of 2001, we've spent over $1.7 billion.

So as I always say the best predictor of the future behavior is to look at past behavior, and we've been putting our money where our mouth is.

And the Board just authorized another $500 million share repurchase in July.

Thanks very much.

Our next question comes from Adam Waldo of Lehman Brothers.

Good afternoon, everyone.

Good afternoon.

Brad, I know you were reluctant to discuss any volume price mix assumptions behind your fiscal '05 guidance by product segment until we get to Investor Day.

I wonder if you could give any commentary around a plant headcount growth for fiscal '05 underlying your guidance?

Two things; one is, I think we probably won't give explicit guidance down at the product level, even at Investor Day.

But secondly, we don't expect much headcount growth next year in aggregate.

Okay.

So pretty much flat?

Yeah, plus or minus.

Recall, also, we've got pretty big seasonality in our headcount through the tax season where we have a large number of service and call center or other folks on the payroll temporarily for that part of the year.

Okay.

That's helpful, thanks.

Also sticking with Jim's theme of where do we get the margin expansion in fiscal '05, and trying to drill down specifically on R&D productivity and customer service and support productivity opportunities, can you give us some sense whether those are areas on which you're focused in fiscal '05 and beyond?

And, if so, what kind of initiatives you may have under way there?

The answer is yes.

This is Steve.

We've been focused on them for 4-years.

We've been doing 6 Sigma projects for 4-years in all of those areas, and that's one of the reasons we keep getting volume leverage and operating margin improvement.

So to use a baseball metaphor, Steve, what inning of the game do you think we're in with those initiatives?

Bottom of the 1st.

Good to here.

And then finally on capital redeployment priorities, can you give us a sense at the recent 38 to $40 share price, how you would rank-order your capital redeployment priorities among organic reinvestment, acquisitionship, buybacks, and potentially a dividend?

So our capital priorities haven't changed, and they don't tend to change based on plus or minus a few dollars in the stock price.

Okay.

The first and foremost we need obviously some amount of money to run the business.

Secondly, those acquisitions that make sense both strategically and add operationally to our businesses, and meet an attractive financial hurdle.

And then third, we return it to the shareholders which has been in the form of a share buyback.

We continue to have a lot of discussions about dividends.

I would say our observation so far is lots of people want to talk about it.

Relatively few actually want one, but we'll see how that changes over time.

And I would just add to that.

We continue -- this is something we talk about virtually every quarter , how to return our excess cash to shareholders, what's the best way to use that, and we're going to continue to think about what the best path is.

We're listening to investors, and at this point we've decided the best way still is to announce the $500 million share repurchase.

I said July earlier, I think I it actually may have been approved in May.

Very helpful.

Thank you.

Our next question comes from Michael Millman of Soleil Securities.

Thank you.

Could you talk a little bit about your thinking in regard to possibly doing some sort of joint venture with eBay on their close to 500,000 small businesses who use them primarily, and sort of -- plus that they have some number of millions who -- small businesses have used them partially?

And sort of the other side of that coin is, your current small businesses, are you thinking about any way in helping them, for example, to use search, the kind of things that are interactive, overture are pushing?

Michael, we have a secret weapon in our Company, and his name is Scott Cook, and you may not know, but Scott Cook is actually on the eBay Board.

That's one of the reasons that we asked.

Yeah, so, the answer is we -- it's something that we are talking about and exploring.

And what we find in many cases is that eBay sellers have radically different needs than what we have found an ability to find synergy between what we do.

But rest assured it is something that's on the horizon, it is something that we're talking about, and we have all of our best brains trying to capitalize on eBay's success and marry that with our success so both companies -- or both companies' customers will be more successful.

And the other side of that question?

Michael, this is Scott.

I think the key to both questions is something that's key to our process of innovation.

We look for where there is an important and unsolved customer problem that we can solve well, and that has been the basis of our big giant businesses, QuickBooks, Do-It-Yourself Payroll, TurboTax, and that's what we're looking for in both of these examples that you described.

We're not going to go after them unless we find that is where a big unsolved problem on which you can build a business that can produce a decade or more of growth and profits.

And you're suggesting you haven't really found that yet?

We would have it on the market if we had found it and had enough time to get out.

The fact that we don't have it on the market yet suggests we either haven't found it or we're working on it.

And we don't -- and I'll just say we don't have anything to announce at Investor Day regarding that either.

So this is something that we're working on, but we don't have anything close to market on it.

Thank you.

Our next question comes from David Farina of William Blair.

Good afternoon.

Using your new restated categories, if you look at QuickBooks related -- than that's kind of growing consistently at 20% the last couple of years, kind of stable.

And maybe we're seeing kind of a -- if you took the mid-point or guidance range, a 10-point drop or more forecasted for next year, and you have some pretty quick growing categories there.

What's behind -- I mean, I understand the tax side, but I don't see what's behind such a big drop in growth rate in that particular category?

We have some new things we're going to talk about, David, at Investor Day that will impact our QuickBook's growth next year.

In a positive way, we'll take some short-term pressure, but we think we'll have longer term benefit in terms of some new ways we're selling DIY payroll to make it more of subscription service.

So there's some implications there that we think are good for investors long-term, but are going to impact us short-term, and that we'll give you more details on.

Brad, would you add anything to that?

Yeah, David, the other thing I would add is versus last year, as I mentioned in the text we went through, DIY payroll actually grew 32% on a revenue basis last year.

A lot of that was the result of a full-year of a pretty substantial price increase we put through.

We don't actually expect that again this coming year.

So is that a big reason why you're kind of going towards that and why you feel confident that you can move it back up?

Because it seems unusual for company to kind of go down 2-years and then come back the way you're talking about.

There's a multitude of things going on that we will share with you, and then I can't -- I mean, I can't talk about specific things that would affect our business, you just -- we feel comfortable with the guidance we've given, and when you see some of the many new exciting things we're doing, I think you will get a better total picture.

Okay.

Thank you.

Our next question comes from Adam Holt of J.P. Morgan.

Hi.

I had 2 questions about the Q1 guidance.

I know you aren't going to give product level guidance, but historically, you have given sort of product area or group guidance on a quarterly basis.

Are you willing to do that for at least the 2 largest areas for the first quarter QuickBooks related and other Small Businesses?

No.

So I think we find, Adam, that a couple of things.

One is, you know, in a business with this many moving parts, getting all of these subpredictions right, as you've seen is pretty hard.

And, you know, I think the result of that, as we've seen -- and tried this over the last years -- we've got a fair amount of volatility out of it.

So I think we'll stick with the aggregate for now.

And one of the reasons for that, Adam, is that retail promotions move from one quarter to another, and we don't -- we're not in control of a lot of the big levers.

And so it just seem likes we'll end up setting up situations that aren't how we run the Company, and so we really want to try and minimize that.

So we should expect going forward on a quarterly basis to get revenue and operating guidance, but the product guidance we'll maintain on a yearly basis, or the product area guidance?

Yes.

Okay.

And then I guess another question on the Q1 guidance.

If you look at the mid-point of the operating income, or I guess operating loss guidance, it's effectively flat year-on-year on higher revenue.

Should we assume that the majority of the increased expenses are going to be in the R&D area, and what should we imply from that, or take away from that relative to the product road map for the fall?

So I think that -- and I haven't broken it out, but as you look at Q1, R&D is clearly an area where as a Company we're making broader investments.

Exactly how they'll play out in the first quarter is going to be a function of hiring timing, and a bunch of other things moving across the numbers.

But it is clearly a thing that we are making a broader investment as a Company.

Although, as a practical matter R&D investment in Q1 doesn't produce a product in Q1 as you might imagine.

Right.

So in effect we have taken up R&D investing in Q4 to launch some of these new products that we're going to talk about on Investor Day.

So I think it's safe on a generic basis to say we are going to work hard to become more efficient to provide better services at lower cost in some of the other functional areas to free up more money to invest in new offerings to meet unmet or underserved needs.

And I think you'll start to see more and more of that play out for us over the next few years.

Okay.

And then just last question, I guess, also, for Brad.

For the second quart in a row, you've had a pretty substantial year on your increase in CapEx.

Is that still related to some of the software rollouts or is there anything else at play there?

That's the vast majority of it.

And is that still largely seeable?

Well, it's seeable, it's oracle, it's to a lesser extent people soft, and kind of all the things around it.

It's all effectively a series of interconnected projects.

Great.

Thank you.

Our next question comes from Eric Wanger of Barrington Research.

Hello, gentlemen, how are you?

Good.

Thank you.

I guess could you give any more color commentary on how the outreach to Professional Accountants is going?

I actually think we've made some progress, Eric, but I am actually seeing an area where I'm still not pleased with our progress.

I think there's still a lot more that we can do.

We're listening a lot better.

We've made wonderful improvements in QuickBooks 2005 for Accountants.

I was just at a session last week, Scott Cook and I were at a session where we talked with them, and the feedback on the 2005 Version for Accountants was really, really good.

We're making some other enhancements to some of our products that are very high on their list.

But overall I would have to tell you that we're not making as much progress that -- as I would like.

And we have some actions under way to improve that in the near future.

So I would give us a B-, C+ so far on something that is very important to us and I am hoping these changes will accelerate our progress as we go forward.

All right, thank you.

And also a little commentary, is there anything else you're willing to say about the acquisition climate especially given the soften status at the software space?

We continue to look for acquisitions as we have been for 4 years, but we're very picky.

We have, you know, what, 15 to 25% IRR guidelines, depending on the risk that we perceive in an individual transaction.

And so we have a team that's continuing to look for acquisitions, and if we find them, we make them.

But at the same time, we're focusing an awful lot of attention on organic growth and inventing new products that are going to meet customer needs.

So I would argue acquisitions for us are more opportunistic, and we're really putting a lot more attention on organic growth.

Yeah, I think the other observation I would make is that the both operating and financial markets softness you're seeing in software companies is primarily those that deal with large enterprises.

And we actually like not being in that business, for all the reasons you're seeing today.

Great.

What's the status of the -- of the verticals as a segment?

Is the object of the game to continue growing it out, or just do it opportunistically as you said, or --

Yeah, I think given the announcement on IPSS, Eric, let me frame the way I think about verticals these days.

No. 1, we have 3 businesses that we -- that all have generated growth rates that were accretive to the Company with a $12 million profit turn around year-over-year, and they all have plans that we feel pretty good about for this year.

We would expect them to be accretive to the Company growth rate in '05.

So I view them not as a portfolio today.

I view them as 3 independent businesses with -- each one with their own set of growth opportunities.

And that's really the way we manage them, not as a portfolio, but we manage them as 3 independent businesses.

We will continue to look to see if we've found other attractive verticals.

I don't see any on the horizon.

We've looked at most of the spaces, and as we've said previously, we would not make any acquisitions in that space that were of the size that IPSS was.

That's one of the learnings that we had is, that small companies that are stand-alone growth platforms are too hard.

That's too hard to get a return on, that's a mistake I made.

So the last couple of acquisitions have been bigger, and our bigger verticals are performing very well.

Okay.

Well, thanks very much.

Did you tell them no more questions?

Our final question comes from Bryan Keane of Prudential.

Yeah, good afternoon.

Just on tax, Brad, you grew 16% last year, and then 5 to 10 revenue growth this year.

Why would there be such a big change, or can you give us some of the things that go into that number?

Bryan, this is Steve.

I think if you look at the category growth for -- on IRS statistics for 1040s filed electronically, which either web or desktop, the category last year was about 5% growth, and it has been going down for the 5 years I've been here.

So the market trend has been growing at a slow rate than it had been 5 years ago when it was growing 20%.

So we have some new things coming in TurboTax that we're excited about that we'll share on at Investor Day.

And the question is: What is the category going to grow given that some of these new things may or may not have some impact?

It will be hard to tell.

So we are working hard to turn around slower category growth, but the only way we're going to do that, as Scott Cook talked about earlier, is through innovation to expand the category.

And so we feel that without us being successful at doing this, the category is going to grow at kind of the rate it grew last year, around 5%.

Is there any update on the hiring a new head of tax, consumer tax?

No.

We filled that job 4 months ago.

Oh, you have.

So that's already done?

Yeah, his name is Brad Smith, and he's doing a terrific job.

Okay.

Great.

And then on the QuickBooks side on units, if I just back of the envelope, it looks like that units from the Merchant Services Business and then the Do-It-Yourself Business, those have been growing pretty well?

And I understand you're changing the subscription on the Do-It-Yourself Business.

But is QuickBooks units -- should we think about that -- I know it was relatively flat last year, but should we think about that having a declining year -- upcoming year or is that backing into something incorrectly?

Well, we prefer to save the answer until Investor Day when we announce some new things that we're doing that we think will hopefully allow us to get back into positive unit growth in the QuickBooks area.

Okay.

Let me just ask you something about upgrades.

How are upgrade rates?

Where have they trended in QuickBooks?

I don't know, maybe you want to wait for that one, too.

But I guess upgrade rates, any update on how that has been on QuickBooks?

We're pretty stable.

Pretty stable over the last few years.

We don't see that much movement on upgrade rates.

The real focus of our QuickBooks Business is to acquire new users, and that's why we have some things we are working on to try and become even more successful at that and then to do the up-sell and cross-sell that we talked about.

And we think over the last 3 or 4 years we have a pretty good track record of attaching and up-selling higher ASP products or additional services that solve small business needs.

So we actually like the strategy.

We think the strategy is working.

We think we are executing it well and we think we have more opportunity.

And so we're working more on both ends, better at customer acquisition, and better at adding on additional service to help us grow revenue and profits

Okay.

And I just want to add some strategic questions.

Services, Steve, do you have any plans to expand that area of Intuit, or do you think you've got what you need?

No, I think we continue to look at new services for small businesses or taxpayers that will help us better meet customer needs, and also grow our revenues and profits.

So I think that is, Bryan, a continuous focus for the Company.

And the good news about some of that is many of the services that we are seeing that solve real customer problems have recurring revenue nature.

So we get a double-positive by helping customers solve more problems and get add-on revenue that's recurring in nature.

So we're going to continue to focus on helping our customers win and so far we've done a reasonable job of that over the last few years.

That would be organic or by acquisition?

Both.

Okay.

All right.

Great.

And Linda, congratulations on reaching your retirement.

Thanks you, guys.

Thanks, Bryan.

Gentlemen, I'm not showing any further questions.

Would you like to proceed with any further remarks?

I just would sum-up, thank everybody for their participation, and for most of you, hopefully you will be able to make it to Investor Day.

I think we talked about that too much, but that's because we have a lot of stuff that we would like to share that we think you will find interesting.

So hopefully we'll see you on September 29th.

Thanks everybody.

Bye.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may all disconnect.

Everyone have a great day.