直覺電腦 (INTU) 2005 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Intuit third quarter fiscal 2005 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].

The presentation you will hear 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 earlier this afternoon and Intuit's most recent forms 10-Q and 10-K and other SEC filings.

Many of the numbers in the presentation will be presented on a non-GAAP basis.

The most directly comparable GAAP financial measures and the reconciliation of the non-GAAP 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.

After this call concludes, a copy of Mr. Bennett's and Mr. Robert Henske's prepared remarks also will be available on Intuit's Investor Relations page 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, and welcome, everybody, to the Intuit third quarter 2005 conference call.

With me today are Brad Henske, Intuit's CFO, and Scott Cook.

As you know, fiscal quarter number three is Intuit's peak-season quarter producing over 40% of revenue for Intuit's entire year.

This third quarter was simply an outstanding quarter, the strongest quarter we've had in quite a while.

Revenue of 850 million was up 20% year-over-year.

And non-GAAP EPS of $1.55 was up 29%.

GAAP EPS was up 21%.

Now, these growth rates are significantly higher than we'd forecast three months ago, driven by growing strength in our two largest businesses, TurboTax and QuickBooks.

What's behind this?

Well, we've picked up the pace driving organic growth with our customer-centric initiatives, CDI and Net Promoter.

The Intuit secret sauce continues to be our 20-year history of customer centricity.

Our in-depth customer knowledge allows us to make better, faster and more informed decisions that lead to real results.

With our Customer-Driven Invention and Net Promoter methodologies, we actually uncover opportunities others have missed that expand the market and accelerate revenue growth.

For example, our unique understanding of the consumer tax market gave us confidence to make aggressive moves that resulted in our best tax season in a long time.

We grew the category as we attracted new users to the computer, self-prep method, delivering revenue growth of 18% year-to-date, and had significant share gains.

Customer centricity is what's driving faster growth this year, and it's what will drive our growth in future years.

I'll talk more about these insights at an increased level of detail after Brad provides more color on the quarter.

As you know, Brad Henske was recently named the General Manager of Consumer Tax replacing Brad Smith who is now leading QuickBooks.

Brad will continue to act as our CFO as we search for his replacement.

Brad?

I think there's too many Brads there.

Thanks, Steve.

Third quarter revenue grew 30% over Q3 '04, driven primarily by strong growth in our consumer tax and QuickBooks-related segments.

Intuit's non-GAAP operating income of 433 million grew 21%, and about $18 million better than the high end of the guidance range we provided three months ago.

GAAP operating income was 426 million.

Our bottom line results were also very strong, with non-GAAP diluted EPS of $1.55, growth of 29% over the year-ago quarter.

On a GAAP basis, diluted EPS was $1.61.

Let's take a closer look at the fundamentals that are driving faster growth starting with consumer tax.

Consumer tax knocked the ball out of the park this season.

We launched the new customer -centric initiatives we showed you at investor day last October and they worked, driving faster growth and a record tax season.

Simplicity is at the core of these initiatives, as simple to learn, easy to use offerings, are what customers value most.

Third quarter consumer tax revenue of 419 million, grew 22% over the year-ago period.

And fiscal year-to-date revenue grew 18% to 565 million.

That's faster than last year's growth, and significantly better than the 5 to 10% growth target we set at the beginning of the year.

So what's driving growth?

First, simplicity sells.

As we talked about at investor day, we measure the customer experience using a system called Net Promoter.

The higher the score, the more customers are delighted with the product and service experience and would recommend it to a friend.

I'm happy to report that TurboTax's total Net Promoter scores jumped six points year-over-year.

The improved customer experience contributed to the total federal unit growth of 26%, or 2.6 million more units than last season.

These Net Promoter improvements also helped drive growth of our non-FFA federal units, including desktop and web, it was up 12% year-over-year; up from 8% unit growth last year.

We were particularly pleased with our progress on the web, and with first-time users.

Two segments, especially important to our future growth.

TurboTax Web Net Promoter scores jumped 12 points, and that helped fully-paid federal web units grow 20% this season.

The reason this is critical for both Intuit and investors is that our Net Promoter improvements helped grow the computer self-prep category as it takes share from alternative methods.

In fact, we estimate that TurboTax growth drove a significant majority of the 15% software category growth.

Other methods, in total, declined.

This is significant and aligns directly with the fact that the Net Promoter score for the computer self-prep category is the highest of all tax prep methods.

How did we drive Net Promoter scores up so much?

We've begun a multi-year effort to simplify TurboTax through a combination of new processes, new people, and new testing.

The marketplace results are dramatic because simplicity sells.

Simplicity is the number one thing financial software customers want.

And yet we've just begun our simplification efforts.

So far, we've improved only about 20% of the TurboTax screens, and next year's product will be simplified even more.

On top of that, the higher Net Promoter scores this year should produce higher retention next season.

For both these reasons, we believe growth from our simplification efforts has just begun.

The second driver behind our strong season is the word of mouth coming from TurboTax's giant user base.

One of the things that drive prospects to enter the tax category is word of mouth from happy users.

The more happy users, the more prospects buy, which is a competitive advantage for TurboTax, coming from our lead in user base.

Products with smaller scale -- smaller user scale lack that advantage.

We're also using advertising successfully to extend our advantage even further.

You can see the results in the retail share data.

According to NPD TurboTax's retail share rose seven points to 79%.

And for TurboTax Web, our estimates indicate share gain as well.

This data also shows that financial consumers prefer the best to the cheapest.

This is because you don't want to take a gamble with something as important as your taxes.

TurboTax is not the cheapest solution.

In fact our largest competitor prices their products 35% below TurboTax, on average, at retail; yet their digital tax volume shrunk by 6% while total TurboTax unit volume grew 26% this season.

Bottom line, TurboTax benefits from a strong advantage and one of the most important reasons why new customers buy, word of mouth.

It's the word of mouth that grows the category, by getting them to come and purchase the product.

The third reason driving our strong season and future outlook is that we're building winning customer facing applications on the web, the platform of the future.

Our in-depth customer knowledge, ability to create a great customer experience, and large user scale has paid off.

TurboTax Web has grown to become the clear volume leader on the web and TurboTax Web now delivers more dollar revenue growth than the CD version of TurboTax.

Our strength on the web enabled us to play offense with the Free File Alliance, which paid off well, by expanding the category, and capturing a larger addressable market for consumer tax.

We did this with very little cannibalization.

Roughly 5% of paying customers last year moved to the Free File Alliance and we're excited about the opportunity to further monetize this customer base next season.

Finally, we're expanding future growth prospects by using our Customer-Driven Invention methodology to expand the customer tax category.

Snap Tax is a web application that was our experimental new entry this season for simple 1040-EZ and 1040-A tax filers, whose needs have been poorly served by all other alternatives.

While Snap Tax had no meaningful financial impact this year, we're doing what we did with Web Tax in the '90s, creating a new category that consumers need so that we can lead the market direction and capture its growth in the future.

Snap Tax is just the first of multiple new Customer-Driven Inventions where we expect to lead disruption and continue the growth runway for Intuit's tax business.

Let me sum up consumer tax this way.

Intuit has reignited unit growth in consumer tax with new initiatives that were already working and we believe will drive more growth in upcoming years.

Needless to say, as the new General Manager of the Consumer Tax Business, I'm delighted with the opportunities we're going to have next year.

We have a terrific team in place in San Diego and we're all excited about the new things we can pursue which will impact next season and the years beyond.

The QuickBooks-related segment showed its strongest growth of the fiscal year in Q3, with revenue growing 16% year-over-year, to 197 million.

New user acquisition grew approximately 20% year-to-date, which is important to both current and future revenue growth.

So why is growth accelerating this year?

The fundamental reasons are the same as in consumer tax.

First, simplicity sells.

Especially when combined with Customer-Driven Invention.

QuickBooks is at the beginning of a multi-year simplification initiative.

The first product to benefit is QuickBooks Simple Start, which is the product resulting from our Customer-Driven Invention effort to better solve the needs of the 9 million smaller and start-up firms not using accounting software today.

Launched in September, Simple Start's ease of use has doubled Net Promoter scores among new users versus QuickBooks Basic.

And QuickBooks Simple Start is expanding the category and is a major driver of QuickBooks new user growth of approximately 20%.

As a testament to its success, QuickBooks Simple Start has grown from zero to a 10% share at retail in just seven months on the market.

And frankly, Simple Start is just the warmup act for the major launch this November of much simplified products in the QuickBooks product line.

We believe there's much more growth ahead from simplification.

Simplicity is also growing the high end of the QuickBooks line.

QuickBooks Enterprise, our $3,000 offering, grew users 87% year-over-year.

The reason is that QuickBooks Enterprise is a much simpler alternative to traditional mid-market accounting systems.

Simpler in design and simpler for accountants who know QuickBooks.

And simpler for the largest feeder base in the new market tier, the QuickBooks base.

The second thing driving QuickBooks strength is scale advantage and the size of the active user base, just as in tax.

We believe that word of mouth is the number one driver of new customer purchases of accounting solutions; number one by far.

And what drives prospects to buy is word of mouth from happy users.

The greater number of happy users, the more prospects buy, which is a competitive advantage for QuickBooks, coming from QuickBooks giant lead in active user scale.

Products with a smaller number of active users lack that advantage.

This helped drive QuickBooks strong retail unit share which has risen 5 points to 88% for this fiscal year-to-date.

As in tax, customers value getting the right product over the cheaper product.

That's why QuickBooks has triumphed over competitors selling at a fraction of QuickBooks' price.

Thirdly, QuickBooks is also building winning customer-centric applications on the web, the platform of the future.

Customer centricity transcends platforms and has enabled QuickBooks online edition to become the clear leader in web-based on-demand accounting, with about four times more customers than the number two web solution.

Online edition revenue is small and rapidly going; 100% growth in Q3.

So we expect that its biggest dollar growth additions will come in the years ahead.

The last reason growth is picking up is that we're expanding the categories in which we operate.

We've built an ecosystem of solutions around QuickBooks solutions-- QuickBooks, solutions which better solve customer problems while giving Intuit more growth opportunities to monetize the QuickBooks user base.

For example, QuickBooks Payroll combined of -- comprised of standard and the new enhanced payroll, is the nation's most popular payroll solution, used by 840,000 businesses.

It was created with classic Intuit Customer-Driven Invention.

And CDI is the tool we're using to now increase the revenue per payroll customer by adding newer, high service QuickBooks payroll offerings.

Also new this year is enhanced Payroll Plus, which includes state tax forms, and a subscription to either QuickBooks Pro or Premiere.

The two new QuickBooks enhanced payroll offerings have only been in the market for about eight months, and already have 100,000 customers; one of the fastest uptakes we've seen on a new service.

All in, we've seen 20% revenue growth for QuickBooks Payroll this quarter, making it the fastest growing major payroll service that we know of.

We also saw continued strong growth from Innovative Merchant Solutions, our service that enables small businesses to accept credit and debit cards.

IMS's organic revenue grew 39% year-to-date due to strong growth in both number of customers and card transaction volume.

Note that we don't partner or outsource either of these two important services, we own them outright.

That's important to success, as we can deliver a fully-integrated superior customer experience, faster innovation, and capture all of the recurring revenue and profit for Intuit.

To sum up, it's been a really good quarter for QuickBooks, and we're working hard to make sure we're on track for another strong year in fiscal year 2006.

Our second tax business, ProTax, had third quarter revenue of $100 million, and grew 21% year-over-year.

Fiscal year-to-date revenue of 258 million, grew 5%, which is faster than last year, and at the high end of our total year range of 0 to 5%.

The same fundamentals that are driving success in TurboTax and QuickBooks come into play in ProTax as well.

In ProSeries, we expanded the family this year.

The new ProSeries Basic product delivered new simplicity for customers looking for a more basic product.

The new ProSeries Express product solved unsolved problems for the rapid refund segment.

Our three ProSeries products now span low to mid-range customers and, taken together, showed positive results.

At the high-end, our Lacerte product had a strong finish to the season; benefiting from quality and significant number of customer-service improvements.

Retention improved year-over-year by six points and total customer growth of 9% significantly exceeded our expectations largely driven by healthy adoption of the two new ProSeries products.

We're pleased with the success in ProTax because it's an important and strategic business.

It gives Intuit the competitive advantage of a deep relationship with many accountants who are influential recommenders of QuickBooks to small and medium businesses.

Our other small business segment, Intuit-Branded Small Businesses, had third quarter revenue of 71 million, up 9% over Q3 of '04.

We like the market fundamentals in outsource payroll as well as in our verticals, and continue to be excited about their performance and future growth prospects.

The fastest growing vertical is IRES, focused on meeting the needs of residential and commercial property management firms.

This business had a particularly good quarter, benefiting from the same customer-centric fundamentals as the rest of the Company.

On a separate note, today we're announcing our decision to sell Intuit Information Technology Solutions, also called Blue Ocean Software, a business that's grown 10% year-to-date.

This is a business where the market situation has changed in a way that to be accretive to Intuit's revenue growth would require much greater focus and additional resources and we believe we've identified better investment opportunities in our core businesses.

We will treat ITS as a discontinued business, for accounting purposes, in Q4 and in FY '05.

Segment results for the past 11 quarters that highlight ITS revenue and contribution margin for those periods are posted on our website.

Finally, our other business segment had revenue of 63 million, up 32% year-over-year, benefiting from a change in our retail channel management and the move Canada consumer tax revenue from Q2 to Q3.

Our Quicken franchise also posted another better-than-expected quarter.

Quicken is an important part of the Intuit portfolio, in part because we have approximately 3 million small businesses that use Quicken to manage their business.

And like every business at Intuit, Quicken is ramping up on its CDI engine to uncover unmet or underserved needs that we can solve well.

For example, the Quicken team began selling Medical Expense Manager, a new product that dramatically simplifies life for people who have significant medical bills.

This is the second product in a series of new offerings launched recently from Quicken.

And we are raising our full-year revenue guidance for this segment to 5 to 10%, up from our original guidance of 0 to 5.

Moving to the balance sheet, Intuit had about 1.3 billion in cash and investments at the end of the third quarter; up approximately 375 million from the end of Q2.

Due to the seasonality of our business, the second and third quarters are Intuit's primary cash generation periods.

In the third quarter, we generated approximately 614 million in cash, including 577 million in operating cash, and 37 million in proceeds from the exercise of employee stock options.

We also spent cash during the quarter, including 216 million for our stock buyback program, and 19 million in capital expenditures.

Under the stock repurchase program, Intuit repurchased approximately 4.9 million shares in Q3 of '05, for an average price of $43.63.

We have spent over $2.2 billion over the last four years to buy back over 50 million shares at an average price of about $44.50.

We also depleted our fourth repurchase program this quarter and today are announcing repurchase program five for another 500 million.

Turning to guidance, excluding the effects of our distribution -- disposition of ITS, revenue guidance for the year remains at the levels we announced on April 22.

Guidance given in a minute for Q4 and FY '05, however, is adjusted to reflect our intention to sell ITS and its reclassification as a discontinued business.

We estimate ITS would have contributed 58 million in revenue, $0.09 in non-GAAP EPS and $0.07 in GAAP EPS in FY '05.

Excluding that, for the fulfill year, we expect total revenue to be in the range of 2.005 to $2.02 billion, or growth of approximately 11 to 12%.

Non-GAAP operating income of 535 to 545 million, or year-over-year growth of 18 to 20%, and GAAP operating income of 508 to 518 million.

We expect non-GAAP diluted EPS of $1.96 to $1.99, a year-over-year growth of 23 to 25%.

This is the same as our previously issued guidance range, excluding ITS.

And we expect GAAP diluted EPS to be in the range of $2.02 to $2.05.

For the fourth quarter, again excluding ITS, we expect revenue of 270 to 285 million, or a growth of 5 to 10% over Q4 2004.

We expect a loss of $0.09 to $0.12 per share on a non-GAAP basis, versus a loss of $0.09 in the year-ago period; and we expect a loss of $0.09 to $0.12 on a GAAP basis as well.

As we discussed last quarter, we're going to wait to provide fiscal 2006 guidance until we've completed our annual planning process in Q4.

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

Thanks, Brad.

We've been more specific today about what drives growth and leadership positions in our core businesses.

So let me share my perspective on why we're doing well and believe we'll continue to do well in the future.

The answer at a very high level is very simple.

Intuit is a customer-centric product and services company.

We drive growth and have beaten our rivals because we do a better job in the key area that matter, with customers.

So what's the secret to our success and why is it difficult for others to duplicate?

Well, let's start with the environment for our customers and prospects.

Their reality is very different from the enterprise world that many of us are familiar with.

Number one, there are lots of them, millions of small businesses and households.

A fragmented market made up of millions of independent decision makers.

So while they are very different, and they do have many common customer and prospect characteristics, they're not experts in technology, taxes, or accounting.

In fact, they're just the opposite.

The buyer is typically the primary user of the product or service.

Once they learn new software or service, they're habit-bound and unlikely to change unless they have a real problem.

They lack an internal support network, like most of us have on our jobs.

Because of that, they need to be you much more self sufficient.

And in most cases, our buyers don't pay experts to modify their technology to make it right for them.

So that's the customer situation.

Now, let's talk about what they do every day.

The term one-armed paper hanger may be appropriate.

They are overloaded with the day-to-day activities of life and work.

Again, there are similar characteristics of these tasks.

Tasks like paying taxes, keeping the books, paying bills and doing payroll are required but not desired.

And not a passion or priority for hardly anyone.

The completion of these tasks often involves deadlines and urgency that creates anxiety and high levels of emotion if there are any problems.

And most importantly, the penalty for making an error or getting it wrong can be quite severe.

Almost like Sarbanes-Oxley compliance to a CEO or CFO.

So these factors shape what's different and critical about winning with this set of customers.

Because of the high level of variation in individual customer situations and capabilities, one size doesn't fit all.

They need simple, Right for Me solutions.

They have many unmet or underserved needs, and they're frequently using sub-optimal methods to do their work.

Uncovering and solving these problems in a manner that delights them and inspires confidence is very hard to do well.

They're also hard to reach and influence.

This creates difficult acquisition economics, as customers are too small and fragmented to make a field sales force economical.

Related to this, when deciding what to buy, since they aren't experts, they rely primarily on word of mouth recommendations from people they trust.

And because they're on their own, human-assisted support networks have sprung up and are critical to their success.

Examples would include accountants, on and off-line user committees-- communities, and educational and training networks.

So why has Intuit done a much better job than others at serving these customers in the past and in the future?

We think it's all about customer centricity and our ability to deliver even better experiences with our existing products.

Plus, to create new disruptive solutions that create new categories and drive sustained revenue and profit growth.

There's a secret sauce as to how we consistently beat others and create durable advantage.

First we have a long-standing culture and capability to deliver simplicity that resonates well with this group of customers.

You might say what's the big deal?

Everyone gets that simplicity sells.

But delivering simplicity is really hard.

Software and services today are still far too hard.

And to be successful, you really need to get inside customer's heads, understand how they think and how they really do their work.

And that's what we do and why we win.

It's in our DNA and everything we do.

And because we learn by doing, we continue to get stronger and better.

Second, by applying our core capability of Customer-Driven Invention, or CDI for short, we are skilled and serial disrupters.

It's how the company was built 20 years ago.

It's how the Company has continued to grow, and it's how we will continue to grow and be successful in the future.

CDI is what enables Intuit to succeed where others fail.

We're constantly looking for new or underserved needs that our customers have.

We then use our CDI methodology to consistently develop great solutions to those needs and drive growth for Intuit.

We've done that successfully again this year, in QuickBooks with Simple Start and Enhanced Payroll, and we're applying this methodology in all of our businesses.

In doing this in small businesses -- in small business, we've created quite a sustained ecosystem.

Let's start with the critical third party elements of our ecosystem because for many reasons they are the hardest to duplicate.

For example, on the accountant front, we have approximately 200,000 accountants who use QuickBooks to work with their clients.

We have thousands of community colleges and 27,000 proadvisors that teach QuickBooks all across the country.

And we have 30,000 developers that create applications for QuickBooks.

On an internal front, we have more than 20 Right for Me QuickBooks offerings.

So whether your business is just getting off the ground, is more established, or has grown to a couple hundred employees spread out over several location, we have a QuickBooks product that very specifically meets your needs.

If you need a product that has industry-specific features, we have that, too.

Today, we sell flavors of QuickBooks specifically tailored for the industries including retail, construction, accounting, professional services, and manufacturing.

We also offer a great solution for targeted retailers that includes both QuickBooks and POS software and hardware.

With QuickBooks payroll, we have by far the nation's most popular payroll service.

We have a range of -- we offer a range of payroll offerings that integrate with QuickBooks as well as supplies, support, and services that enable these businesses to take credit cards as a form of payment.

Now, this ecosystem didn't happen overnight.

It's the product of over a decade of work that our customers and critical third parties have helped us build.

We have a broad integrated offering that provides small businesses many things that they need, easily and from one trusted source.

Third, it's all about Net Promoter.

We're continuously improving existing products and services with a sustained focus on simplicity.

You've heard that about many of the success stories and the progress we're making from Brad.

We continue to learn by doing and get stronger and better.

And fourth, a new thought from us, through our multi-year passion and commitment to customer centricity, we've created large and happy user bases with critical durable benefits.

A perpetuating scale of positive word of mouth that influences purchase decisions and creates positive brand preference for Intuit.

Communities, of third-party value contributors create a network effect, particularly in small business.

Key Intuit partners like accountants, developers, and educators add value by improving the customer experience.

Their existence helps grow the base and the ever-growing base helps expand and grow the network.

We've covered a lot today.

After our largest quarter of the year.

So let's quickly sum up.

We've had a great nine months and are on track to deliver another strong year; with 11 to 12% revenue growth and 23 to 25% non-GAAP EPS growth.

Our largest businesses continue to perform very well.

We had an outstanding quarter, an outstanding consumer tax season and have uncovered a number of new growth opportunities we're excited about.

QuickBooks has a lot of momentum and we're well positioned heading into fiscal year '06.

The competitive environment is changing and we are ready.

Stay tuned as we unveil some exciting new initiatives in the future.

Let me close with a final thought.

Our targeted customers are different, and so are we.

Intuit is a customer-centric company uniquely suited to meet the needs of this customer base, both today and in the future.

It's in our DNA and contributes to our durable advantage.

We have large customer bases that give us scale advantage and word of mouth, and a network effect with third-party value contributors.

We continue to learn and get stronger.

That's what we believe is going to drive sustained growth and success in the future.

Thanks to all the Intuit employees who delivered a great quarter and to our shareholders for your support.

With that, let's get to your questions.

[Operator Instructions].

Bryan Keane, Prudential.

Brad, the G&A was up about 61% year-over-year.

What -- can you give us some color on what that was?

Sure, it's not any one thing, there's a bunch of bits and pieces in it.

Inclusive of now, the amortization of the infrastructure investments we made last year, a change in our real estate amortization in San Diego.

We're going to move into new facilities there, somewhat earlier than we originally anticipated, so we have to make a catch-up entry for the amortization of the-- the buildout.

And lastly, expenses related to Sarbanes-Oxley.

Okay.

And I guess what's a better kind of going-forward in the fourth quarter, what -- should the G&A drop significantly, I guess, then?

It'll come down a fair bit in the fourth quarter.

Okay.

On-- just on the Blue Ocean divestiture, is there a buyer you guys have in mind or did you just decide this recently?

We don't have a buyer mind.

We're going to put it out to a relatively broad process and we've engaged CSFB to help us with that.

Okay.

And then finally, just obviously TurboTax for the Web donated by Free File was spectacular this year.

I think it was up 207%.

Better than probably anybody expected.

I was just reading Brad Smith's comments on April 13 at the House Committee on Ways and Means, and it sounds like Intuit wants to put restrictions back up on the Free Alliance according to his comments.

I was just curious, you know, what the plan is there.

I think we continue to have discussions to -- with the IRS and other members of the Free File Alliance to get the program back to its original charter, which is in line with the philanthropic intent that the program was originally intended to do.

We'll see how those discussions evolve and where they go, but Brad Smith's testimony was consistent with the charter that was originally set up for the Free File Alliance when it was set up three years ago.

And I think, perhaps, importantly we're prepared to win either way.

Okay.

But I guess if you had a choice, you'd rather put back -- go towards what the original alliance was structured for?

Yes.

Heather Bellini, UBS.

I was just wondering, Steve or Brad, if you could just give a little bit of help.

When we start to think about the success and the turnaround in the QuickBooks business this year, is there a sense that you could give us how much of that is related to Simple Start and how much of it is, you know, you're seeing people back on their traditional kind of three or four year upgrade cycle; whereas, maybe that paused in the past?

And how we should think about that going forward?

I think it's-- I think it's important to say that it's a lot of variables.

It's growth in enterprise, as you saw an 87% growth in enterprise.

It's growth in -- 20% growth in QuickBooks Standard Enhanced Payroll.

So the upgrade pattern has not changed markedly.

I think what's new is QuickBooks Simple Start plus the beginning of simplicity initiatives, or our Net Promoter initiatives, that are driving growth across the board.

So I would argue that the revenue growth is driven more from the ecosystem, but the new user growth is primarily driven from strength from Simple Start.

So it depends on if you're talking about unit or dollars.

And I guess a follow-up, there's been a lot of talk about-- an OEM agreement that you may or may not be signing with Dell for something -- for a QuickBooks product, which maybe most likely would be Simple Start.

Is there anything that you have to share with us today regarding-- regarding that move?

I can just talk -- this is Scott.

I can just talk about our history with Dell.

We're very happy with the results we're getting, so are they.

What their telephone sales reps need is a quick easy sale to make in an add-on to a hardware purchase.

And with something with the brand adoption and brand preference that QuickBooks have-- has, it just makes it a great add-on sale of high revenue and profit for them and for us.

And that's-- that's been a good add-on to-- to our success pattern.

Would there be a formal announcement -- could there be a formal announcement coming or is this in your opinion just business as usual with Dell?

I would count it business as usual and if and when there's an announcement we'll make that announcement.

Adam Holt, JP Morgan.

The first question is on the consumer tax business.

It looked like there was a greater divergence between revenue and units this quarter than there was last quarter.

Could you talk in a little more detail about the relative contribution of some of the add-on services that drive that?

I think, Adam -- it's just timing, it's the e-file revenue gets booked when the people actually e-file, and so the more people, you know, -- that's just something, Brad, I don't know what you would add to it, it's that simple.

I think a lot of the add-on services in e-file state, tend to be towards the back half of the season where as federal units, particularly ones we're selling to retail, tend to be at the front half.

So the mix-- and that's been true all the past years.

It's also why it's dicey to look at these kind of things in the middle of the season and why the total season is really the only appropriate way to look at year-over-year comparisons.

Are you comfortable talking in any more detail about what the revenue impact was of the add-on services for Free File?

Not today.

Okay.

A question on QuickBooks.

I didn't see in the release what the average selling price was.

And can you talk about the year-on-year units in the Premiere category, given that you have a much broader product suite in Premiere this year than last year?

I don't think we're releasing any more information than we have in the fact sheet which gives the Premiere units by quarter.

Yes, I think regards to pricing, because of the mix of what's going on with products, and frankly because of all the discounting promotions that happen in different parts of the year, we had more and more challenge trying to draw meaning out of-- meaning out of an aggregate price number on a quarter-to-quarter basis.

So the conclusions you might come to by watching the number didn't actually match what was going on with the business.

Given the misleading nature of it, we took it out.

And I think that's because we are trying to do two key things.

We're trying to acquire as many new users as we can.

And then we're trying to find ways to monetize them over their lifetime value.

So a lot of the ASP is misleading because it's a mix.

The more units we sell of Simple Start, which is great for us, the lower the ASP, the more units would he sell of Enterprise, the higher the ASP; and so average ASP for QuickBooks is becoming less and less relevant because there's so many moving parts.

And it's-- frankly, it's not something we're solving for, we're solving for revenue and profit growth.

And-- and I think that's why we changed that.

Just-- just a last question, if I could, on the business verticals.

With the sale of the IT services piece, that'll be the second divestiture effectively in that, what we used to talk about as business verticals.

Has your thinking changed about the-- the strategic importance of this category of products for you?

And what should we look for going forward?

I think the businesses like IRAs are growing very, very well and we'e having great marketplace success with our distribution management business.

I think they are not part of the core of the Company because there's not much synergy between them and our small business ecosystem and accountant ecosystem.

But they're both great stand-alone businesses on their own.

So we still like the verticals.

But there's not a lot of synergy with the course, so they're kind of stand-alone businesses.

As long as they continue to perform well and deliver and we're excited about their growth prospects, they'll remain a viable part of the portfolio and both of them-- or all of them are on a nice trajectory now, so let's see how it plays out.

I would not expect us to buy additional stand-alone businesses that don't have much synergy or adjacency to core-- our core QuickBooks ecosystem.

This is Scott.

I'd add one thing, which is ITS was different from all the rest in that it really isn't a vertical.

It's a horizontal sold to IT managers across all industries.

It's not a vertical industry.

So it was different from anything else in that portfolio, and so you shouldn't take our decision on ITS to have any relationship to the verticals, because they're different in kind.

And what really drove the-- the sale is that the market has changed so that in order for us to really grow at the level to be accretive to the Company, we'd have to invest significant amounts of capital and managerial talent to get bigger; it's becoming more of a scale game.

We think we've improved the value of this Company and we will get, we hope, more than we paid for it.

And so it's been fine while we've owned it, but the market has changed and that's really what's driving the outcome, not any big strategy shift.

Tom Berquist, Smith Barney.

As you look out over the next year or so, in the merchant competition from Microsoft and-- and the QuickBooks franchise, is there any way to characterize what types of users might be most at risk?

For example, it seems to me that people who have been using the product for many years are probably fairly unlikely to switch, at least in the near term.

So is the-- is the area of attack, do you think by Microsoft, going to really be concentrated on sort of new entrants into the work force and is that part of the logic of trying to get those people into Simple Start?

Or if you could walk through how you're thinking about that a little bit?

I think, Tom, you understand kind of our position very well.

We think the primary battle ground will clearly be new users or people that are not using an accounting software product today.

That's why we launched QuickBooks Simple Start last September, because we think it's a great product for entry level businesses, priced at 79.95.

So we think it meets the needs of that segment, and the results would show it's been a very successful launch so far.

So we think that -- you understand the strategy well, and it's to acquire new to the world businesses and then, over their life cycle, migrate them up the-- up the chain.

Tom, this is Scott.

Let me add that you're right about the resistance of existing users to switch.

People, once you've got a software product that's working in a satisfactory manner, you just don't want to switch and go to something new.

Similarly, though, there's a challenge on new businesses making the decision, because the prime reason that a new business picks its first accounting software solution, the prime driver is word of mouth.

Word of mouth from other happy users.

That's who these business people trust.

And that makes it hard for a start-up -- for a new entrant because they start with no happy users.

Thus, no word of mouth.

Does that also include, Scott, the additional derivative products that you guys have created for specific verticals which, at least initially, Microsoft will not have from what I can tell?

Is that-- is that part of the word of mouth that people are more cliquey, in terms of which industry that they're in versus looking at a more generic across-industry platform product?

Well, I think regardless of whether a new to the market entrant has industry-specific versions or not, you have the same problem.

You start with no users, so a new entrant starts with no word of mouth.

And so they lack the number one and primary thing that causes buyers of accounting software to buy.

Okay.

Then just one follow-up on the tax business.

I know that investors sort of lose interest in the tax business during this period of the year.

I was wondering, though, if given how many of your users are now on the web, do you have any way to start reaching out to those users earlier in the year; you know, maybe before you even get to the end of the year so they can start to do some kind of taxing what ifs to try to figure out what they might be able to do in terms of buying or selling stocks at the end of the year or any sorts of things that might help them get ready for next tax season?

This is Scott.

That's always an opportunity for us.

Okay.

So nothing-- nothing formal that would cause you to have any sort of pull-forward in tax revenues on the web earlier into the year?

No.

Greg Smith, Merrill Lynch.

Just looking for an update on the full outsourced payroll solution.

It sounds like you're growing more pleased with the progress.

Is that a fair assessment?

Yes, Greg, this is Steve.

I think we're pleased with the business.

It continues to perform well.

We're going to have a very, very nice greater than $20 million year-over-year turn-around in profitability in this business.

And so we-- we -- and we believe we have some interesting ideas in our pipeline on how we might be able to accelerate growth.

So we think the business has stabilized and it's on a nice trend and we're working hard to make it an even bigger winner in the Intuit portfolio.

Okay.

And then I just also wanted more color on ITS, you know, looking at the numbers that you're breaking out, it had been growing pretty nicely with pretty attractive margins.

What -- what really-- really has changed there over the past couple months, and do you want to hazard to guess at-- at the valuation you may get?

Greg, I think the thing that's changed in that space, ITS today is a company or business that sells basically one product with some add-on things.

And that space is consolidating up into vendors that sell broad suites of products.

Which leaves us at a strategic level to either be in an acquirer to create that, or where it's sort of the best time to contribute the products that we have to somebody else building a broader similar suite of products.

So that's the, if you will, strategic fork in the road that brought us to the decision to be a seller today, because the time and effort and capital to invest for a broader suite, while probably a good opportunity, isn't the right place for us to focus.

Yes, I think it's safe to add that this is a decision based on looking two or three years forward, not looking backward.

This business has performed very well and it's a great business.

But as we look over where we think it's going to go in the next three to five years, that's the framework with which we made this decision.

And as we've revved up more and more exciting growth opportunities in our core, we think that's a better place to invest our focus and resources.

Okay.

So you don't think you'll have any trouble selling it, given the market environment?

I don't believe so, but we'll see.

And then lastly, Brad can you just run through the reason for the shift in revenues in Canada-- from one quarter to the next?

We moved a chunk of our tax revenue, the retail piece, or a big part of the retail piece, in Canada to consignment, which is both a more conservative way to look at it but more importantly matches the behavior of the competitive retail dynamics in that market.

Glenn Greene, ThinkEquity Partners.

First question has to do with the consumer tax business.

Obviously you guys picked up a ton of incremental customers this year, probably about 2.5 million, and approaching 1.5 million through the Free File Alliance.

The question, I guess, is how do you go about monetizing that customer base and sort of either upselling or, you know, getting those Free File federal customers to pay you for the federal?

Well, I think, you know, part of it depends on what the product offering is.

As we've talked about before, the offering that we had this year in the Free File Alliance didn't actually allow to you upload all of your data from using TurboTax in prior years, so the customers that were in Free File this year have a simple decision to make when they come next year.

They can go free again, depending on what the requirements are and their qualifications, which we're still sorting out.

But if they do that, all of the data that they entered into TurboTax they'll need to re-enter, whereas if they buy the product, they'll enjoy the same year-over-year experience that our paid customers do, which is about 70 to 75% of the data and screens you have to enter port across automatically for most customers.

It's a huge time savings and I think a convenience that'll steer a lost people into the paid product.

Remember, that when you do taxes, this is an event that our customers are going to spend, many of them, hours and hours on, culminating in writing a virtual check to the government for tens to hundreds of thousands of dollars.

But plus or minus a few bucks in the price, we've demonstrated they're not terribly sensitive to.

And this is Scott.

Let me add that it's not true that FFA returns have no revenue attached.

In fact, because of state paid attach, I refer to these as partially paid returns.

Because even this year, we had a big chunk with paid state tax attach, from which we made real revenue from.

Yes, we make money through the customers that come in through the Free File Alliance.

Totally understood.

I was just wondering how you monetize the incremental customer.

The second question relates to the -- obviously the Microsoft threat on the QuickBooks side.

I'm wondering if you're sort of thinking about any sort of change to your pricing tactics for the base QuickBooks business, just sort of, you know, competitively go after them.

Well, I think it's safe to say we're modeling all sorts of different scenarios, and when they announce what they're going to do, we will respond appropriately.

Okay.

And then third, just a confirmation, you paid, what was it 170 million for Blue Ocean?

Approximately, yes.

Michael Millman, Soleil Securities.

I have a couple questions.

First, I think going back earlier in the year, you-- it's -- you had suggested, it seemed, that it was going to take some time to get back to double-digit revenue growth and, of course, you succeeded in getting back this year already.

Can we assume that you wouldn't have pushed it if you didn't think that double-digit revenue growth is something that we should expect going forward?

I think we'll let you know how we feel next year in August when we get through our planning process, but we've said from day one, our goal was double-digit revenue growth.

We just had both of our big businesses that have delivered at a much higher level this year than we thought they were when we put our our guidance earlier in the year.

And for the reasons that we went through today.

So we've been -- we've been very pleased with the season for both QuickBooks and TurboTax, and they both had better seasons than we expected for the-- for the reasons we covered in the -- in the discussion.

The-- the ITS sales, assuming, as you indicated, or you hoped to get roughly what you paid for it, maybe more, can we assume that that will be used additionally to return shareholder value directly, or is it likely to be put into the pot to use for other investments?

A couple of things.

Firstly, I think we didn't comment on what we expect to get for it.

But this is a pretty active M&A space at the moment.

Secondly, as a general matter, you should expect that excess cash, which we have today, and this will be much that more, will get a returned to shareholders.

And plus we just announced our fifth 500 million share repurchase today, so I think we're still putting our money where our mouth is in terms of putting our cash back to work to deliver value for shareholders.

And also, it seems, at least to us, that you had an extraordinary increase in your share of the desktop.

And usually, it takes a year when you put in innovations, it takes -- it shows up the next year as users give you referrals.

Can you talk a little bit about why you think you got that increase almost immediately.

Yes, Michael, that is an excellent observation.

I think you see two effects going on.

One, driving this year's share is just better execution throughout our consumer tax organization.

From tech support to retail to advertising, instore merchandising.

Our team's just done a much more solid job executing across the board, and that's brought immediate benefit.

Then on top of it, very much as you described, because of the Net Promoter effect, and the retention-- improved retention, that we'll benefit from next year.

So this fortells a story of strong growth next year as we continue with the superior execution, but then add the benefits that come generally in the second year of improvement.

Gentlemen, I'm not showing any further questions.

Would you like to proceed with any further remarks?

I'd just like to thank everybody for their support.

We're very excited.

We're gearing up for the competitive battle to come.

We just finished the strongest quarter we've had in a few years and our big businesses are humming on all cylinders.

So we're looking forward to finishing this year strongly and being well positioned for another great year next year.

Thanks to everybody for participating.

Bye.

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

This concludes the call.

You may all disconnect.