直覺電腦 (INTU) 2005 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 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.

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

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

The presentation you will hear on this call includes forward-looking statements including statements regarding revenue and earnings guidance, trends in customer growth, competition and future products and services, as well as statements that express Intuit's expectations, beliefs, plans, and forecasts.

These forward-looking statements involve important factors that could cause actual results to 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 Web site at Intuit.com: The earnings press release issued earlier this afternoon and Intuit's Form 10-K for fiscal 2004 and its most recent reports on Form 10-Q and other SEC filings.

These forward-looking statements are based on information as of today's date, and Intuit assumes no obligation to update any forward-looking statements.

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 Web site at Intuit.com.

After this call concludes a copy of Mr. Bennett's and Mr. 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, everybody.

Welcome to the fourth quarter and fiscal year 2005 conference call.

With me today is Brad Henske, our CFO, as well as Scott Cook.

Let me start by saying how pleased I am with our results for both the quarter and the full-year, especially revenue growth.

Fourth quarter revenue of 302 million was up 17% year-over-year.

And on a non-GAAP EPS basis we had a loss of $0.08 versus a $0.09 loss in the year-ago quarter.

So for the full-year revenue was up 13% to a little bit over $2 billion.

Non-GAAP operating income was up22% to 551 million, and non-GAAP EPS was up 25% to $1.99.

Our strategies in our core markets of small business, tax and accountants are working enabling Intuit to acquire more new customers and better monetize our large base of customers over their lifetime.

And there's a lot more work we can do to deliver even better results in the years ahead.

I'll talk about why I'm feeling confident going into fiscal year '06 in a few moments, but first let me turn the call over to Brad for more color on the business.

Thanks.

As Steve mentioned, fourth quarter revenue was 302 million, up 17% over the year ago period.

This reflects stronger than expected results in the QuickBooks-related and Intuit branded small business segments.

Turning to results for the year revenue was up 13% over FY '04 with growth driven by strong performance in our Consumer Tax and QuickBooks-related segments.

Non-GAAP operating income increased 22% over FY '04 to yield an operating margin of 27.0%.

And GAAP operating income increased 25% to 524 million which represents an operating margin of 25.7%.

Non-GAAP diluted EPS was up 25% to $1.99, benefiting from our operating leverage and lower share count.

And on a GAAP basis fiscal year 2005 EPS was $2.03, up 28% over FY '04.

GAAP EPS was higher than non-GAAP EPS due to a lower GAAP tax rate and the benefit of discontinued, the profits from discontinued operations, namely our Information Technology Solutions business.

Turning to the individual businesses, our QuickBooks-related segment had a great year.

Revenue of 753 million was up 15%.

Our strong growth was driven by success with two key initiatives.

Number one, acquiring new customers, and number two, monetizing them over their lifetime through upgrades and add-on solutions.

We made tremendous progress in both areas.

First, new user growth.

Over the past several years, the number of new users added to the QuickBooks franchise had been relatively flat, but that improved dramatically in FY '05.

I'm happy to report we acquired around 485,000 new QuickBooks users in FY '05, up about 30% year-over-year.

QuickBooks Simple Start introduced last October, helped us acquire over 85,000 new software customers, one of the most successful new product launches in Intuit's history.

And this was just the first year.

As you recall, Simple Start's list price is $99.

And it's designed for businesses so small and simple that bookkeeping is typically done using alternative methods like their checkbook, Microsoft Excel, or pencil and paper.

And since there are about nine million small businesses that don't use any accounting software today, we think there's a big opportunity for future growth and we believe QuickBooks Simple Start is the best product for this segment of customers at any price point.

Once we acquire customers into the franchise we work to solve additional problems so we can monetize them over their lifetime.

One lever is upgrades to newer or higher end versions of QuickBooks, like Pro, Premier, and Enterprise.

Upgrade units grew roughly 12% in FY '05 and most of the upgrades were in our core Pro and Premier editions.

Although still small we're seeing strong growth in QuickBooks Enterprise edition which sells for roughly $3,000 and units were up 76% in FY '05 to around 9500.

Another key lever of revenue growth is to add on products and services to solve customer problems beyond accounting, such as Payroll, Merchant Services, Point of Sale, and financial supplies.

We saw real success in better monetizing QuickBooks customers in FY '05.

QuickBooks Standard and Enhanced Payroll, our do-it-yourself products, grew revenue 20% primarily due to unit growth and enhanced Payroll Plus which includes our do-it-yourself Payroll software, state tax forms, and a subscription to either QuickBooks Pro or Premier.

This recurring revenue service has been very popular with customers with 109,000 signed up in FY '05.

We believe we can continue to grow both new users as well as upgrade them to enhanced Payroll in FY '06 and beyond.

Our merchant payment processing business called Innovative Merchant Solutions, saw organic growth of 40% in FY '05 driven by growth in customers and transaction volume.

This business is executing very well and we're thrilled with how this acquisition has paid off so far.

We expect another strong year in FY '06.

In QuickBooks Point of Sale revenue grew 23% in the year driven by strong unit growth.

In summary we're excited about the prospects for the QuickBooks business that lie ahead.

Our second small business segment, Intuit Branded Small Business, had revenue of 231 million, up 11% over FY '04.

These numbers do not include results for our Information Technology Solutions group.

You'll recall we announced our intention to sell this business three months ago and it's treated as a discontinued business for accounting purposes of past results.

While we'll get to guidance in a minute it will be excluded from our non-GAAP fiscal guidance going forward but included in our GAAP guidance for FY'06.

The standout performer was in the segment was our IRES Vertical, which sells to residential and commercial property management firms.

Revenue was up 22% in FY '05.

Next, Consumer Tax had a stellar year with strong revenue and share growth.

Revenue of 571 million was up 16% over FY '04 driven primarily by unit growth.

Federal units increased 27% including the free foul alliance and our retail share of federal units grew 7 points to 79%.

We will provide a more detailed retrospective of this past tax season at investor day on September 28th and we'll talk about our major initiatives for next year at a separate event probably in New York close to the beginning of the tax season.

Professional tax revenue of 265 million was up 5% over FY '04.

Our Pro Tax customer base increased 9% year-over-year largely driven by solid adoption of our two new Pro series offerings.

And finally, our other business segment which includes Quicken and Canada had revenue of 218 million for the year up 9% over FY '04.

Moving to the balance sheet the Company had approximately $1 billion in cash and short-term investments on its books at the end of fiscal 2005.

During the year we generated significant cash including $590 million in operating cash from continuing operations, and $166 million in proceeds from the exercise of employee stock options.

We also spent cash during the year including 70 million in capital expenditures and 709 million in our stock repurchase program.

Under the repurchase program Intuit repurchased approximately 4.7 million shares in Q4 '05 at an average price of $44.22.

And for the fiscal year we bought 16.2 million shares at an average price of 43.72.

We have approximately 291 million remaining in our fifth repurchase program.

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

In FY '06 we expect revenue of 2.18 to 2.24 billion, or growth of approximately 7 to 10%.

Looking at our business segments we expect QuickBooks-related revenue growth of 5 to 10%, Intuit branded small business growth of 5 to 10%, again excluding ITS, Consumer Tax revenue growth of 10 to 15%, Professional Tax growth of 0 to 5, and other business revenue growth of 5 to 10.

We expect non-GAAP operating income of 595 to 617 million, or year-over-year growth of approximately 8 to 12%.

We expect GAAP operating income of 501 to 523 million reflecting a higher GAAP tax rate as well as option expenses and the associated taxes.

And we expect non-GAAP diluted EPS of $2.19 or $2.29, or a year-over-year growth of approximately 10 to 15%.

The non-GAAP results exclude expenses associated with employee stock options.

We expect GAAP EPS to be in the range of 1.86 to $1.96 reflecting a higher GAAP tax rate, again, as well as the option expenses.

For Q1 of FY '06 we expect revenue of 270 to 285 million, and a non-GAAP operating loss of between 95 and $85 million, and a GAAP operating loss of between 121 and 111 million.

As expected, our first quarter loss will widen year-over-year as the Company continues to grow and we invest ahead of our seasonally strong second and third quarters.

And Finally, non-GAAP earnings per share we expect a loss of 30 to $0.35, and on a GAAP basis 38 to $0.43.

Moving forward, as you're aware quarterization of our revenue shifts somewhat from year-to-year as a result of a variety of factors such as more TurboTax customers moving to our Web versions and the impact of product bundling and marketing programs have when revenue occurs.

For greater transparency, we've included high level revenue and EPS guidance for all four quarters of fiscal 2006 in our press release and fact sheet.

Finally, one other announcement before I turn it back to Steve.

Jessica Kourakos is leaving Intuit to pursue is other opportunities on Wall Street.

We would like to thank her for her contributions over the last year and wish her well.

Bob Lawson, who is our Vice President of Corporate Planning, will take over Investor Relations on an interim basis effective immediately.

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

Thanks, Brad.

As I said at the top of the call, we're feeling very good about the year we just ended and about the year we've just entered.

This afternoon we announced the upcoming fall launch of the 2006 addition of QuickBooks, code name Denali.

This will be the 16th edition of QuickBooks and we believe it will be a giant leap forward in simplifying business.

We're dramatically simplifying the setup process, more than cutting in half the time it takes businesses to get up and running.

We've also launched a simple one-click home page that includes only the activities that are important to each individual business.

And we're providing a feature that will have a huge benefit to accountants, an always on audit trail, which means accountants won't to have manually look for changes made since they last looked at the books.

We're also introducing a new database that will significantly improve scalability of QuickBooks Enterprise Solutions, our high-end QuickBooks offering, allowing 50% more concurrent users and far faster performance.

We're really excited about this new, simplified QuickBooks, and we have more exciting new things coming in the QuickBooks ecosystem in the upcoming year and beyond.

With respect to the rest of the Company, we're making solid progress across the board.

Our other big business, Consumer Tax, s gearing up for another strong season.

We have some exciting new things we'll share at an investor day meeting closer to tax season.

In short, I'm thrilled about where we are as we enter fiscal year '06.

We're in great businesses with great opportunities.

We've got a great team in place and we're executing better every day.

With that, I want to thank our shareholders for their support and thanks to all Intuit employees who helped deliver another very good year and who are working toward delivering solid results in fiscal year '06 and beyond.

With that let's open it up to your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Laura Lederman of William Blair.

Good afternoon.

A few quick questions.

One, can you talk a little bit about the Microsoft QuickBooks competitor, how you see your product differing from them and just thoughts on their pricing?

And separately, you had such a great tax year last year can you talk a little bit about what you're doing to help continue the growth there?

Thanks.

On the, I'll give you, Laura, let me give you my perspective on both of those, then I'll ask Scott to add anything on the QuickBooks side if he has perspective.

We feel very confident that the improvements we've made in QuickBooks are going to make a big difference for our customers.

You know, you learn a lot in 16 years of dealing with small businesses and there's a lot of very simple and subtle things that are involved in building accounting packages that we think through 16 versions we've continued to refine and become better at.

That said, we've made quantum changes in this year's product that we think are really going to make it a big leap forward.

So I think that the answer is we feel great about our QuickBooks lineup from Simple Start through core through Enterprise.

And we're excited about the upcoming competitive battle to take some of the uncertainty away.

We've been in the preseason for quite awhile.

We're all suited up and we're ready to play and we're anxious to see what's going to happen out on the playing field but we enter confident.

With Consumer Tax the answer is we have a lot of interesting new things that we're doing that we don't want to share today, as we don't want any sharing of our thoughts on QuickBooks pricing, but we have a strategy to be very competitive in the marketplace, and, of course, all this is reflected in our guidance for the year, which we think portrays another strong year for the Company.

Scott, I don't know if you have anything you'd want to add on the QuickBooks front.

Let me just ask if you have any question remaining after Steve's answer.

No.

Thank you so much.

Our next question comes from Drew Brosseau of SG Cowen.

Great.

Thank you.

I'm going to follow-up on the Microsoft one.

There seems to be some debate in talking to Microsoft versus some of the comments you guys have made about where you're anticipating the competition from that product.

They seem to be suggesting that it will be more against at least Basic, if not Pro, and you guys seem to think it's a bit lower end than that.

Can you talk about what you've been able to do in terms of looking at their product and what if any advantages you think they might have as compared to what advantages you might have?

I think the, I mean, I think this is one of the interesting things that plays out.

Number one, we've had their product since they launched the beta, so there's no big surprise here, Drew.

And we've known this has been coming for five years, so we've been working on things strategically for the last five years to get prepared, and then when we found out exactly where they were coming last November we've been able to sharpen our game a little bit in terms of what their product is going to be.

We believe Simple Start is a better product for people that are using, that are not using any accounting software product today because it's simpler, easier to use, less expensive at $99.

We think that's the best product, and the fact that we sold 85,000 units the first year we think is a strong testament to the strength of that brand-new product.

I think the important thing is it did not really, we grew core units, too, Basic, Pro and Premier, while selling 85,000 Simple Start units.

So I think the big advantage they have, or I don't know if it's big advantage we'll see, the marketplace is the familiar look with Outlook.

And I think that's the big thing we can't copy, but in terms of integration between their applications and SBA, QuickBooks integrates very, very well with the Microsoft application.

So ultimately we think we've got everything they have and more and the customers will ultimately, will see, will choose.

We also think it's a battle for new users and I think we're both pretty consistent on that.

So a little bit of long-winded answer because I know there's so many questions out there about this, and we're going to spend the majority of our investor day on September 28th talking in much more detail about how we see small business and when we get everybody together face to face.

Can I just follow with one other?

Sure.

If I take the 85,000 out of your total, the growth of the core was positive but it was, I don't know, 3 or 4%.

Is that a fair thing to do, or I guess what I'm really wondering is what kind of cannibalization do you think Simple Start created versus really driving the addition of people that you would never have gotten otherwise?

I think if you look at year-over-year total units sold they were up nicely.

I don't have the data right in front of me.

But upgrades was up 12%, new users were up about 30% so I think we actually won on both fronts.

Total units were up 18% in total, and if you go back last two years they were relatively flat.

So we think we hit on both fronts in '05 from some of the positive changes we made to the product, and we think that momentum will serve us well as we move into '06.

Thank you.

Your next question comes from Bryan Keane of Prudential.

Yeah, hi.

Good afternoon.

I just want to follow-up on that.

If there's 485,000 new QuickBooks users and 85,000 were Simple Start, well doesn't that say that there's about 400,000 others that are doing Pro, that bought, new users have bought Pro and Basic, and wouldn't that be a risk to a Microsoft launch?

If Microsoft had a better product.

Okay.

The second question I had was on the tax rate on the quarter, in the fourth quarter.

Something happened there.

I don't know.

It looks like you actually took a loss instead of usually getting a benefit in the quarter.

Yeah, we took a loss in the quarter.

As you know the way the tax rate works is every quarter you true it up to what you think the whole year is.

So the delta between the notional flow through in the quarter and what we actually booked was big compared to a few dollars of loss, but was small compared to the year and was truing up our tax rate in totality to the 35% on a pro forma basis we'll see for the entire year.

Bryan, I want to add one comment to what Scott said.

I actually think the secret to our strength in the market goes far beyond the product versus product comparison.

I think it has to do with your relationships with accountants, it has to do with the word of mouth that's generated, it comes from all of the certified QuickBooks users that there are around the country, and so I think it's much broader than just a product to product feature comparison, where frankly we feel we stack up very, very well.

It's the whole ecosystem that is part of this and that's why we're anxious to get in the game, play the game, and we'll be very excited to see what we're talking about a year from now after we've been through a year of competition.

Yeah, one final point on that, the question asked earlier, excluding Simple Start, QuickBooks units in the year grew about 10.5%.

Okay.

And then Brad, the revenue guidance I think is 7 to 10 and then non-GAAP operating income is 8 to 12.

Typically you guys would show more margin expansion than that.

Is there more extra spending on sales or marketing this year why that operating income isn't faster than revenue growth?

Bryan, if you go back and look at the last six years that I've been here, we have been running about 1.5 to 2 times operating revenue, operating profit leverage above revenue growth and, you know, it's in the same range but we are clearly investing more for the long-term and we're investing in making sure we have a successful FY '06.

So I think the ratios are pretty consistent to what we delivered over the last few years.

I mean, this year we grew, '05 we grew revenue 13% and operating profit 22, so still in that 1.5 to 2 times revenue growth range.

We'll see how it all comes down.

All right.

Great.

And then finally, just the employee stock option expense for fiscal year '06, I guess, is that just the difference between GAAP to non-GAAP or is there something else in there?

No, the difference, as you probably know and we show as a reconciliation, we excluded from our non-GAAP items the amortization of intangibles and other non-cash charges like that so the delta for FY '06 is that plus the impact of employee stock options.

What is employee stock options for fiscal year '06, or what is it expected to be?

This is the FAS 123?

Yeah.

Something on the gross order of about 65 to 75 million which roughly equates to somewhere in the zip code of $0.25 a share.

Okay.

Thanks.

Our next question comes from Adam Holt of JP Morgan.

Good afternoon.

I have a couple of questions on QuickBooks.

If my math is right, if you look at the unit growth, even adding in the subscriptions, revenue growth outpaced unit growth on a year-on-year basis in the quarter.

I know you all are trying to get away from an average selling price but maybe you could talk a little bit about the difference between revenue growth and unit growth.

Adam, I'd be careful looking at just the quarter, because at the quarter, sometimes in the quarter we true up reserves for the year and clean that off, and that can distort ASPs.

I think on a yearly basis the reason we're trying to get away from ASP is ASP is going to be driven more by our mix of what we sell between Simple Start and Enterprise and Premier and Pro than it is between any pricing actions.

So ultimately our strategy is to have a right-for-me solution for customers and let them pick what's right for them and ASP is just something that falls out of that.

So that's the reason we think it's actually a number that confuses investors and that's why we haven't focused on it.

Just along that line, if you go back to last year's commentary looking into fiscal '05, you made the point that the majority of the story was going to be about unit growth more than pricing.

Would that be the same theme heading into fiscal '06 both in terms of QuickBooks and Tax, or, you know, will there be new opportunities for pricing leverage heading into '06?

Let's separate them.

I think the answer is, we believe in TurboTax, I believe in TurboTax that the unit growth is the biggest and will continue to be the biggest opportunity for growth in that business for quite awhile.

On QuickBooks, I think the answer is we're planning to, we're going to have to be competitive in price in the short-term.

And so I think we have to see.

We're going to be responsive to the marketplace and how the products are perceived, so I wouldn't want to call a long-term pricing strategy in QuickBooks at this time.

I think we've been prudent in our assumptions that go into the plan but let's get in the market and let's see what happens and we'll adjust accordingly to make sure we're maximizing shareholder value, short and long.

Just one more question on QuickBooks, actually.

It looks, if my notes are right, as if the launch of the QuickBooks products this year is a little bit earlier than we've seen historically.

Does that suggest that you'll actually see the product released earlier than the late November time frame we usually expect?

No, we think the schedule is pretty consistent with what we've had the last few years, Adam.

There's no big change in the schedule plus or minus a week one way or the other.

Great.

Thank you.

Our next question is Greg Smith of Merrill Lynch.

Hey, guys.

Looking at the, revisiting the operating income growth expectation for FY '06, I guess I was surprised by your revenue growth being a little bit stronger than expected but then the operating income growth may being a little bit less.

You talked about investing for the future.

How should we think about that split between maybe sales and marketing and R&D?

I think you should think about it in that every year we look at all the money we spend very, very rigorously and very thoroughly and we deploy it to the where we believe we get the best return on investment short and long, and it's the same process we've used for the last six years that I've been here, and so we don't have any kind of hard rules of the road.

We look at where we think we are in terms of the opportunity and we continue to invest where we believe we get the best return on investment both short and long, and I think given all the competitive intensity this year, we may change the mix a little bit, but in the long-term our strategy hasn't changed and we're responsive to the marketplace.

This is Scott.

Let me give a specific example of that.

Five years ago we decided that our technical underpinnings underneath QuickBooks were not able to stretch as our customers were stretching them so we decided we needed to update the technical infrastructure underneath QuickBooks.

So for the last three years we've been investing in an effort to build a new database and technical underpinnings underneath QuickBooks.

At the same time we've had multi-level efforts going in simplification of key business tasks the way QuickBooks does, and in developing even more right for each specific business solutions.

Each one of those development efforts would have been normally what we would have filled an entire annual release for QuickBooks, and we've had three of them that are all launching together.

So we've been investing more on QuickBooks R&D over the last few years to bring all three of these efforts to market at once.

That's also, by the way, why we code named this release Denali.

I believe Denali maybe in the Eskimo language may mean "the big one," it's the term for [inaudible] because this one is all about three annual upgrades all in one, and that comes from more R&D.

But we didn't make that decision based on any percentage, split, or mix, we made the decision because it was the right thing to do for the customers and the customer experience.

Great.

Thank you.

That's helpful.

The one last color I'd add on that is look at expense growth year-over-year, it's going to be more heavily weighted in R&D than sales and marketing.

Yep.

Okay.

And then, just, we sort of touched on this already but just thinking about the Consumer Tax guidance, 10 to 15 revenue, should we think of unit growth being pretty close to that, maybe just a little bit less?

Stay tuned.

Okay.

And then lastly, the, sort of the long-term objective here, getting operating margins into the low 30s percent, anything that's changed structurally that would derail that target or you feel like you're still firmly on track for that down the road?

We're still solving, as we have been for quite a while, double-digit revenue growth and greater than 15% annual EPS growth.

And the operating margin falls out of that.

But if we project forward, double-digit revenue growth with ongoing profit leverage, I see nothing that's changed that doesn't lead me to the conclusion that we should be, like we did again this year, continue to get operating profit leverage.

At the same time as we are seeing more and more new growth opportunities in virtually every business, because of our launch of right-for-me strategies in every business, we are reinvesting more money in driving faster organic growth in the future.

And as I've said is all along, if the trade-off is deliver another 100 basis points of operating margin or reinvest that money to deliver faster organic growth, I'm going to opt for faster organic growth.

So that said, I still believe that the margin objectives you talked about, Greg, are reasonable.

Thank you.

Our next question comes from Tom Berquist of Smith Barney.

Thank you.

A couple questions on just the business splits, I guess.

One was other, it looked like it was showing better growth this year.

I think you said 5 to 10%, Is that coming from Quicken?

Are you anticipating either new product introductions or just a new free fresh with that?

Stronger performance in Canada and the U.K.

Okay.

Got it.

And Quicken performance, which has been in the upper single digits the last couple of years is performing well, too.

Got it.

And then on the verticals, mentioned how strong any construction was, or maybe it was the residential.

I guess the question is, is that it looks like, in looking at the Microsoft products that they don't have any vertical functionality.

How do you think about the trade-off between sort of more generic core products and vertical products over the course of this year and next year as the competition heats up with Microsoft?

I think it's apples and oranges.

So the vertical business that did particularly well this year was the business that sells software to large scale property managers, both commercial and residential, actually.

With an average transaction over $100,000 per transaction.

Yeah, so I think it's completely apples and oranges and will be irrelevant to any competition with Microsoft.

Let me now address the QuickBooks element of that, because within the QuickBooks line separate from the stuff that Brad was just covering, we have quite a focus on right for my business offerings, which means offerings that are right for the size of the business and right for the industry of the business.

One of the things that's coming in QuickBooks 2006 is a major change to our offerings for product-based businesses.

Price-based businesses are distributors, wholesalers, manufacturers, and we have really a leap frog of capability going there.

We've studied the work flows carefully of these product-based businesses, and we've built in automation that automates and simplifies a dozen of the work flows done by product-based businesses, including functionality that is not available in other offerings even at far, far higher prices.

So we continue on the strategy, and while other competitors may be copying what we did in the '90s, we are continuing to move farther into the lead on the new innovations we've brought in this decade.

I think another thought to Scott's point is this is an area where we have generally, QuickBooks has generally been stronger in service-based businesses than product-based businesses because we had, for some companies, a gap in inventory performance.

We didn't just copy what other people had in inventory.

We leap-frogged them, and we believe now we have leadership functionality on an inventory basis which is going to make QuickBooks a much better product for goods-based, product-based businesses, especially in the QuickBooks Enterprise space.

We think both the database replacement and better performance as well as this new inventory functionality should help us a lot ob the Enterprise basis as well as with the core parts of the core product, so we're very excited about this new code-named Denali product and we think it's going to do very, very well in the marketplace.

Is there anything proprietary that keeps Microsoft from being able to pull transactions out of your products?

There was some debate about that on Microsoft's call about whether or not they could reach in and extract transactions type process.

It's not terribly an important issue, because what they can't reprogram are the customers' minds.

Once you understand how a software product like QuickBooks operates and it becomes second nature for you, switching to any other software product is torturously painful.

It's not the data conversion, it's the mental conversion of the users, your team and your accountants.

That's what keeps people so happy with QuickBooks is we don't force them to change.

Here's an important observation.

While some other companies have three different accounting platforms, and as you grow they want you to switch from between three different products, obsoleting all of your prior investment and knowledge.

In QuickBooks we have one platform, from the smallest business up to strapping mid-market companies with hundreds of employees who never have to change the platform or the user interface.

You're never obsolete your data or your knowledge.

That's the real importance of how you provide real ease and why people stay with QuickBooks and don't leave to go somewhere else.

Got it.

Last question on the stock option comp.

I noticed that it's actually slightly fallen as the year progresses.

Should we assume that it will continue to fall in future years as well?

Yeah, so I think on, yeah, I think you'll see it fell this year, you know, from the numbers I gave out, a few minutes ago, it will probably fall a little bit next year.

Then it's hard to tell because it depends on what the stock price does and the like, but what we've seen is first a general reduction, the number of options outstanding because of our lower grants over the last few years, and secondly, perhaps more importantly, they've been granted at lower prices, and therefore the cost per option has come down, and that's, you know, when you put it into the magic map that's FAS 123, the result that comes out is a number that's been falling and probably continue to fall for a little while.

Thank you.

Our next question comes from Michael Millman of Soleil Securities.

Thank you.

I want to ask about your tax software this year you increased your market share by about 10%.

I was wondering if historically when there's been a very large change in market share, if that's sort of bounced back in the next year?

Secondly, related to that, what's your assumption about your market share this year and what's your assumption about FFA this year?

And finally, related to that, your retention this year and your assumption of retention next year?

Sure.

So let me try and touch on those.

Firstly, from a market share perspective, so there isn't a lot of history of market share bouncing around, it's actually up until last year in retail been quite stable so there's no data to look at.

That having been said, I almost think that's the wrong way to think about it, because we've got such high share of retail, we expect to continue to be able to grow successfully the business we do with our retail partners, who like this, is a terrific product that drives traffic in their store in the January and February time frame when not many other things are driving customers into retail stores.

I think from a share perspective it at some level depends on what our competitors do.

We're solvent for how do we grow our business.

Secondly on the Free File Alliance, as you saw last year we were quite successful in gathering new customers there and gained significant share in Free File.

We'll talk more about that and the data behind it on investor day.

The Free File agreement is still open and still under negotiation and there will be more discussion about that as there is more information to share.

But suffice it to say I think we've proven that we can win no matter how this comes out, and I think most potential outcomes are actually better for us than versus where we are today.

And we'll share the retention data and some of the other insights when we give you a more diagnostic view of last tax season coming up at investor day.

Thank you.

Our next question comes from Glenn Greene of ThinkEquity Partners.

A couple questions.

The first one has to do with, if you look at your gross margin trends the last few years you've shown some really nice leverage, at least for the last three years, and I'm just wondering, as we head into FY '06, and getting back onto some of the questions related to operating income growth relative to revenue growth, if you're going to see sort of a flattening of that gross margin trend or perhaps even a decline?

Glenn, I think, for what it's worth, gross margin is not a thing we spend any time thinking about here.

In software businesses like this, it tends to be an artifact of what you allocate into that line for service and support and things like that.

That having been said, on our product-based businesses, so where there actually is physical cost of goods, we have seen the cost of those products continue to go down over the last five years and we expect they'll continue to go down in the future as we get more and more efficient in our supply chain activities.

And a big part of too, Brad, if I'm not mistaken, is the mix between software and service businesses which can have an impact on gross margin.

As we grow service business faster than software businesses, that has an impact on gross margin for the most part.

So at the bottom, at the end of the day we're solving for revenue and EPS growth and I think we've shown over the last five or six years that we've been able to deliver profit leverage while delivering revenue growth.

So at least that's the way I think about it, Glenn.

Okay.

And then just an update on the CFO search and the ITS sales process.

ITS sales process, we've got multiple interest bidders and my guess is we should be able to get this closed in the next quarter, I think, Brad is that safe to say?

Something close to it.

We'll see.

And we are still working on the CFO search, and as soon as we, we've seen lots of good candidates, and as soon as we get something specific we'll have an announcement on that.

Good enough.

Thanks.

Our next question comes from Jim Macdonald of First Analysis.

Yeah, guys.

I just wanted to ask about your mind-set overall in thinking about guidance for 2006 with this Microsoft entry and H&R Block's maybe more aggressive stance.

How conservative do you have to be when you thought about your guidance?

I wouldn't use, I think what we've done the last few years, we've been prudent and thoughtful on our guidance and I think we've used the same approach this year.

Every year we always face some degree of uncertainty, and what we share in our guidance is our best view of what the year looks like at this point, and we update it as we get into the year.

We go into this year feeling very good about where the Company is and the progress we've continued to make, and we're just going to keep focused on getting better and better at delivering for customers and we'll see where the chips fall.

The guidance we gave now is consistent with how we see the year at this point in time.

Okay.

And just a quick follow-up on DIY Payroll, we had, I think, the first down quarter sequentially in quite awhile.

Any --

I think we still think DIY Payroll is a big opportunity.

Revenue grew 20% year-over-year, and so, you know, the bottom line is we still think there's a bunch of opportunity.

One of the drivers is that we changed our sunset policy in May and that had impact on the fourth quarter.

Previously we were marketing to sunset customers a little bit early to entice them to upgrade, and we stopped that policy.

Thanks.

Gentlemen, I'm not showing any further questions.

Would you like to proceed with any further remarks?

I'd just thank everybody for their support.

We have a lot of new exciting information to share in September 28th at investor day, and as Brad talked about for the first time, a tax, Consumer Tax specific event just before tax season, so I hope you also appreciate the fact that we have gone I think an extra mile in terms of giving, Brad, what, quarterly guidance now that we didn't give last year to help you as you see the quarterly splits from where we see them.

We're excited about the year.

We feel great about the year we just completed.

Thanks for your support.

We look forward to talking to you at investor day.

Good-bye.

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

This concludes the call.

You may all disconnect.

Everyone have a great day.