直覺電腦 (INTU) 2009 Q2 法說會逐字稿

Good afternoon.

At this time, I'd like to welcome everyone to the Intuit second quarter and fiscal year 2009 conference call.

(Operator Instructions) With that, I'll turn the conference over to Jerry Natale, Planning and Analysis, Investor Relations and Treasurer.

Thanks.

Good afternoon, and welcome to Intuit second quarter 2009 earnings conference call.

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

Before we start, I'll remind you that our remarks includes forward-looking statements.

A number of factors could cause our results to differ materially from our expectations.

You can learn more about these risks in the press release we issued this afternoon.

They're also in our form 10K for fiscal 2008 and other SEC filings.

All documents are available on Investor Relations page of Intuit's website at inuit.com.

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

Some of the numbers in this report are presented on a non-GAAP basis.

We've reconciled the comparable GAAP and non-GAAP numbers in today's press release.

A copy of our prepared remarks and supplemental financial information will be on our website after this call ends.With that I'll turn the call over to Brad Smith.

Thanks Jerry, hey that's some business title you have there, buddy.

Good afternoon, everyone, and thanks for joining us.

Earlier today we announced our second quarter results and updated our guidance for the fiscal year.

We delivered a strong second quarter with revenue within our expected range and operating income and earnings per share significantly above our expected range.

For the full year, we now expect revenue to come in a bit below our expectations, but we still expect to deliver positive revenue growth.

And we expect earnings growth for fiscal year '09 to be very strong.

I'm pleased with our team's performance and with the Company's results relative to the environment in which we are all operating.

Results like these certainly aren't typical as you look out across the industry.

While it's clear that we are not recession-proof, we are proving to be resilient.

Our performance is holding out because our products and services are needed most in times like this.

Our offerings help people save and make money.

We do this by helping them be more productive so they can accomplish more with less.

We help them with tax compliance so they avoid paying penalties.

And we make our products and services so easy that our customers have the confidence to do things themselves rather than paying fees for someone else to do it for them.

When it's all said and done, we put more money in our customer's pockets.

That's exactly what every consumer and small business needs these days.

When you look across our businesses, we earn the majority of our profits from products and services that haven't been materially impacted by today's economic environment.

For example, taxes still need to be filed regardless of the economy.

And while it's still early in the season, we expect another solid year in tax.

Our financial institution's revenue is driven by long-term contracts and we have pretty good visibility into that revenue stream.

And our payroll business continues to show positive customer growth and good retention.

Now remember, our payroll business benefits from being the low-cost provider, relative to out sourcers.

And the flat fee pricing in our do-it-yourself payroll business makes reduction employment levels.

However, as I mentioned last quarter, some of our businesses are more exposed to the economic downturn.

These businesses include QuickBooks, Real Estate Solutions and Quicken.

Each of them has come under increasing pressure as the economic environment has deteriorated.

As a result, we've reduced our full year revenue expectations for these businesses and adjusted the outlook for the Company as a whole to reflect these changes.

Now despite this increased pressure, we are adapting and we're managing the business for success.

We have a clear 5-point plan to deliver positive top line growth and strong earnings growth for the year.

And we have tangible proof points to demonstrate that it's already working.

I'll say more about that later in the call, first let me turn it to Neil to walk us through the results of the business segment and financial details.

Thanks, Brad.

Let's start with Company-wide results.

Second quarter revenue was $791 million down 5% year-over-year.

Growth would have been 2% without the year-over-year changes in deferred revenue in our tax businesses.

As a reminder, deferred revenue would be recognized in the third quarter.

Our non-GAAP operating income was $172 million, well above our expected range.

Note that this is in spite of about $58 million in operating income that shifted from Q2 to Q3 because of the change in revenue deferrals.

Our non-GAAP EPS of $0.34 was also well above our expected range.

Earnings remained strong, even in this economy.

That's a direct result of the operation of rigor we use to run the Company and we've taken a number of specific actions to meet the challenges we face in this environment.

First, we're slowing our hiring.

We're continuing to hire key talent for long-term success, but we're evaluating all open requisitions and making sure they make sense in both the long and short-term.

Second, we're evaluating our performance-based compensation program and adjusting our expected payment levels to take the current environment into account.

Third, we're monitoring our marketing costs and adjusting our programs to make sure we're getting the lift in consumer acquisition that we expect from our investments.

And finally we're being disciplined about our discretionary spending and taking a hard look at what is truly necessary.

While we're managing expenses carefully, we're continuing to invest in the long-term by aggressively pursuing new customers and protecting our R&D innovation pipeline.

We believe we have the right balance of short-term rigor and long-term vision.

You'll hear more specifics from Brad on these matters later in the call.

Now let's review segment results.

First, tax segments, Consumer Tax, second quarter revenue was $187 million down 25% from a year-ago.

This includes a shift of about $70 million in revenue from Q2 to Q3.

As a reminder, bundling our federal E-file service with our Consumer Tax desktop product caused us to postpone recognition of revenue until later in the year.

Without that revenue shift we would have seen growth of 4%.

It's still early, but so far in the tax season, it's playing out about as we expected.

We continue to see people filing later in the season, and customer growth is coming from the online version of the product.

Our accounting professionals second quarter revenue was $133 million which amounts to 14% growth.

This includes about $12 million of revenue shifted in from the third quarter.

Fewer services were bundled into our professional tax solutions this year, which means more of the revenue is recognized up front.

We've included a table in the posted version of the script to help track these changes for revenue times.

In the total small business segment, second quarter revenue was $322 million up 5% from a year ago.

Adjusting for the acquisitions of Homestead and Echo made in FY08, revenue would have been flat for Q2.

In the QuickBooks segment, second quarter revenue was $164 million, 2% less than the same quarter last year.

The growth rate would have been about 4 points lower without the acquisition of Homestead.

The decrease in revenue was primarily due to fewer than expected paid new QuickBooks users.

On the plus side, our upgrades remain on target and our online addition and enterprise products continue to add to their customer bases.

Online addition customers increased by 9% and enterprise customers grew by 21%.

Revenue for those businesses was also quite strong.

While the number of paid new customers is lower than planned, our focus on customer acquisition is paying off and we're pleased with the total number of new customers acquired this quarter.

In the payroll and payments segment, second quarter revenue totaled $158 million which is up 14% from a year-ago.

This growth would have been 8% without the Echo acquisition.

Merchant acquisition growth remained strong at 14%, however, sales volume for merchant declined 8%.

A rate we believe is in line with what other processors are seeing.

Payroll customer base was up 2% and retention is holding steady.

And we're particularly pleased with the rapid growth of our online payroll service.

In the Financial Institutions segment, revenue was $76 million in line with expectations and up 5% year-over-year.

Personal finance works launched in the first quarter, and we're pleased with the reception from customers and the banking press.

So far, more than 160 banks and credit unions are live or implementing the solution and our pipeline for new sales remain strong.

This quarter we launched small business finance works and though it's early, we've had good customer response.

Our internet banking user base is up year-over-year but down sequentially as conversions of newly signed institutions are taking longer than we'd like.

We are seeing record growth in bill-pay users as we continue to make significant improvements in the end-user experience.

In our other businesses segment, second quarter revenue was $73 million down 21% year-over-year.

This is due to weakness in our Real Estate Solutions business and Quicken and includes the foreign exchange impact from a strengthening dollar.

On the balance sheet, Intuit ended the second quarter with $802 million in cash and investments.

Our cash flow remains strong and we expect to generate about $900 million in operating cash for the fiscal year.

Our deferred revenue was $472 million, up $135 million from second quarter 2008.

This is due primarily to the deferral of revenue from Q2 to Q3, for the E-file bundling and growth in our subscription-based businesses.

Capital expenditures were $50 million in line with expectations and on track to hit $200 million capital spending estimate for the year.

Our stock repurchase program returned about $35 million of cash to shareholders and we have $400 million left in the current authorization.

Turning to guidance.

While we remain committed to accelerating our top line growth rates in the long-term, there's clearly short-term pressure on revenue in today's environment.

We still expect to deliver a strong tax season, and are reiterating our prior guidance for the Consumer Tax and the Accounting Professionals segments.

We are also reiterating our prior financial institutions and payroll and payments guidance.

We have lowered our full year revenue outlook for QuickBooks and our Other Businesses segments.

As I mentioned earlier, upgraded units of QuickBooks are coming in as anticipated but new users are under pressure.

Paid new users comprise about one-third of our total paid users in any given year.

We now expect QuickBooks revenue of $580 million to $620 million or a 7% decline to flat with last year.

In our Other Businesses segment, Real Estate Solutions customers slowed their spending significantly and we are not anticipating recovery in the near term.

We are also seeing declines into in our consumer driven Quicken business.

Full year guidance to $270 million to $290 million or a 19% to 13% decline.

As I mentioned last quarter, foreign exchange has impacted this segment, accounting for approximately seven points of the year-over-year decline.

With these changes, our fiscal 2009 revenue guidance for the Company is now $3.13 billion to $3.25 billion which is annual growth of 2% to 6%.

As mentioned earlier, we are aggressively managing expenses and expect to deliver strong operating income and earnings per share for the year.

We now expect non-GAAP operating income of $917 million to $970 million and non-GAAP EPS of $1.78 to $1.89.

These ranges are wider than we'd normally set reflecting the uncertainty in the economic environment.

But despite that uncertainty we believe it's important to provide transparency and the results we expect to deliver across the range of revenue outcomes that we believe are most likely.

And with that, I'll turn the call back to Brad.

Thank you, Neil.

As you each know, good companies find ways to capitalize on these difficult times to strengthen their position.

Our goal remains unchanged.

We strive to be an innovative growth company that helps consumers and small businesses achieve their dreams.

And the way we contribute to their success is by helping them put more money in their pockets.

We do this by offering easy to use connected services and as we look ahead, increasingly these services will capitalize on the market trends of social, mobile, and global, to accelerate our growth.

Now clearly we've seen some fundamental changes in the economy in the recent months.

These changes have only bolstered my confidence that we're on the right path.

We don't view this as a short-term downturn.

In fact, we think of it as a new normal.

A new normal that plays well to who we are and what we deliver as a Company.

We're adapting to this new normal with a 5-point plan.

It's a plan to play offense, not defense.

And it's already producing tangible results.

Let me share some of the specifics with you.

The first principle in the plan is to stay laser focused on customers, customers, customers.

They need our products like never before and we need to acquire them, serve them, delight and retain them like never before.

So growing our customer base is our number one goal.

As we've proven in each of our businesses, we have the means to monetize customer relationships overtime and generate profits, even if we originally acquire the customer with a free product.

Now we're being aggressive in our demand generation and promotional offers and in the use of free products to bring new users into the franchise.

These are all proof points of it's first principle in action across the Company.

You'll see more of that in the coming months.

The results are already evident.

QuickBooks is just one example.

As we reported on our last call, total QuickBooks units were down about 3% through the first quarter.

Thanks to our aggressive demand generation, the retail small business accounting software category as a whole grew 13% in the month of January and QuickBooks gained an additional 4 points of share over the same period last year.

Now total QuickBooks units in Q2 were up 5% and we're now up year-to-date in the worst spending environment that any of us can remember.

We're getting smarter every day and we will remain focused on growing our customer bases as our number one priority.

Our second principle is to deliver improved operating leverage with strong operating income growth.

We now know that revenue will be less than expected, so to balance the equation, we're adjusting our spending.

It's as simple as that.

We'll continue to make good resource allocation decisions throughout the year.

But as you heard Neil talk about, we have levers to adjust our spending and will continue to adjust if conditions erode in the second half of the year.

Our third principle is our unwaivering commitment to growth.

We can't diet our way to success long-term.

We're investing to grow our business in smart ways that will help us come out ahead when this turbulent chapter ends.

An example here is the investment we made in the Small Business United Stimulus Plan that we launched in late January.

The program helps small businesses get started with free and discounted offers.

We continue to see that many of these users immediately upgrade to a paid product or they begin using one of our attached products, such as Payroll Or Payments.

These free offers target newer businesses, rather than the smaller established businesses and the customer ten to be incremental to us.

Here's something each of you have been asking us in the last several quarters in the calls.

Our free simple start offering generates about $30 in revenue per activation in the first 12 months and we're not seeing any significant caniblization of our paid products.

Now I want to put that into context.

That product had a list price about $99 in retail that would typically be promoted at $49.

When we give it away for free, we make $30 in the first 12 months.

Free is clearly not free.

Our fourth principle is to protect and nurture innovation.

Even as we adjust our short-term spending, we need to plan for long-term success by keeping the innovation pipeline flowing.

For instance, over the next several months, we expect to come out with an online payroll service for Mac users.

We'll also be introducing online payroll functionality that will appeal to accountants and the inclusion of our online payroll offering will be going into the small business finance force platform to name a few.

Our fifth and final principle is to take advantage of inorganic growth opportunities as they materialize.

We have a strong balance sheet with lots of cash.

Which let's us invest for the long-term and capitalize on opportunities that make good, strategic and financial sense.

As you know, we began making proactive changes last summer before the economic storm truly hit and it's paying off.

We believe we were better prepared for the downturn than many companies and we continue to be proactive to ensure we stay that way.

The formula we use to run this Company still works.

Having talented and engaged employees focused on delivering great things for customers so that we can grow revenue and profits.

On the employee front, we were named one of Fortune Magazines 100 best companies to work for for the eighth consecutive year and our employee engagement scores and surveys remain best in class levels.

Our priority is to ensure our priorities remain focused on delivering for customers and that our employees understand we remain committed to their continued engagement.

One action we're taking to reinforce our commitment to employees is to change the timing of this year's restricted stock grants.

Typically we grant restricted stock units, RSUs, just after the end of the fiscal year.

This year we'll grant them in our third fiscal quarter.

The competition for top talent in the technology industry remains very strong.

And we have great talent.

Our goal is to keep it that way.

I want to be clear, these grants exclude me and the senior executives of the Company.

The stock compensation expense associated with this grant will reduce second half GAAP EPS by$0.02 per share.

When it comes to delivering for customers, our employees are simply unmatched and they're energized by our Company's commitment to help our customers save and make money in these very difficult times.

Our customers also recognize and value the role that we play in their success.

For example, in a recent survey, 70% of QuickBooks users told us they believe that using QuickBooks helped make their business more profitable.

And most of those users say the improvement in their bottom-line profitability is as much at 20%.

At the same time, they can get up and running in the QuickBooks franchise with a product like Simple Start for free.

Now I want to be clear this is information we haven't even told the prospects about yet.

So just imagine the ability to communicate we have an offering that can improve your bottom line if your situation is like other small businesses by as much as 20%.

So the ability to help people save and make money at a low cost, during very difficult times is why we expect to grow our customer base, strengthen our position and enable faster growth in the future.

That's just part of how we are doing things to do right by our customers and it makes me really proud to be a part of this Company.

The final part of our formula is growing revenue and profits.

Even though the year is playing out differently than we originally planned, we will deliver positive revenue growth and very strong earnings growth while continuing to invest for the long-term.

So to close, by continuing to execute against our long-term strategy, while managing through the current environment with the five principles I've outlined, we remain confident that we're going to grow even stronger for our employees, our customers, and our shareholders.

And with that, I'll turn it over to you to answer any questions that are on your mind.

(Operator Instructions).

Our first question or comment comes from Brian Keene, Credit Suisse.

Hi, guys.

Now that tax season is on its way.

Are you units of revenue growth growing, are units of revenue growth going to be at par this year for tax season or will units grow faster than revenue growth?

Looking for color on that?

The delta there.

Brian, as you know, we're still early in the game.

What we do see right now is uh, the performance in retail as a category is actually down year-over-year, but we saw very strong growth on the web.

You'll see those results posted in our tax update.

Right now in terms of our forecast for the year, we haven't changed our guidance on revenue and you can take a look at how the units are tracking.

I think for this particular year, we're going to let the cards play out as they are, but we're going for customers.

We want to deliver on the revenue guidance we've given for the business.

We'll do as many customers, as many units as we can.

Since there are so many things in the year that are different, we wouldn't have any better prediction for you than we already guided.

The retail side's weaker, but the web's probably stronger.

I'm trying to figure out that matches up to plan or if it's still too early to tell how that will equate out to remember.

Brian, great point.

That's a trend that's been going on for several years.

The web has been the category growth and retail continues to decline.

This year we're seeing a more precipitous decline in retail as the overall retail environment with the economic situation is being impacted.

But we're also seeing a commensurate growth in web online.

We're seeing strong results there.

I think you'll see that trend continue as it has for the past couple years, this year.

Just looking at the tax data, any reason why the free file alliance units were down 15%?

I guess I thought that might pick up in a recession?

Brian, I think it's a combination of things.

At the end of the day, it will come down to how the end of the season plays out.

We're seeing a delay in tax filings that may impact some of the free file situation.

We also know that in a commercial market now you have offerings that are free, not only ours, but also competitive offerings.

There are more alternatives available to tax filers than there were several years ago.

I think it's a combination of all the things that may be impacting free file alliance.

And then finally for me on the QuickBooks side, it looks like you guys are getting solid unit growth, but I guess it's below expectations on the amount of paid users.

It sounds like you still expect to get--you're still able to get revenue from them over the next 12 months.

Is there a bigger kick, thereafter?

In other words, once you get them into the Echo system so to speak, you can cross-sell more and more products to get that number up higher than the $30 you mentioned.

You got it, Brian.

As we talked about in investor day updates, we've proven that over a five year period, we increased the revenue per customer three times- 3X.

And so this is all about an ecosystem play.

The first thing that's to convert nonconsumption and get people into the category with a new unit.

And then from there, we're able to monetize them either by moving them up in the chain with upgrades or attaching Payroll and Payment.

So the lifetime value of that customer is what we're focused on and we do believe this is a precursor for future growth.

Thanks a lot.

Thank you.

Our next question or comment comes from the line of Jim MacDonald, First Analysis.

Your line is open.

Good afternoon, guys.

Hey, Jim.

Could you talk about whether you think the retail drop is due to the economy or due to the higher price point because you had to bundle the E-file?

Jim, if you look at retail overall, software categories are tending to have a tougher this year in retail, whether it's small business accounting, tax or office productivity suite.

Retail overall is having a difficult environment.

To separate that from a multi-year trend we've seen.

where people tend to choose online offerings of tax, as opposed to the desktop offering and that's been going on for several years.

If you put the two together, there's an natural inclination for new customers to choose online and you also have a tough environment in retail.

In terms of our price point, we're actually holding our share relatively well compared to the premium we have over the competition.

Results are published from MPD.

Where our share--we're pleased with how strong we've held despite the fact that we have a price premium that we took this year.

Net net, I think it's just a continuation of what you typically see with new products moving online with new consumers and the second being the fact that there's an economic environment out there that people are struggling with and not going to retail.

For a quick follow-up, you talked about web payroll being strong.

I know it's early days yet and you have other products coming out here, could you quantify that a little bit and talk about-- are you basically trying to take over, maintain your accounting relationship with our accounting offering you talked about?

Versus the competition?

Yeah, so as you know, payroll for us is one of our core strategic businesses.

We think it has a lot of runway overall.

One of the new trends in the last several years is online payroll.

Our product's been on the market for about a year.

We've made fundamental changes to functionality as well as pricing.

We actually have an offering in the market that allows a new business to get up and running pretty quickly at a pretty low price about $100 a year.

And so we've seen traction continue to build on that product, especially as the economic environment's gotten tougher and they look at alternatives like outsourcing to ADP or PayChex.

We're seeing the momentum really build.

In terms of the functionality routing for accountants, as you know, accountants are a key decision maker in helping for a small business choose a payroll solution.

And the easier we can make it for an accountant to work with a small business on the their payroll, the better our product success will be.

That's what we're building into the product, is to enable the accountant to use it and also work better with their small business clients.

Will it be private label?

Will the accountant be able to use it for payroll?

At this point we haven't revealed all the details because we don't want to get to far ahead of our headlights of competition.

You know the space pretty well, we know what's important to the accountants, so we're going to make sure this product is more compelling than anything else they have in the market.

Okay, thanks.

Our next question or comment comes from the line of Heather Bellini, UBS.

Your line is open.

Hi, thanks, Brad.

Two quick questions for you.

One would be on cost side, which you guys did a great job with this quarter, how sustainable is that and how much more room do you have to adjust costs?

And I guess the other would be, particularly on the QuickBooks side, how did you come up with your guidance?

What I'm getting at there, are your assumptions that the environment's going to continue to deteriorate or are you taking a snapshot in time right now and assume it's going to be stable?

Thank you.

Thank you, Heather.

Let me start with the first question and I'll ask Neil to jump in here as well.

On the cost side, we do believe we have the leverage in place, we can adjust the spending depending on how business performance is coming in while not damaging the franchise on the long-term.

To answer your question, we still have more opportunity, depending upon how we feel the business results are coming in to do the right thing short-term and also protecting the long-term growth of the franchise.

Is there anything you'd add to that?

No, I think that covers it.

On the QuickBooks forecast, we did see an uptick in December and January, but we did not treat that as an ongoing trend.

We have assumed no improvement in the performance for small business overall and in fact we're seeing deterioration in other parts of the business particularly with the charge volume and payment.

At this point what we tried to do is do our best to find the basement.

We didn't build any of the up lift we've seen in December and January, we're assuming conditions will not improve in small business, but we're going to do our best to continue to deliver results like we did the last 30 days to do better than what the overall market looks like.

Great, thank you very much.

Thank you

Our next question or comment comes from Adam Holt, JPMorgan.

Your line is open, sir.

Good afternoon, and thanks for taking my questions.

My first question, I was hoping to circle back to Brian's question about QuickBooks units.

If you look at the paid units sold in the quarter.

They were up about 3%, I was wondering whether there is any, actual, I guess, moving down the stack in terms of average selling prices going lower for the paid units, outside of the fact that there were less new paid units than you were expecting.

Yeah, there's a little bit of that.

I would tell you what we're actually seeing Adam which is interesting, the Enterprise product, QuickBooks Enterprise, which is our most expensive product SKU in the product line is actually growing faster than anything else.

And online editions right on its heels and its a subscription business that costs about $240 a year and so it's a more expensive product.

We have been heavily promoting the pro and premier SKUs.

And obviously we've been out there with free Simple Starts but we've seen a mix shift, but overall, nothing that surprised us.

Pretty much what we would have hoped to deliver in the first half of the year.

If I could shift for a minute to the tax business.

I have two questions there.

First of all the IRS is out with pretty bullish expectations for the category for this year and there are some questions as to whether or not you'll see spill over impact from last year's stimulus to this year's tax season, could you give us your latest thinking in terms of what is now underpinning the updated tax guidance from a category perspective?

And secondarily, I know it's real early in the season, but you do have five, close to five million turbo tax web units, what has been your experience thus far in terms of converting folks that were free last year to paid units this year?

Yeah, so let me start first with the question around the category as it relates to the IRS numbers.

A couple thoughts here.

Keeping in mind that what you'll see is through the balance of the year, the pro returns will start to build they tend to be later in the season and the do it yourself E-file solutions tend to come in early and sustain throughout the season.

I think the snapshot in time is showing the effects of several things.

One is where we are in the season.

The second is, as we taught, returns don't always equal units.

In our particular case, we sell a desktop version of Turbo Tax and there's a typical 2.1 returns filed for every unit we sell.

So they really don't correlate 1:1.

What we've built into our assumptions is the last five years trend.

8% to 9% category growth.

That's what we've got build into our model.

If this year the numbers come in better, our goal is to continue to grow the category and pick up shares, we'll take advantage of that.

The second part of your question was free and whether we've seeing a change fundamentally year-over-year, we are still seeing people who use free product last year move up to paid.

There's a slight deviation from what we saw the prior year.

Nothing that has us alarmed.

In fact, continues to keep us bullish on pushing free aggressively because we see it is incremental to the category and it does grow our franchise long-term.

There's been no seismic shift, there's been a subtle shift, but something we continue to believe is the right long-term strategy for us.

Would that subtle shift have to do with retention of free customers or how free customers are interacting with software?

So it basically comes down to, if you want to import your prior year information, you would pay for the product a second year..

If you want to rekey it in, you would go ahead and use it free again.

They're staying with us, we're not losing them, there's a very subtle, and I mean subtle deviation in the percentages we had assumed.

And as a result, we're still keeping them in the franchise and we're pretty confident, long-term we'll be able to monetize the customers.

Terrific, thank you very much.

Our next question or comment comes from Ross MacMillan.

Your line is open.

Thanks just circling back on costs.

The big delta from our perspective was on sales and marketing.

I know you have levers I was just curious, are you getting a lot of benefits just because of remnant advertising being so much cheaper and in other words, is a lot of the benefit you're seeing on sales and marketing the fact it's cheaper to run your marketing campaigns this year than it was last year?

Ross, this is Neil and we're really not using that to reduce our overall spend--in categories where we're seeing the cost for impressions come down, we're basically using that to increase the impressions where we're getting a one for one return where we're getting a good uplift in customer acquisition for the dollars we spend.

We have some dollars that shift from category and from quarter-to-quarter.

Those numbers move around a bit based on campaigns we have going on, but the lift we're talking about in terms of our expense levers are adjusting our spend for the return that we're getting back in.

So we invest more in programs that are bringing in customers and we scale back ones that aren't.

It's not an indication of the market.

So the shift this quarter was more just to do with other things such as being tighter on discretionary expenses, et cetera?

Exactly.

Okay, and then just one other one from me, on the financial institutions business, I guess, you commented that you've seen a sequential decline in internet banking end users.

That's a couple quarters we've seen that trend now and I think you made a comment regard to activation pace can you just recap on that and provide the color?

Thanks.

Can you just recap on that and , provide the color?

Yeah, Ross, this is Brad.

So first it's important to note that internet banking year-over-year is up about 3%, but over a few quarters it's sequentially down.

The challenge we're seeing is the sales pipeline remains robust and strong, but the implementation in switching over to our platform and the current platform is getting delayed.

Many of these banks are going through short-term decision making on their own.

And the resources they would typically devote to this integration and implementation are getting pushed out.

That's literally what we're up against on the internet banking side.

We still have a healthy pipeline, we have good transparency into the status of the banks and so we still feel long-term we'll be able to turn that number around.

It's a short-term phenomenon.

So the modest decline is really just a function of maybe churn in the base and the lack of lack of speed if you will on those new implementations to mop up that attrition?

Exactly.

That's correct.

One very last one, going back to this issue on Turbo Tax.

That negative decline, the decline rather you saw in retail units, I'm just curious with what's happened in the early part of the season.

Do you actually think you could end up with, a better number on the objection the retail side, relative to what you've seen thus far this season?

Or is that not the assumption?

In other words, is negative 14 the kind of run rate you'd expect to see for the entire season or do you think you can call some back on retail?

So Ross, it's hard to predict.

I'll tell you what we're doing.

We're playing the game to win at retail.

So we have the right level of promotional activity.

We have good tight measurements to know if we're winning share or losing share.

And we're not going to give up an inch in retail.

For us, it's all about capturing more tax filers whether they're in desktop and retail or online and the web and growing the category.

That's the way we're going to bring in the year.

For everyone that's going to make a decision at retail, our goal's to win that decision.

If the overall category in retail is down, we want to make sure we won more than we lost in that category.

Is that what you've done so far this season?

So far this season in the retail category, we are where we thought we'd be in share with the price position we took.

On the web we have internal data that suggests we are gaining share, which I'm excited about.

That's the future of the category.

Great, thanks very much.

Our next question or comment comes from Laura Lederman, William Blair.

Your line is open.

Thanks for taking my question.

Just a few follow-up questions, one on Heather's questions about QuickBooks.

You mentioned that you're modeling that it's staying weak and not putting in the uptick you saw in January and February .

Can you talk about what the uptick was?

Was it in units, was it in ASPs?

Can you talk about how those months were different than the ones

So the overall category hadn't grown for 12 months in retail.

In December when we began our aggressive promotions and began to amp up advertising, it grew about 2% and we saw our units start to tick up.

In January, the category grew 13% and our units ticked up at a pretty sizeable rate which was able to reverse what in the first quarter had been a year-over-year down tick in units to actually now we're up in the positive range year-to-date.

Net net it was a unit uptick.

It was driven by our aggressive demand generation and promotional activity.

We're excited about that.

We know those customers will start to buy payroll and payments and eventually upgrade.

That's the gain we're on right now.

Primarily around units and category growth.

That's helpful.

Looking at cash, can you talk about buy backs versus acquisitions, this type of environment, the desire to hold onto cash so just addressing what you plan to do with the balances there..

Sure Laura, is this Neil.

As we mentioned last quarter, we did pause on our share buy back program just because we're anxious to see what kind of opportunities become available in the marketplace.

We do see this as a great period to invest, to invest in talent, to invest in technology and even opportunities that may come along.

We'll wait and see how the season plays out, but for now, we're going to let the cash position build a little bit.

Okay, and also real quickly on Homestead.

You talked a lot about QuickBooks and Homestead in the economy too, can you give specifics on that?

Homestead business continues to perform at a strong rate.

We're seeing more people coming in and looking for ways to generate sales and get customers.

They're looking for websites.

So the overall Homestead business is benefiting from the fact that it's part of the Intuit family and we've got it on our website.

The performance is at the expectations we would have hoped.

Thanks so much.

Thank you.

Our next question or comment comes from the line of Phillip Rueppel, Wachovia Securities.

Your line is open.

Great, thank you very much.

A couple more questions on QuickBooks and your revised forecast.

First of all are you assuming any share loss as you go forward or is it the assumption of category growth that's been revised and along those lines, do you see, is it just continued loss of new paid customers or do you see that spreading into the other categories of, of QuickBooks and/or the upgrades?

Thanks, Phillip.

Let me start first with the first question.

Our goal is to grow the category and to grow our share in the category.

What we've seen, we've actually picked up four points of share year-to-date in the category.

We don't see any share loss.

We're continue ing to grow online with QuickBooks online edition, which is one of the stronger performers in the portfolio.

And we're clearly growing the category in share in retail as well.

In terms of the second question around the new paid units, we did see an uptick in January in new paid units, but year-to-date, the things we feel good about as upgraders are on plan with what we've planned.

We're seeing strong performance in free.

As I shared earlier, we're making money off of free in the first 12 months and more money into the second year, many of them are buying Payroll and Payments, a subscription service and more of the revenue will fall into the second 12 months.

In terms of new paid units, if we can sustain what we did in January, we'll see that number uptick, but we haven't built that into the forecast, because we don't think one month makes a trend.

One follow-up if I could on the market share commentary.

If you look at Consumer Tax, is this also an environment where you think you can gain share, over the course of the year, or is it one where maintaining share might be the best thing for revenue and profitability?

Our goal is growing the category and as a result, trying to grow faster than category and pick up shares.

We're playing to grow the category and grow share.

We think we can do that and deliver in the guidance range we provided.

Great, thanks.

Thank you

Our next question or comment comes from the line of Brent Thill, Citigroup.

Your line is open.

Brad, just on the pricing environment, can you walk through how aggressive you'll get on pricing?

Do you expect to hold prices here or will you get more aggressive if you continue to see the deterioration we've saw.

As a quick clarification on the QuickBooks side, is that what drove the unit volume in the quarter?

Yeah, so Brent, is it specifically focused on QuickBooks, the question?

On the Small Business accounting and QuickBooks.

Okay, thank you.

So right now we've been testing a lot of what we call AB tests.

What are the best offers that generate the highest up lift in units and revenue and we're always looking for what's the best one that will draw the biggest up lift and exceed the break even point.

That promotion tends to be the one that runs at the time.

Promotions start to get fatigued and we switch around.

We have had promotions that include three free, where we're putting a bundle together between Payroll Payments and QuuickBooks, we have others where we discounted the QuickBooks pro products to $129 or even a net to zero for 24 hours at Staples.

Every one of those promotions, we measure rigorously to make sure we got the units we wanted and it delivered revenue at the costs we're looking for.

An I think you will see us continue to experiment with promotions so long as they continue to deliver a positive ROI.

That'll be the way we manage the balance of the year.

Continue to go for units, but make sure it delivers the right short and long-term, lifetime value we're expecting.

Can you comment on the tax pricing relative to the competition in HR Block?

In retail we have a price point that is about $10 more expensive than HR Block.

Which is why I feel good about where we've been able to hold the share within the range we thought we would.

On the web, it's hard to be lower than free and so we have a free offering in the market.

Some of the competitors do as well.

That comes down to making sure you have the easiest to use and the best offering and have the most aggressive marketing and I think our team's doing a good job there.

From a pricing perspective, we have a $10 premium retail and on the web we're competing aggressively and growing pretty quickly.

Thank you.

Thank you.

Our next question or comment comes from the line of Scott Schneeberger, Oppenheimer.

Your line is open.

Thanks, good afternoon.

Following up on the Turbo Tax theme the mention of your voice that you are taking share in the early season what do you see for the overall industry?

Do you have IRS, data that, that, just go a little more in depth on what would lead you to believe you are taking that share?

Yeah, so let me start with, in retail, share gets measured by NPD and that gets published.

On the web, it's a combination of two things, what the IRS publishes, but we also realize that returns don't equal units.

We work with internal sources and external companies.

A company called Com Score and we do our best to measure our progress and results relative to the competition using outside research firms.

That's what gives us our indication that we are doing a good job in the marketplace, relative to our competition.

We'll know the final results at the end of the season when everything's been tallied and the numbers get produced.

Do you feel this is going to be another year of roughly a 60/40 pay prepared do it yourself split?

Do you think that will change over the season?

No, I don't think so.

Okay and in the release on units you mentioned there was commentary shifting into the third quarter was that, to mean that most of the 6% growth was derived in February, versus January?

Anything we should read into that?

Any slow start in January?

No, I think it's a combination of a couple things.

First of all for the last decade, we've seen the natural procrastination of tax filers later in the tax season to file.

This year, I think there have been a few things that accelerated it.

One is as you've seen things like 1099 which typically are supposed to be out by the end of January when W-2s go out, actually now, many companies are getting forgiveness to send those out later.

You have a lot of financial services companies that aren't getting the material out quite as soon as they would.

I think there's a bunch of things playing in to people filing taxes later.

So that's the natural thing happening in the market On our side, we made changes to product pricing, which pushed revenue from Q2 into Q3.

It's the combination of those two things we meant to talk about earlier.

Could you speak to the Turbo Tax online community and the benefits you're deriving there, thanks.

Last year we were able to introduce the live community inside our Turbo Tax product.

And we had about 40% of our customers questions getting answered by other customers at a very high accuracy rate.

So this year, we've made sure that it is not only prevalent in Turbo Tax but we also have it in our other products like QuickBooks and ProTax products.

This year's product we continue to see a very strong adoption of the online community in terms of people getting questions answered and we also put it into the desktop version of Turbo Tax this year.

We're getting positive results, not only in terms of customer participation, but in terms of the overall quality and feel as a product as a result.

Thanks very much.

Thank you

Our next question or comment comes from the line of Michael Millman.

Your line is open.

Thank you.

Questions on both major categories.

On the QuickBooks, you indicate that you saw some improvements in December and January, and yet you've reduced your guidance for the year presumably based on the numbers that were in the first quarter that we'd already seen.

What drove you to reduce the guidance from January guidance?

Okay...

so Michael I'll take that one.

I anticipate you had another question, so I was being silent--

I'll ask the tax question if you keep the line open, please.

Okay, so let me start with QuickBooks.

So we saw a 12 month period where the category wasn't growing.

Coming out of Q1, we didn't see the results expected and had to readjust guidance.

We've seen stronger performance in December and January, we believe that there's still enough uncertainty in the marketplace in terms of the overall balance of the year performance that we're going to aggressively push the promotions that we think will drive units, but we also believe that revenue and our ability to drive revenue in the second half is something we think it was more prudent for us to adjust the guidance the way we did.

If you put it together in Q2, units were up 5%.

Revenue was down 2%.

And so that's why we believe it's much more appropriate for us to readjust the guidance, even though we're going to be much more aggressive and continue to drive units in the categories.

I guess the answer was that you actually did see further decline, did you not expect to have a decline in the second quarter in QuickBooks revenue?

No we didn't.

Which is why we now adjusted the guidance, balance of the year, but also we were pleasantly surprised to see we could grow the category and grow units in a very challenging time for small businesses.

We think that we need to continue to be prudent on what our guidance is the balance of the year in QuickBooks.

On Tax, you said that you typically get 2.1 uses out of the boxed, this year, wouldn't you expect to see that to be greater now that you're allowing five and secondly it looks like your units are actually growing slower than what were hearing about growth on the do-it-yourself side.

Can you address that?

Yes on the first on it's a very fair question and it could very well that with the e-filing in there with desktop products you may have more than 2.1 returns filed.

Whish is fine with us.

We actually encourage the path along the desktop products.

There's no issues or concerns from our side there.

In terms of the growing faster or slower than what's being reported in the IRS, it's comes back to an apples and oranges comparison.

We have our own measures internally on what we shared.

Winning more or losing more than competition and our data suggests we're growing share on the web.

The MPD data tells us what the share results are in retail.

The difference between that and what the IRS is reporting is simply the difference between returns and units.

Returns don't equal units.

A desktop product has multiple returns being filed.

When you look at the units, that may well get back to the first question?

That's correct.

Absolutely.

I think it's a very good hypothesis that may end up playing out.

Thank you.

Thank you.

We have time for one final question.

Our final question comes from the line of (inaudible).

Thank you for taking my question.

First question is on the $70 million of Consumer Tax that you expect to push out from the second to the third quarter.

Could you assess for it, the level of certainty around that?

Is this only an accounting issue for the whole $70 million that you sold the units and can only recognize the $70 million or is it contingent on anything happening in the April quarter.

This is Neil, we've already sold the units and it's a matter of deferring the revenue over the E-file curve.

Since they paid for the E-file privilege when they bought the box.

Got it.

And on the financial institutions business.

Uh, sounds like you're getting a lot of banks to adopt the personal finance works product.

The question there is what percentage of those banks are new wins versus upgrading existing digital insight customers and the second part of it is what business model have you adopted for these new customers?

Is there an up front license fee or is it more of a per user you're going to ask the banks for?

Yeah, so let me start with the first what we've been focused on is continuing to sell new banks with the digital insight platform.

And I will tell you that having the finance works as a part of that value proposition is helping keep our sales pipeline healthy.

We haven't broken out what percentage of the banks we reported are new, versus the existing ones who are adopting it.

Both are getting tremendous benefit from it.

There is a small license fee, but we tend to get the bulk of the revenue will come from transactions.

That's the business model long-term for finance works.

Users or transactions?

It is based on similar to bill pay or internet banking which is on per usage basis, that's the model for Finance Works so it's on a transaction basis.

Ladies and gentlemen, this concludes our question-and-answer session.

Gentlemen, I'll turn the conference back to you.

Great, I want to thank everybody for dialing in today.

I'm clearly pleased with our second quarter results.

Especially in light of everything you're hearing in the marketplace.

Also feel good with our balance of the year forecast.

We're going to deliver positive revenue growth, we're going to deliver strong earnings growth and going to continue to grow our categories and our customer bases which we know we can monetize over the lifetime of the customers.

We certainly don't expect it to be an easy lift.

We know the market out here is very difficult but if we stay focused and continue to execute, we feel good about the prospects for the balance of this year and for many years to come.

Thanks again, we look forward to speaking with you soon

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

This concludes the call.