直覺電腦 (INTU) 2008 Q3 法說會逐字稿

Good afternoon.

I'll be your conference facilitator today.

At this time, I would like to welcome everyone to the Intuit third quarter 2008 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) With that, I'll now turn the call over to Bob Lawson, Intuit's Vice President of Investor Relations and Financial Planning and Analysis.

Mr.

Lawson?

Thanks.

Good afternoon.

Welcome to the Intuit third quarter 2008 conference call.

I'm here with Brad Smith, Intuit's President and CEO; Neil Williams, our CFO; and Scott Cook, our Founder.

Before we get started I'd like to remind everyone that our remarks will include forward-looking statements.

There are a number of factors that could cause Intuit's results to differ materially from our expectations.

You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2007 and our other SEC filings.

All of those documents are available on the Investor Relations page of Intuit's website at Intuit.Com.

We assume no obligation to update any forward-looking statement.

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

The most directly comparable GAAP financial measures and reconciliation of non-GAAP financial measures to GAAP are provide in today's press release.

After this call concludes a copy of our prepared remarks and supplemental financial information will be available on our website.

With that I'll turn the call over to Brad Smith.

Thanks, Bob.

Good afternoon, and thanks to everyone for joining us.

As you've read in our press release, Intuit had a very strong quarter driven by an outstanding consumer tax season.

Revenue, operating income, and earnings per share were all above the high end of our expectations.

We now expect the full year to come in better than we had previously guided so we're raising our full year revenue and profit outlook for the Company.

I'm pleased with these results and I'm really encouraged by the way the team achieved them.

In Consumer Tax we drove the strong results by creating our best offering ever and executing with excellence throughout the season.

Our 17% unit growth reflects market share gains in retail and on the web.

We're winning.

We're winning because we remain focused on ease-of-use which leads customers to recommend our solutions to their friends and their colleagues, and I'm happy to say that our systems handled twice as many tax returns as last year on the last two days of the tax season.

In small business we continued to deliver solid double digit revenue growth in Payroll and Payments, and we beat our best third quarter ever last year in QuickBooks.

These results are in spite of a tough spending environment for small businesses.

Our focused actions in the second half of the year mitigated the short-term challenges and we are now well positioned as we head into next year.

Our financial institutions business also showed an upward trend in performance.

The increase in revenue this quarter is modest but it indicates we're on the right track and we shifted the momentum in the right direction.

All in all it was an excellent quarter and we're on track to deliver another year of very strong financial performance.

With that I'll turn the call over to Neil to walk us through the financial details.

Thanks, Brad.

Let me start with a summary of third quarter results.

Revenue of $1.3 billion was up 15% year-over-year.

Non-GAAP operating income of $728 million was up 17% year-over-year.

Non-GAAP earnings per share of $1.39 increased 23% year-over-year, and GAAP earnings per share of $1.33 increased 28% year-over-year.

We're certainly pleased with the GAAP and non-GAAP operating leverage we've generated in the third quarter.

Turning to business segment results, Consumer Tax third quarter revenue was $657 million up 16% over the year ago period.

Year-to-date revenue was up 15% and units were up 17%.

(inaudible) Units and revenue grew roughly in line which demonstrates our ability to monetize our free tax offerings.

It's also important to note that none of the growth in units or revenue is due to the Federal Governments economic stimulus program.

We didn't charge customers who filed returns just to receive stimulus checks and those units were excluded from our statistics.

As Brad mentioned, our strong performance was driven by our continued focus on ease-of-use, excellent execution of our marketing programs throughout the tax season, and the success of our free federal product.

Unit growth started strong and continued to accelerate as the season progressed.

Our growth outpaced the category and we gained about 3 points of market share in retail and about 1 point a share online.

Professional Tax revenue of $166 million was up 20% in line with expectations and reflecting a shift of revenue from the second quarter to the third quarter as discussed on prior calls.

Year-to-date Professional Tax revenue is up 1%.

Total small business revenue grew 9% in the third quarter.

Within small business, QuickBooks revenue of $165 million was up 5% over the year ago period.

Excluding about $6 million of revenue from Homestead, which was acquired in December 2007, QuickBooks revenue was up about 2% from the third quarter of last year.

QuickBooks units including free Simple Start activations were also up slightly in the quarter.

If you recall, the third quarter 2007 was our strongest third quarter ever for QuickBooks revenue and units, so we feel pretty good about growing over those numbers given how tough a year it's been for small businesses.

The Payroll and Payments segment again delivered solid growth with revenue of $142 million for the quarter.

Adjusted for the impact of the ADP sale and the acquisition of Electronic Clearinghouse Inc, segment revenue was up 13% for the quarter.

This was driven by 20% growth in payments customers and 1.5% growth in transaction volume per customer.

Growth has slowed slightly from prior quarters due to a reduction in payroll float revenue and slightly slower growth in charge volume per merchant.

Overall, we feel great about the strong customer growth in our payments business and really like the long term growth potential of this segment.

Particularly with the addition of the capabilities we acquired with Echo.

Financial institutions revenue for the third quarter was $76 million, adjusting for the timing of the Digital Insight purchase which closed February the 6th, of 2007, third quarter growth would have been 10%.

We still have a lot of work to do but we're pleased with the progress we're making in this segment.

Our other businesses segment revenue of $107 million was up 20% year-over-year driven by strong results in our Canada, UK , and real estate solutions businesses.

I would note that the weaker dollar contributed to the Canadian business growth and currency gains account for about 7 points of the segment growth rate.

Moving to the balance sheet, Intuit ended the third quarter with $897 million in cash and short-term investments.

We also have $292 million of auction rate securities that were reclassified from short-term to long term investments in Q3.

We don't believe the carrying value of those securities is impaired because the assets underlying the securities are generally student loans which are guaranteed by the U.S.

Department of Education.

We have the ability and intent to hold these securities until liquidity returns to the market.

Other secondary markets develop, or the securities mature.

Because it's not certain when liquidity will return to the auction rate securities market, the long term classification makes sense.

Cash flow from operations was $832 million, capital expenditures were $95 million during the third quarter.

This is up from $36 million in the same quarter a year ago.

As discussed on prior calls, the increase is driven by investments in our new data center and expansion of office capacity to support our growth.

In the third quarter we used the remaining $300 million of stock repurchase authorization to repurchase 10.8 million shares.

We have requested and the Board has approved a new authority of an additional $600 million.

Moving to M&A activity, the previously announced acquisition of Echo closed on February 29.

Echo rounds out our complement of payment processing solutions and has been folded into our Payroll and Payment segment.

The acquisition is performing better than planned and is expected to be neutral to operating income and EPS in FY '08 and slightly accretive in FY '09.

We've summarized the M&A impact on our third quarter year-to-date growth rates in a table that is included in our posted conference call materials.

Moving to fiscal 2008 guidance, we are raising guidance for 2008 total Company revenue, operating income and earnings per share.

Fiscal 2008 guidance is now revenue of $3.05 billion to $3.06 billion, which is annual growth of 14%, non-GAAP operating income of $860 to $870 million, which is annual growth of 12% to 14%, non-GAAP diluted EPS of $1.61 to $1.63 which is annual growth of 13% to 14%.

We have also raised our Consumer Tax segment revenue guidance to 14% growth to reflect the excellent tax season just completed.

Previous guidance was 8% to 12% growth.

And with that I'll turn the call back over to

Thanks, Neil.

Good stuff.

Before we get to your questions, I'd like to share my perspective on our business now that I've been in the job for almost two quarters.

One of the first things I wanted to do as CEO was to step back and to take a fresh look at our Company.

So over the last five months I've traveled around the country talking to employees, meeting with Board members, engaging with our customers and talking with many of you.

Through that process, a clear picture of Intuit emerged.

It's a picture of a vibrant, growing Company with strong assets and lots of untapped opportunity.

It's a picture of a Company that is embracing the changing world around us in a way that will help us make the next 25 years just as successful as the last 25 have been.

First, we have a foundation of strength upon which to build.

We have three growth engines, tax, small business, and financial institutions, that are not only delivering today as you saw in this quarter's earnings but they're well positioned to deliver double digit growth for the foreseeable future.

In addition we have two longer term initiatives, healthcare and global that could add to that growth down the road.

Each of these growth engines are powered by world class brands, large user bases, and strong customer loyalty that drives word of mouth and creates a thriving ecosystem.

These strong assets provide Intuit with differentiation in the markets we serve and with a solid foundation for the future.

With that foundation, we're actively pursuing strategies to continue to innovate and position these businesses to win in the future.

So let me share a little bit about what the future looks like.

Our goal as a Company is clear.

To be recognized as one of the most innovative and fast growing Companies in the world.

While it will take some work to get there, I couldn't be more excited about the innovation that is taking place across our Company.

Our employees are energized and are passionate.

They're embracing new technologies, they're inventing new business models and they're crossing new geographies to help our customers achieve their dreams and they're doing it with connected services.

At Intuit, connected services takes three distinct shapes.

The first type of connected services are when the service connects to our software in a way that makes that service superior to any alternatives in the market.

Two examples that we have today are payroll and payments.

Both of which are superior to competitive offerings because they integrate into QuickBooks software which makes them easier to use and at a lower cost than the alternatives.

The second type of connected service are software solutions that are delivered as a service.

This type is better known in the industry as softwares of service.

Our goal with these connected services is to ensure they deliver revolutionary benefits or cost advantages.

Examples of this type include TurboTax Online, QuickBooks Online, our new online payroll product, or our online banking platform offered to financial institutions.

The third and final type of connected services are solutions that leverage our vast ecosystem of end-users to connect people to other people.

We're seeing this today when TurboTax customers get their questions answered by other customers in a TurboTax live online community, and we're making connections between accountants and our small business clients all the time in our QuickBooks Pro advisor community.

Now, connected services are by no means new for Intuit.

In fact roughly half of our Company's revenue comes from connected services today, and they're growing at strong double digit rates and they're nicely profitable.

Our employees are also capitalizing on three key market trends to create and deliver more of these connected services.

First, they're embracing the concept of social networks and user generated contributions to create and deliver value through our large and growing user bases.

Second, they're creating solutions that will work on any device including mobile devices.

And finally, they're doing this with a more global mind set as we look to better serve U.S.

based companies seeking to do business globally while also defining new opportunities to serve customers in new markets.

We call this, social, mobile, and global and these are new catalysts that will enable us to accelerate our growth over time.

Now that's why I'm optimistic about the long term prospects of this Company but I'm also excited about what we're doing to get ready for next year in fiscal year '09.

We already talked about this seasons great results in consumer tax, but we feel really good about next season as well.

The success of our free offering, the customer response to our focus on ease, and the continued improvements in net promoter scores for both the online and the desktop product all drive customer retention, more recommendations, and the overall growth of the category.

This gives us confidence that this business will continue to perform well into the future.

In small business, we've got a really promising QuickBooks '09 product in alpha testing.

We're also applying what we've learned over the past two years to make our marketing and advertising program even more effective, and we're continuing to drive strong growth from our connected services, like payroll, payments, and SAS offerings in our small business ecosystem, and we're learning new ways to expand and grow the category with low cost or even free offerings.

In financial institutions we're starting to get real traction.

We had a very successful user conference with record attendance and very positive response to our personal finance work demonstration at that conference.

We now expect to rollout the first version of Personal Finance Works this October, and we will follow with an expanded set of small business offerings and capabilities in December.

Now turning to our longer term initiatives of healthcare and global, in healthcare, we continue to believe there's a large, unmet need that will prove an attractive opportunity for us if we can solve it well.

This quarter we announced a new Quicken health partner, Medical Mutual of Ohio.

We expect both Cigna and Medical Mutual of Ohio to begin rolling out our solution to their plan members later this calendar year.

There's no material revenue impact for the next couple of years but we're excited about finally getting the much anticipated product into the market.

And when it comes to global, we see this as a large opportunity for us as well.

We continue to make progress around defining the offerings and the geographies that we'll focus on first and I have little doubt that global will have an impact on Intuit's business results over time.

In closing, we had a great quarter and expect to deliver another great year in a tough environment.

We have a recipe for success and a set of operating principles that have enabled us to deliver year after year.

Those principles include growing organic revenue double digits with operating margin expansion, using the cash we generate to fund growth initiatives, and returning excess cash to shareholders in the form of share buybacks.

We've got an excellent foundation to build on, we're driving innovation throughout the Company to accelerate our growth, and our strategy to win is now clearly defined for a connected services world.

Thanks for all your support and thanks to all of the Intuit employees who are so focused on delighting our customers and with that we'll turn to your questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes to us from Bryan Keane of Credit Suisse.

Hi.

A couple of questions on the segments.

I guess first on tax, do you guys think you'll be able to further monetize the free TurboTax customers next year and is there any way to quantify how many customers there were that used the free TurboTax this year?

Yes, Bryan, this is Brad.

We do now have two and a half years of experience of learning what free is about and how best to monetize free.

We feel good with the model.

We have a pretty good handle for how to get customers who use free to come into the franchise and actually buy additional products and services so we're confident about the free model as we look to next year.

We think that will be one of the growth catalysts.

The second question which was actually quantifying the number of people who came in free, we have not put those numbers out, Bryan, we haven't disclosed those numbers at this time.

Probably for competitive reasons I assume?

Yes.

Just turning to QuickBooks, obviously a dramatic turnaround.

Can you talk about what happened there and how you're able to do that?

Yes, Bryan, it really came down to great execution on the part of the team.

Regardless of the environment we believe we have the ability to execute well and be responsible for our own outcome so the second half marketing programs we've put in place, tightening up our marketing messages, increasing our advertising, produce the results in line with the expectations that we hoped and the team continues to take a page out of TurboTax.

They're learning about focusing on ease, looking at advertising, and continuing to test and learn what's free, which better positions us for next year as well.

So I'd sum it up by saying really good execution and not letting the economy be a factor in holding back our results.

This year's QuickBooks I think Vista was one of the big bells and whistles.

It sounds like '09 you got is some new interesting things that will maybe help drive unit growth next year?

Yes, Bryan the good news about Vista is once we built it into the product now our go forward versions will be Vista compatible and what we are looking at is looking at new services and new functionality that will solve important problems, problems for customers as we look at QuickBooks 2009.

And then just finally on the financial segment, it looked like that showed a little bit of a rebound.

Do you figure that continues and any worry that you'll be impacted by an economic slowdown?

Bryan, we are pleased with the progress in financial institutions.

We're not satisfied yet that we're all the way to bright.

We have a lot of opportunity still in front of us.

The team is executing well, I believe that with the pipeline we have, with the facts we have, the personal finance works coming into the market in October and small business capabilities coming shortly thereafter, that if we continue to execute we'll continue to produce the kinds of results that we expected when we brought Digital Insight into the Company.

In terms of the economy we aren't seeing any real impact on the economy in the financial institutions industry today.

Okay, great.

Super job.

Thank you.

Thank you.

Our next question is from Ross MacMillan of Jefferies & Company.

Yes, thanks.

I guess two questions.

Firstly just on tax.

Neil, I heard you comment that you didn't think the numbers were influenced by the rebates this year, but I think E-filing growth was even higher this year than last year so I'm just wondering how you manage to parse that out, and you can be convinced that you didn't have some unit benefit from the rebate?

That's the first question.

Yes, Ross, so great question, and what we've done is two things.

The first is we built into the interview and the product a set of questions that would help identify if you had a filing that was part of the economic stimulus package.

If it was we routed you to those respective products which were free.

And then the second thing we did was we conducted a blind survey of all TurboTax Online users to make sure if anyone else in the product could actually use the product for the economic stimulus package we removed them from our numbers.

So we feel pretty confident that we pulled those numbers out of our reported units and revenue that we've provided today.

Okay, great.

And then just on the financial institutions, clearly a pick up in the sequential revenue there, but two questions.

I did notice that the Internet banking end-user and bill pay end-user counts are growing but at a decelerating rate.

Could you just talk to that?

And then secondly, as Finance Works and the related small business one gets released, where should the revenues from those show up?

In financial institutions or are those going to be somewhere else?

Thanks.

Yes, so Ross on the first one, agree with you.

Our online banking is option, Internet online banking as well as bill pay adoption growth while it's trending back up in the right direction isn't where we want it to be.

This is an area we think we can have a big impact by applying Intuit's historical focus on ease-of-use, to help increase ease-of-use and drive adoption and our team is really focused on that as we speak.

In terms of where Personal Finance Works will show up in the financial reporting, it will impact the adoption hopefully of online banking as well as the customers adoption of other services as we introduce expanded capabilities for small businesses.

So it should show up in the core financial institutions reporting that we'll provide.

Thank you.

Thank you.

Our next question is from Michael Millman from Soleil Securities.

I think I have a couple questions or several questions.

Regarding the tax growth, can you give us some idea of the source, in other words did you increase retention and was it a lot of new customers?

Was it from some other sources?

Yes, Michael, there were three things that we believe fundamentally drove a really good tax season this year and sets us up for next year as well.

The first was the teams continued focus on ease-of-use, using new methods, things like smaller customer experience teams, building functionality into the product like life event changes which historically has been a reason why people would consider going to someone to do their taxes or even TurboTax Live Community.

All of those were our continued pursuit of building what we think was the best offering we've put in the market in many years.

The second thing is really good execution around customer acquisition.

The team came out of the gate day one, we had an aggressive advertising campaign, we had really good online marketing and I believe we continued to learn throughout the season and got better at bringing new customers into the franchise and last but not least was free.

We continue to learn what's free, we continue to expand the category by getting new customers into the category and in looking for ways to monetize them and when you put a bow around those three things which is a really good offering, with a focus on ease, the fact we had good execution around new customer acquisition and the continued success was free that delivered the results we were looking for and helped grow the category.

I was surprised when you said you're only increased share 1% because number two player was actually down and you were sort of midteens.

Is there someone else sneaking up, taking share as well?

And sort of related to that, Block has said that they think that free tax is not profitable and even though they were down in digital, their profit doubled and maybe you can give us some color on what you think about those statements vis-a-vis your experience.

Yes, so let me start first with share.

We felt really good with our market share gains in retail this year, up 3 points and on the web actually picking up 1 point.

We also believe that in the online presence, we are growing faster than the category.

There were lots of players out there so there's no sizeable player that we see that is picking up share at a faster rate than we are but there is a lot of other players in the market so as we continue to learn about how to get more aggressive on the web and we put our energy there I only see upside for us.

In terms of the second thing, profitability of free, clearly the best indication I could give you of that is how aggressively we push it.

You can see from our own results that we're raising revenue and earnings guidance and free was a big piece of the portfolio in tax this year and it's also a best practice we've brought over to our small business franchise so we think free is a great way to expand the category and we have found days to monetize it and make it profitable.

Thank you and finally, could you update us on your work with Google and in particular, now that they just announced their health product different than yours, but have you been working with them?

Did you discuss some relation between the two of you regarding some sort of health products?

Yes, Michael, on the Google relationship, it's a long term partnership.

We've been trying and testing different things and we've had success in a lot of areas.

We've had some learnings in others that we continue to step back and refine and we'll continue to have a strong partnership with them in the foreseeable future.

In terms of their healthcare initiative they're going after a different part of the market than we are.

If you think about healthcare there's really two types of problems that are being solved in the market.

One is healthcare making your health records portable and those are the types of things that Google are trying to help solve and then there's actually the financial aspect of managing your healthcare, how much do you owe on your bill, how much will your deductible cover and that's the piece we're focused on.

I do see these being complementary down the road but today there haven't been any really material or meaningful discussions between the two companies because I think we're both early in the journey but given our partnership we'll see over time if that translates into anything in terms of working together.

Great thank you very much.

Thank you.

Our next question is from Brent Thill from Citi.

Thanks, Brad, just on the QuickBooks business, can you just give us a sense of what you have seen in the current upgrade cycle?

There have been some concerns over the discounting that you guys have given in some of these promotional programs.

Can you just address that?

Is that something that you think is unusual or is that something that you've seen in past discounting promotions?

Yes, Brent, we aren't seeing anything right now that's unusual in the upgrade cycle.

Actually our ASPs are up.

We are looking for ways to get customers to remove the consideration like free Simple Start which we know will come in but ultimately isn't free.

They end up buying additional products or services or even upgrading to a paid version so there's nothing we've seen that's unnatural in the upgrade cycle that would lead us to have any questions.

Okay, and then just as it relates to online addition of QuickBooks, you've seen a pretty dramatic deceleration in Q2, Q3 towards online.

Is there something that particular is standing out why customers are still choosing the traditional method?

Yes.

Two parts to the question, Brent.

First of all, QuickBooks Online for us is an exciting franchise.

It's growing customers at 20% year-over-year and revenue even though we don't publish the number is up over 50%.

There is when you look at the fact sheet, the numbers don't tell the whole story.

Last year in the second and third quarters we were testing a new product which was basically a version of Simple Start built on the QuickBooks Online platform and while it was a good idea it really didn't materialize into a product that customers ended up liking or reusing and so we have a little bit of an apples and oranges comparison but the first thing I'd say is it's a very healthy franchise, it's a product line we believe in, it's growing customers 20% and revenue over 50.

The second piece is I think it's a natural adoption rate of small businesses in the market.

We launched QuickBooks Online addition the same year we launched Turbo Tax Online and here we are multiple years later and we see the number of people filing their taxes online is now higher number than those that are actually doing it on the desktop but small businesses just haven't adopted online accounting as rapidly.

The good news is when they're ready to move in that direction we have the leading product in the market and we'll be ready to capture that opportunity.

Thanks.

Thank you.

Our next question is from Heather Bellini from UBS.

Hi.

Thanks, Brad.

I was wondering if you could help us out.

I believe you said the Echo data was available on the website.

Could you just walk us through what the Echo contribution was in the quarter to Payroll and Payments and what's factored into your expectations for the July quarter, please?

Yes, Heather, I'm going to have Neil actually walk you through that.

Okay, that would be great.

Thank you.

That's fine, Heather, and as we said, the Echo transaction performed better than we expected so far, we expected it to be slightly dilutive.

But can you comment on the revenue line?

Yes.

It ended about $7 million, a little less than 7 million, 6.7 million in revenue in the quarter.

And can you comment on your expectation what it's adding to Payroll and Payments for next quarter, please?

We haven't talked about fourth quarter.

We're keeping our guidance for the fourth quarter overall basically where it is, but as we said on the call we think it will be, we're looking for it to be neutral this fiscal year.

Okay, but on the revenue line it should do a little bit more than $6.7 million then in terms of the contribution for July on the top line?

Yes.

Okay, great.

Thank you very much.

Thank you, Heather.

Thank you.

Our next question is from Jim Macdonald from First Analysis.

Good quarter, guys.

Thanks, Jim.

On TurboTax, you've been able to keep units and revenue pretty much in line.

Can you tell us kind of how you did that and if you expect to keep being able to do that given the shift to more web tax and then free?

Yes, I think it comes down to continuing to understand how to bring customers in and then create opportunities that help solve additional problems if they're willing to pay for it.

So here we are with a couple of years under our belt and the team has really done a great job of experimentation, things like AB tests trying to find out the best way to get a customer into the franchise and then to do that and also provide opportunities for them to solve additional problems that will lead to revenue.

So I think the net-net is it's just good execution on behalf of the team, creating offerings that are easy to use, creating additional problems that solutions will solve additional problems and finding ways to monetize those relationships over time.

Just one more, on Homestead, could you articulate kind of now you've owned it for a little while what your vision is for Homestead?

Thanks.

Yes, Jim.

First of all the important thing for small businesses when they get started, there's about 26 million in the U.S., 300 million worldwide, one of the first problems they have is actually getting found.

They want to get customers and the first thing they have to do is be found and in the old days we used to turn to Yellow pages and now if you look at consumer behavior typically to go online to find a plumber or find a pizza delivery or whatever the particular service is and what you find is about 50% of small businesses today don't even have a website and as the other half that do, two-thirds of them haven't really updated the site in the last two years.

So they're lost and what Homestead does is it provides a very easy to use solution to help you get up and running and have a website.

You can Do-It-Yourself, you can actually work with Homestead's creative artists to help customize a site for you, and the strategic value for us is two parts.

The first is our own installed user base of small businesses has the same numbers as the rest of the market.

Half of them don't have a website.

So think of this as a great attach product to sell into the QuickBooks space just like Payroll and Payments.

But the other opportunity for us is, this is a brand new front door into the small business franchise.

If the first thing they think about is getting customers we can now lead with the website from Homestead and then as they begin to get a little more mature, they may want to add-on other products like small business accounting with QuickBooks for payroll and payments.

So the value for us is new front doors to the franchise or an additional product to sell into the QuickBooks space.

Okay, thanks very much.

You're welcome.

Thank you.

Our next question is from Vikram Churamani from Lehman Brothers.

Yes, hi, guys.

Congratulations.

Brad, just following up to your comment earlier, you talked about double digit growth.

I believe it was next year or longer term, and you talked about margins expanding.

Could you perhaps help us a little bit in terms of should we, because this year you had about flattish operating margins looking at your guidance because of some of the acquisitions.

Is it fair to say that we should, going forward, is your margin expansion of at least 100 to 200 basis points which you've been doing historically?

Yes, so what we haven't done yet is we haven't provided guidance for fiscal year '09 or beyond.

We'll do that in the fourth quarter.

But what we do and what I just shared earlier in the conversation is we have a set of operating principles that we run the Company by for many years and as we want to grow revenue organically at double digit rates and to expand operating margins and then to use our cash to invest in other ways to accelerate growth either long term initiatives or potentially acquisitions, and then we'll return the excess cash to shareholders in the form of stock buybacks.

Our goal around revenue is to grow revenue faster than expenses and as you know, the best opportunity we have to expand operating margins is to grow the top line because the marginal profit on the last unit we sell is the most profitable unit we sell.

So if we continue to accelerate our revenue and our unit growth we'll continue to get operating margin expansion.

Okay.

Fair enough.

And just a quick follow-up.

Could you perhaps help us to some degree if you can understand how big is the QuickBooks Online piece relative to revenue, overall revenue for QuickBooks?

And then also if you can give us an update in terms of Finance Works, the shipment date and when should we expect the product to be rolled out?

Thanks.

Yes, so let me start with QuickBooks Online addition.

It is a relatively small piece of our overall portfolio today.

If you look at roughly 4 million customers using desktop and we have about 130,000 and some using QuickBooks Online Edition, it's relatively small, it's growing quickly but relative to the other software the service competitors in the market, it is significantly larger than the next nearest player.

So small in our portfolio, large in terms of the emerging market of softwares and service for online accounting.

On personal Finance Works, we'll be rolling out the consumer version of Finance Works in October which means we'll make it available to those customers who have signed up for it and we will begin the implementations in October and then we'll be following shortly thereafter with an expanded set of small business capabilities that will also sell for installed base for those banks that are serving small business customers.

So October for personal Finance Works, December for expanded small business capabilities.

And that's your sort of release date per se but it goes beyond just three beta customers and your salesforce or I guess the channel everyone is selling it?

The (inaudible) were selling it.

That's right, yes, Vik.

Perfect, thanks.

Thank you.

Thank you.

Our next question is from Laura Lederman from William Blair.

Yes, thanks for taking my questions.

Just a few.

What if you look at the goal for long term double digit revenue growth and I realize you're not giving guidance but would you expect long term for QuickBooks growth to move up from the kind of 5% type of growth we're seeing?

And along that same lines if you look at QuickBooks, what's your sense as to how much the economy is impacting QuickBooks and what other impact there could be as well besides obviously the difficult comparison?

And then I'll follow-up with a few other questions, thanks.

Laura, this is Neil.

Yes, we definitely think that the QuickBooks Echo system will definitely have double digit growth going forward, and we feel very comfortable about that.

We've seen great performance in our Payroll and Payments segment already and as you know from prior discussions, we do look at that and manage that as an ecosystem.

We'll tell you that our plans right now are not contingent on an economic recovery.

We're building our plans to win assuming the economy stays as it is, if things improve that will just be additional help for us but we're not planning on that.

We're not baking that into any of our plans for the QuickBooks franchise going forward.

If you look at the QuickBooks franchise and just the growth of QuickBooks itself not looking at the whole ecosystem including payroll and payments and I realize that's not how you look at it but if you were to look at it that way, the growth rate we're seeing now, how much of that do you think is due to the economy versus category penetration, if you will?

Yes.

Laura, I'll take this, it's Brad.

Hi, Brad.

I think it's important to point out there's 26 million businesses out there in the U.S.

with about 4 million using QuickBooks so it's not a penetration challenge for us.

It's us continuing to learn about how to drop ease-of-use and how to look at opportunities to bring new customers out of a shoe box for paper-and-pencil and into the small business accounting software package and this is where things like getting smarter about our messaging and our advertising, getting much more astute about how to leverage new offerings and business models like Free and also continuing to get better at ease-of-use and the core products will help us expand that category.

The other thing is by bringing in a tax service that serves as front doors for QuickBooks, historically we always led with accounting and then attach Payroll and Payments but what we discovered now is some of the first problems small businesses have is actually getting customers and getting paid.

So we can lead with websites now from Homestead or expand to payment options from our payments business and then eventually attach QuickBooks to those customers.

So there's multiple ways for us to accelerate the growth rate of QuickBooks and it's not a penetration challenge.

Following up on Homestead, can you talk a little bit about that market and how they differ from website pros and the other ones out there and the competitive advantage besides being part of Intuit that Homestead has?

Yes, I sure can.

First of all if you look at the overall market and developing websites, the predominant method today is working with a third party agency and outsourcing it for several thousand dollars, and the bad news for that is that small businesses then get a website but have no idea how to keep it relevant and fresh and so it gets stale very quickly and it doesn't produce the results they're looking for.

What Homestead does is Homestead provides a Do-It-Yourself solution.

It's template driven so it's sort of like an interview in TurboTax, it helps you develop a website very easy to do and ultimately if you want to get a little bit of help they actually have a consultant or an artist who will work with you and help you add some bells and whistles whether it's a shopping cart or just adding more images like your logo.

What differentiates them in the market is when we were doing our due diligence and looking at acquisition, we went out and did the net promoter scores, the willingness to recommend this product or service to a friend or family member and we did it for all alternatives in the market that we could find to size and Homestead was significantly above the next nearest alternative in the market in terms of ease-of-use and willingness to recommend.

So what differentiates them in the market is they have the same focus as Intuit which is focusing on ease-of-use, providing a superior solution, at the lowest cost possible.

Thank you.

Thank you.

Our next question is from Scott Schneeberger from Oppenheimer.

Thanks.

Congratulations.

First question is on TurboTax.

Could you discuss a little bit on, just kind of following up on the net promoter theme, could you refresh us on net promoter scores across the different channels of tax prep and then also discuss where will your future growth in TurboTax come from?

Is it getting the incremental new user each year?

Is it continuing to take from pencil and paper?

How many of those folks are left or are you getting it from somewhere else?

Thanks.

Yes, so Scott, at this point, we haven't completed all of our analysis for this tax season on the specific net promoter scores for all of the alternatives.

What I can tell you we know is on our own individual products we increased our net promoter results for both desktop and online but the most exciting news for us is our biggest increases were from new users using TurboTax Online which is where we know the category is going.

If you look back at our prior investor day presentations which are posted on our website you will see the data up through this last tax season that will show things like manual prep is down in the minus 70's.

You get to things like H&R Block and tax stores which were in the high single digits or low double digits, somewhere in that 8 to 12 range and then you get into the software category and you get up in the 40% plus and that's all software players not just Intuit and we of course believe we are pushing ease-of-use even further so our numbers are higher than that which we shared at the Investor Day presentation.

So overall the net promoter scores, it's clear and also it's correlated to category growth.

You look at the software category overall, it's been growing four times faster than the next nearest alternative which is the tax returns prepared by a Pro and so net promoter aligns with category growth.

The second part of your question you asked about was source of new users.

Our biggest opportunity is not to just fight for share.

Our biggest opportunity is to expand the category and bring new users into the category and we believe the biggest opportunity there is to continue to help people understand there are easier solutions at a better value than going to a tax store and so that's our primary focus.

Okay so primary focus really more on going or taking from a tax store.

I assume still from pencil and paper but we're probably getting down in how many more can be converted but just confirming that it's more on the tax store?

Yes.

So Scott, there is a residual amount out there in paper-and-pencil and I say residual out of 140 million, there's still millions of people doing it that way so we continue to convert from paper-and-pencil about 5 million in total I believe will actually file this year on paper-and-pencil out of 140 but ultimately what you have, is that the wrong number?

Did I get the wrong data -- 15 million I'm sorry, Scott , 15 million on paper-and-pencil but what you have is you have about 5 million filers who come into the category each year that are new to filing taxes, they tend to be the next generation of tax filers and they're predominantly going online day one, so that's an opportunity for us as well.

But to answer your specific question, converting from tax stores, getting new users to come into the category day one and continuing to capture those still on paper-and-pencil would be the predominant

Okay, thanks.

That's helpful.

Switching gears a little bit, you've been playing up global.

How rapidly should we expect to see that come through in the revenue lines at the various segments and in which segments will we expect to see first there?

Yes, so Scott, I wouldn't be building anything to our models or your models any time in the near future.

We know that this is a lot of learning ahead of us.

We know that it's a big opportunity across the world in terms of opportunities to grow the category.

We're proudly focused on small business today but we have a lot of learning ahead of us and we haven't proven yet that we could do it well.

So there's nothing in the short-term that I would be building into our financials or encouraging you to think about as you look at your models.

Thanks and one more if I could sneak it in.

Obviously organic growth is strong for the business.

Anything and some acquisitions still occurring, could you just give us some thoughts on where future acquisitions may come and how aggressive you will be with future acquisitions?

Yes, so Scott, we always look at opportunities as we try to expand our growth rate and our operating margins to see if there are chances for us to either build to buy our partner so M&A is always one of the alternatives we consider.

We just completed a pretty extensive look back at the last 10 years of M&A.

We looked at the transactions that we completed over the last 10 years as well as divestitures and we took the opportunity to learn the things that worked well and the things that we weren't so proud of, and coming out of that was pretty clear that when we use M&A as an opportunity to either introduce new products or services to market quicker than we can build it ourselves and capitalize on our existing customer base that's a win for us.

For example, Innovative Merchant Solutions when we bought them and brought them into the franchise they've been a great growth business for us.

The other thing we learned is if we focus on M&A as an opportunity to bring new capabilities in either talent and skills or technology, like Homestead, Homestead is a great technology.

It's web 2.0, they've got great engineers, and they're helping us across the Company think differently about how to innovate.

That's primarily where we focused our M&A efforts is products and services we could sell into the base that we think we could actually get time to market or a superior alternative in building and skills for capabilities that will accelerate our growth rate.

Thanks very much.

Thank you.

Our final question comes from Brendan Barnicle from Pacific Crest Securities.

Thanks so much.

I wanted to follow-up on the QuickBooks Online business and as you take more of a SAS approach there, have you looked at all of some of the SAS platforms like salesforce.com or WebEx, some of the other vendors out there as a way to leverage and enhance the distribution on that product?

Yes, so Brendan, as we look at the SAS market we definitely look at all of the alternatives in the market, we try to learn from those and where it makes sense we look for partnerships or other opportunities to grow.

What you'll find is many of the players today, the example you gave, salesforce.Com, or other names that come to mind, historically focused on a different part of the market than we serve.

We are the classic long tail, the very small businesses, small and simple, there's 22 million of them, they have less than five employees.

You've got another 3 million between 5 and 20 employees and then you've got about 600,000 that are above that 20 employee mark.

The salesforce.com and the others tend to be on the higher end of that pyramid or even further North and where we are with our particular products we're down in sweet spot of 26 million.

So if it makes sense we work with them.

We certainly try to learn from them because they've been out in the market and they're doing things with SAS, but today we don't see, for example, with salesforce.Com (inaudible) QuickBooks Online Edition doesn't meet the same customer set both of us are trying to serve.

So your QuickBase product address that market so you could provide that kind of platform for that for that customer base?

Yes, so QuickBase right now is a great business for us in terms of opportunity.

Historically we've been focusing on Fortune 100 Companies, helping them manage the productivity inside of their organization but we've also seen an opportunity for QuickBase to serve as a platform to have third party developers or even others help develop solutions for small businesses.

So we have not in the past had that as a big growth opportunity but as you look at some of the recent releases we've introduced with QuickBase being a development platform that can certainly be a catalyst for us in the future.

And then lastly over on the financial institutions side of the business, anything change competitively in that market?

No.

Same players are in the market.

There are other front end providers which Digital Insight has always been the lead of that pack.

You have core processors out there who continue to deliver their services and some of whom build front ends and it's always been a market of competition where some will actually provide their own solution and then carry other alternatives in the bag because at the end of the day it's the financial institution who wants to choose the best solution because it's their viability that they're trying to manage which is getting more of their customers to adopt online banking and so really nothing has materially changed in terms of the competitive landscape.

Great, thank you.

Gentlemen, I'm not showing any further questions.

Would you like to proceed with any additional remarks?

Just want to thank everybody again for the questions this afternoon and for the ongoing feedback and support.

We're very excited about our third quarter results.

We feel good about fiscal year '08 and we're looking forward to another good year in '09.

Looking forward to speaking with you again soon.

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

This concludes the call.