直覺電腦 (INTU) 2009 Q3 法說會逐字稿

Good afternoon.

I will be your conference facilitator.

At this time, I would like to welcome everyone to the Intuit third quarter and fiscal year 2009 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 Jerry Natoli, Intuit's Vice President Finance and Treasurer.

Mr.

Natoli?

Thanks, Molina.

Good afternoon, and welcome to Intuit's third quarter 2009 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 2008, 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 statements.

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

We have 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 available on our website after this call ends.

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

Thanks, Jerry.

And thanks to all of you for joining us today.

Today, we announced third quarter revenue growth of 9% and non-GAAP operating income growth of 15%.

Both results are at the upper end of our guidance that we provided last quarter and I'm pleased with our performance in several key areas.

Consumer tax had another successful season.

Customers grew by 11% and our data suggests that we gained share overall with very strong performance in the online segment.

At the Company level, our revenue generated from connected services has grown 15% year to date and is now 56% of the Company's total revenue.

And we continue to grow our operating income faster than revenue by increasing our productivity, while continuing to be disciplined in our resource allocation.

Now with three quarters in the books, we're narrowing our full year revenue and earnings guidance.

We're still within our previously guided range and we're on track to deliver another strong year.

I'll share more of my perspective later.

But first, let me turn to it over to Neil to walk us through the financial results.

Thanks, Brad.

Let's start with Company-wide results.

Third quarter revenue was $1.4 billion, up 9% year-over-year.

Non-GAAP operating income totaled $837 million, up 15%.

Non-GAAP diluted earnings per share was $1.68, up 21%, and GAAP diluted EPS was $1.47, up 11%.

Cash from operations was $935 million, up 12% year-over-year.

As Brad mentioned, revenue and non-GAAP operating income came in at the upper end of our expected range.

We're pleased we are able to demonstrate the operating rigor to consistently deliver operating income leverage.

Let's review the business segment results, starting with the tax segments.

I'll focus on year to date results for the tax segments because that's most relevant, given where we are in our reporting cycle.

Consumer tax third quarter revenue was $777 million.

Year to date revenue was up 7% from last year, and year to date total consumer tax units were up 11%.

Revenue per return was in line with last year, but total revenue did not come in where we expected.

The shortfall was primarily due to our decision part way through the tax season to eliminate charges for multiple returns prepared with the TurboTax desktop product.

While we anticipated an adverse impact from the change, we expected to make up the shortfall with higher unit volume but though the season peak was higher than last year, it wasn't as high as we expected.

That said, our free offering performed as expected and brought in lots of new and profitable customers.

And we gained share versus low price competitors and tax stores.

We're still analyzing the season's results and will have more information at investor day.

Our accounting professional segment wrapped up a very good year.

Revenue for the quarter was $179 million and year to date revenue was up 8%.

Let's turn to small business.

While the environment remains difficult for our small business customers, we offer solutions that help people save and make money and customers are responding to that.

Third quarter revenue was $307 million, which is 1% higher than the third quarter of last year.

We also continue to grow customers.

Within small business, QuickBooks segment revenue totaled $149 million, down 8% from last year.

QuickBooks units grew 7% for the quarter and are up 4% year to date.

Given the environment, we're pleased that we increased our total units, especially considering the strong quarter we had a year ago.

And as you all know, unit growth is key to the health of the small business ecosystem because it gives us the opportunity to monetize these customers over their lifetime through cross-sell and up-sell efforts.

The payroll and payment segment had another good quarter, with revenue of $157 million, or 11% growth.

Our payroll retention rate remains in the mid-80s and our customer base grew year-over-year.

We're particularly pleased with the growth in our online payroll product.

The opportunity to sell payroll solutions to customers who are outside the QuickBooks base is very attractive.

Our payments business is also holding up well and we grew customers 12%.

Average charge volume per merchant remains lower than last year, although the 8% decline this quarter is in line with our expectations.

The financial institution segment had revenue of $78 million in the third quarter, or 3% growth.

We see strong customer interest in our FinanceWorks products, and we're pleased to see increasing growth in our user bases.

We had 5% growth in Internet banking users and 20% growth in bill pay users.

On the balance sheet, we ended the quarter with $1.7 billion in cash and investments.

We still expect to generate about $900 million in operating cash for the year.

We didn't repurchase shares this quarter and we have $400 million remaining in the current share repurchase authorization.

Capital expenditures for the quarter were $31 million and we're on track to hit our $200 million capital spending estimate for the year.

We have a strong balance sheet that allows us to take advantage of strategic opportunities.

Our preferred use of cash is to drive growth by investing in the businesses we have or in strategic acquisitions.

Each of our businesses has an inorganic road map that's part of their long-term strategy.

In general, we look for skills, technology and products that will accelerate our ability to grow.

We expect a risk adjusted return of about 15% to 20% on our investments, adjusted for risk, and we continue to invest in internal development, and we made a couple of very small technology buys in the second and third quarters.

Turning to guidance, we're three quarters in the books, we're tightening our full year revenue guidance.

Fiscal 2009 guidance is now revenue of $3.155 billion to $3.185 billion, which is annual growth of 3% to 4%.

Non-GAAP operating income of $900 million to $938 million, which is annual growth of 7% to 10%.

Non-GAAP diluted EPS of $1.78 to $1.82, which is annual growth of 11% to 14%.

Full year consumer tax segment revenue guidance has been updated to $980 million to $990 million, which is annual growth of 5% to 7%.

All other segment revenue guidance remains the same.

And now I'll turn it back to Brad.

Thanks, Neil.

As we said last quarter, good companies find ways to capitalize in difficult times to strengthen their position and that's what we're doing.

Our goal remains the same.

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

And we contribute to their success by helping them save and make money with our easy to use products and services.

We're seeing tangible results from the five-point plan we put in place last fall to execute through this downturn.

As a result, we are growing our customer bases and we are continuing to drive revenue and operating profit growth.

I'm going to share with you a few of the examples for each of these five principles.

If you recall, our first principle of our plan is to stay laser focused on acquiring customers.

Growing our customer base has remained our number one goal in this downturn.

You can see the results in consumer tax, where we grew customers 11% year-over-year, with a 36% increase in growth online.

That's faster than the category and it resulted in a 5 to 6-point gain in online share, which we know is the most important segment in tax.

You also see similar results in small business, where QuickBooks units have grown the past two quarters in a very tough environment and we've gained an additional three points of unit share.

Our financial institutions business is also accelerating customer growth, driven by our improved online banking offering and a streamlined bill pay process that improves the ease of use for end users.

Let me shift to the second principle, which is to continue to deliver operating income growth, in spite of the pressure we may see on the top line.

Our operating income increased 15% this quarter and we expect to end the year with operating income up 7% to 10%.

Now, in support of this, we took a hard look at resource allocation last year, focusing on G&A and other investments, and that has not stopped.

We continue to make tough decisions to make sure we're allocating our resources to the highest yield opportunities.

Now, our third principle is to continue to go for growth.

We're investing to grow share so when the turbulent times come to an end, we're going to be ahead of the game.

For example, our free initiatives continue to work in every business.

We're bring new customers into the franchise and we've proven that we're able to monetize them.

For example, our Simple Start free offering, which we shared with you on the last call, generated about $30 per customer in the first 12 months, is now averaging $40 per customer because we've improved our ability to cross-sell and upsell.

Just as a reminder, the paid version of this product used to be $49 when on promotion at retail.

Now we're bringing new customers into the franchise that are incremental with a free offering that we end up monetizing for $40.

That's a pretty good equation no matter how you cut it.

TurboTax Free also remains extremely effective as a new way to bring customers into our tax franchise and we maintained our price per return and segment margin.

We also continue to grow our payroll segment.

Our new online payroll product is gaining strong momentum.

We're adding thousands of customers each month and we're extending our payroll franchise outside of the QuickBooks space.

Now I'll shift to our fourth principle, which is protecting and nurturing innovation.

In an environment like this, it would be easy for any company to scale back on innovation, but that's not us.

We're putting it front and center.

Even as we adjust our short-term spending, we're planning for long-term growth by keeping the ideas flowing and continuing to explore new markets.

For example, we recently launched our Quicken health expense tracker offering through CIGNA and we have two additional plans in the queue for the coming months.

As a reminder, this is an online tool that makes it easier to keep track of medical bills and resolve physician charges.

We're also making tangible progress in the mobile space.

In the past few weeks, we launched Quicken for the iPhone and we'll be announcing this week the launch of GoPayment, a mobile application that allows small businesses to process credit card payments on their mobile phones.

All in all, our internal pipeline of innovative offerings has never been stronger.

And our fifth and final principle is to capitalize on opportunities for strategic alliances, mergers, and acquisitions.

Our strong balance sheet makes it possible to invest for the long-term and take advantage of M&A opportunities when they make sense.

Now, not all of these acquisitions or partnerships are going to make headlines, but even the small ones can move our strategy forward.

For example, we made a technology purchase in the second quarter that will accelerate our delivery of CRM offerings for small business customers.

This quarter, we purchased technology that helps users understand and manage their online reputations or what they call word of mouth, which is the number one driver of new customers for small business owners.

And we recently signed two strategic partnerships to integrate finance work into our partners' banking channels.

Now, as Neil mentioned earlier, we continue to evaluate opportunities of all sizes and we have rigorous ROI hurdles in place.

This allows us to ensure that we continue to effectively allocate the Company's capital relative to alternative uses of cash.

When you put them all together, these five operating principles are simply working.

They are delivering concrete results, they are extending our leadership position and they are helping us succeed.

And most importantly, they are enabling us to help our customers do exactly the same thing.

We're on track to deliver a solid year in a very difficult environment and we are setting ourselves up for even stronger results in the future.

And with that, Molina, I'll turn it back over to you to go to questions.

(Operator Instructions) Our first call comes from Sarah Friar from Goldman Sachs.

Thanks for taking my questions.

Just quickly, on the cost side, clearly you have a great focus here and the quarter came in quite strong.

But as we look at the guidance, it seems that you're getting a little bit more conservative for the fourth quarter.

Is there something incremental from a cost perspective that gets spent in Q4 that we should be thinking about as to why the margins would contract again?

Sarah, this is Neil.

And for the fourth quarter, couple things going on.

We are not expecting revenue to really gain any momentum in the fourth quarter, so our revenue forecast is a little more conservative.

And secondly, the fourth quarter is when we begin to invest and really build for the next year, so we have some expected investments in the fourth quarter that really position us well for 2010 and beyond.

Those are the two big issues really affecting fourth quarter performance.

Got it.

And Neil, are those more discretionary type investments, like for example marketing and so on, or is it true infrastructure build?

I'm just wondering how much flexibility you have in terms of spending it or not, as you see the quarter progress.

I would say they are more discretionary in nature, Sarah.

There are things we look at the payback and return we expect for those and they are still part of our plans that we're putting together for next year.

Got it.

And then if I could ask you one other on the linearity through the quarter, since you're one of the best companies for us to look to as we think about SMBs.

What did you see as you went through the quarter, any signs that purse strings were starting to loosen up as you saw it month by month, or not much change at all right now?

Sarah, this is Brad.

I think first and foremost, entrepreneurs tent to be optimistic and resilient.

They find ways to innovate and fight through a tough downturn, but to be frank with you, there's nothing we've seen that's sustainable that would indicate we're on the ride up.

In fact, we've planned no improvement for the balance of this year or even into 2010.

We see some blips up and then we see some blips down.

Some would argue that that would suggest you may be at the bottom.

But until we can actually see sustained trajectory improvements, we're not going to bank on an improvement.

Got it.

That's helpful.

Thanks a lot.

Thank you.

Your next question comes from Kash Rangan from Merrill Lynch.

Hi, thank you very much.

Just on the small business side, I think the NFIB had a survey which indicated that sentiment stopped getting worse.

I was just curious to get your take on it.

Do you consider that to be leading indicator of what could happen to the QuickBooks franchise?

Secondly, Brad, if you could talk about the payment side of the business, we've seen very good metrics on the number of end users and for the banking product and the bill payments.

How far are we, or how close are we to the tipping point where this end user usage actually translates into more materially faster revenue growth on those two product lines?

That's it for me.

Thanks.

Thanks, Kash.

Let me start with the first question on small business optimism.

I think small businesses were the last ones to become pessimistic about the economy and I'm not suspecting they are going to bet first ones to see the optimism coming out.

And that's simply because on a day and day basis, they find ways to fight through whatever the current environment is.

I would tell you that what we actually look at is their behavior.

Are they making purchasing decisions?

Are they able to get customers when we talk to them?

Are they able to actually keep the customers they have?

Are they able to collect the bills from their customers?

Right now I would say it's still a dog eat dog world for small businesses, but again, they are finding a way to make it happen.

Net-net, I don't say that's a leading indicator or a lagging indicator.

We actually just look at our business results and that gives us the best indication of what the performance looks like for small businesses and right now it's no different than it was a quarter ago.

When you asked about the online banking, we are actually seeing improvements with our active ease of use work that we've been doing in online banking and bill pay, and by improving the ease of use for end users, we've been able to grow our online banking customers quarter over quarter and we've had two very strong quarters of bill pay growth.

At the same time, we continue to have a good, solid pipeline of new banks signing up, and with the current partnership we announced with Metavante, we're able to sell stand-alone FinanceWorks without the online banking platform from Digital Insight.

We can actually attach it to Metavante's other online banking platforms, which gives us new ways to reach new customers.

And so I think what you're going to see is a tipping point, as we exit Q4 of this fiscal year, we're going to be on a continuing trajectory up in the Digital Insight business and that will deliver double-digit growth as we head into fiscal year '10.

And that is for that particular segment.

Great, thank you very much.

Thank you.

Our next question comes from Brian King from Credit Suisse.

Hi, good afternoon.

Brad, we're in an obvious, pretty serious recession here and yet you're growing units and QuickBooks up 7% for the quarter and I don't think anybody expected you to be able to grow units that strongly in a recession.

So how are you getting that done and where are these users coming from?

Yes, Brian, two things, one is we've remained aggressive with our advertising.

We've been aggressive with promotional discounts in retail.

But I think the bigger shift is one we just recently shifted to, and that is getting much clearer about the value proposition for small businesses.

And I'll give you an example.

We've now done work that tells us that a small business that uses QuickBooks improves their bottom line profitability 27%.

That's over $13,000 a year for a product that costs you $199.

By getting much clearer and better at executing things like that, we're able to get customers into the franchise, and that, combined with things like free Simple Start that we've been able to prove we can monetize, get incremental customers into the category for the first time.

We're just playing offense and we think we're going to continue to be able to do that, despite what the economy is, and we'll find ways to monetize those relationships over time.

And I assume the strong unit growth in QuickBooks will help both payroll and payments going forward.

They will.

In fact, if you saw the results for payments this quarter, we grew again new merchants, new acquires coming in 12%.

And that is very healthy growth.

Now, right now that particular segment's got a little drag because the average charge volume is down about 8% year-over-year.

But as soon as that charge volume starts to pick up, with all these new customers we brought into the franchise, that's going to be a tailwind for that business.

And our payroll business, Brian, just continues to execute great.

We've got retention in the mid-80s, which is still world class levels compared to others.

That online banking product that we have out there, or, excuse me, the online payroll product is adding thousands of customers a month and we're very excited about that space.

So I think you're going to see more for us in both payroll and payments.

Okay, and I just want to switch gears to tax.

I know you guys were expecting a stronger end of the year, and it didn't really materialize in terms of units.

Any idea what happened or where those people went because you guys have a pretty good idea with the IRS numbers what kind of numbers to expect.

Yes, Brian, I'll tell you, we really don't have all the answers yet because the IRS hasn't published the total results that they see, but let me put that into context.

You're absolutely right.

Revenue was disappointing for us in total, but here's what we feel good about.

We grew customers 11% year-over-year and we grew them 36% online, which you know that's the game to be played in the future.

And we were able to take share this year from tax stores and from the low end competitors on the web.

And in doing that, we're able to hold revenue per return and margins in the segment year-over-year.

And so you put all of that together and what we boiled it down to on our side is the fact that we made a decision as we entered the season to do the right thing for the customers, and that was to bundle our E file price into our desktop product and that created a revenue divot, and we thought we could offset that with incremental units, and we were able to offset some of it but not all of it.

So at the end of the day, we focus on the things we can control.

Once we'll see the IRS data, we'll know if there was any other shift.

What we do know is that tax stores lost, and we do know that the competitors that we go up against online lost, and we gained.

What we don't know is what happened in the other segments that we haven't been able to see up to this point.

But it doesn't look like, because price per return was relatively flat, it doesn't look like you're seeing pricing pressure in that segment.

No, we're not.

Okay, and then just finally, I know you're not giving fiscal year, next fiscal year guidance, but maybe you can sum up how you're feeling about heading into next year, Brad.

Well, I think that we've played the game this year the best we can and we've gotten smarter.

On some things, we've gotten smarter later in the season, like this value proposition messaging I mentioned in QuickBooks.

But there's nothing we could have hoped for other than coming out of this particular year with more customers than we went in, with more market share than we had going in, and with investments in our R&D pipeline that are producing new products like mobile payments product I mentioned and others, and if those things start to click like we think we will,then as soon as this economy starts to turn, and we continue to get better ta executing, we should have a good year going into fiscal year '10.

Nice job on the operating margins.

Thank you.

Thank you.

Our next question comes from Laura Lederman from William Blair.

Yes, thank you so much for taking my questions and nice job on the quarter in a difficult environment.

Starting with the Digital Insight business, I know you had had problems getting some of the banks up and running and were expecting that to improve.

Is that already starting, or is that still at that pace behind plan?

And then I'll go to the next question.

Thanks.

Yes, Laura, we're still seeing banks delay implementations.

What our team has done, which I'm very delighted with, our team continues to be very innovative, is our stand-alone finance product, which is the ability to actually plug that into your online banking channel, most implementations in this business take anywhere from three months to six months.

Our team has gotten that up to a one to two-day implementation.

And so even though we're still having some of our implementations at Digital Insight's platform pushed out from quarter to quarter, we are able now with the relationships, like Metavante, where we sell stand-alone FinanceWorks to get those up and running and implemented in banks, which will give us the ability to create revenue streams in addition to our typical business.

But the short answer to your question is, there's been no material change quarter over quarter.

We're still signing banks up, but getting them implemented on the day continues to be a little bit of a crap shoot.

Shifting to a financial question, you mentioned the number one use of cash would be investing in the business and number two would be acquisitions.

Historically Intuit has done a lot of buybacks.

Your thoughts on buybacks going forward, and is that something you would return to when the environment's better and you don't have to hold on to as much cash?

You know, Laura, I think we'll always take a hard look at that as we put our plans together for 2010 and beyond, and depending on what happens in the environment we'll make those type decisions.

In the meantime, we really are pleased with some of the opportunities we've seen.

Brad mentioned a couple of small acquisitions we were able to make in the last couple of quarters and it will add to our skill sets and our technology base to accelerate growth in some of the products we have.

So for the current time period, I think we like where we are with our liquidity and with our balance sheet structure, and so we'll wait and talk about share buybacks when we have a little more clarity about the economic outlook.

Shifting to -- final question for me and then I'll pass it on.

If you look at QuickBooks, obviously nice growth in units.

Is the revenue more a function of the promotion and free, the delta between the revenue in the units, or is there also general pricing as well?

I'm just trying to understand mechanically the difference.

Yes, Laura, as you know, it's basically the aggressive promotional pricing we've had to try to generate category growth and get customers into retail stores where retailers have been struggling to get traffic.

And the other is free as a percent of the mix.

But as we've shared, we are starting to monetize those free products, and they are starting to increase quarter over quarter in terms of the average ASP.

But the short answer is the pricing reflects the fact we've been aggressive on promotions and now we're getting much smarter in how to message what the value is for the price.

Okay.

Thank you so much.

Once again, nice job.

Thank you.

Thank you.

Our next question comes from Brent Thill from Citi.

Thanks.

Your operating income is outpacing your overall revenue growth pretty nicely.

Brad, underneath the comment you made about no improvement planned for the next year, do you still plan to continue to grow the operating income faster?

And just from a sense of the margin side, where do you feel like you continued to get better margin profile ahead into 2010?

Yes, Brent, first and foremost, we have a simple philosophy we talk about inside the Company that we'll grow revenue faster than expense and that gives us the ability to generate operating income leverage.

And we've even proven in this downturn if we have some top line pleasure, we're able to maintain that discipline while still investing in the future.

The areas we continue to push on as we want to be more efficient and effective across the Company, we think general and administration areas are areas we'll continue to be more efficient.

We're getting a better return on our R&D dollars.

In terms of R&D, we're getting more productive, we're now moving to more small teams with fast experiments.

We're also capitalizing on working with partners who are helping us do some of the development work.

And so across the board, we have an intense pressure to continue to get more efficient and effective in how we do our work day to day.

And I think there's no one particular area.

It's just the rigor we've built into the Company.

Thanks.

Thank you.

Thank you.

Our next question comes from Heather Bellini from UBS.

Hi.

Thanks, Brad.

I was wondering, you mentioned before that you don't see things getting better from here, but you also didn't say that things are getting worse.

So I was just wondering, what are the key external stats that you monitor, whether it's weekly or monthly basis, that you think we should all be paying more attention to in order to watch for the inevitable turn in the market?

Yes, Heather, I wished I could give you a magic bullet answer on that one because I've been searching for it myself.

On one hand, I think optimism index or indices, we all know that confidence drives growth.

I'm watching that both consumer and small business, but I kind of hedged how much I bet on that earlier in the answer I gave.

The second one is just purchasing patterns and actual behavior.

For example, charge volume.

Small businesses count on customers shopping as much as big businesses do and right now we see the average charge volume down 8% year-over-year.

So you can't make gold out of straw and I think that's one of the things we'll keep our eye on, when we've seen an uptick in the actual behavior and customer shopping or small businesses buying.

And other than that, unfortunately, we don't have a real magic formula that we're looking at.

We just try to continue to execute the best we can, given the current conditions.

Okay, great.

Thank you.

Thank you.

Thank you.

Our next question comes from Jim Macdonald from First Analysis.

Yes, good quarter, guys.

For a accounting professionals, your revenue ticked up despite flat volume.

Could you talk about that and how that bodes for the future?

Yes.

Our accounting professional division continues to do a really good job of delivering a customer experience that retains customers year-over-year.

One of the biggest levers we have is not to lose one of our tax prep customers to a competitor, and that team had an outstanding tax season last year and they had another one this year, where the quality of the experience if you called in for support was good.

And we're also getting smarter at going into the customer base and finding additional problems that we can solve and selling them a solution.

So things like QuickBooks Accountant Edition and Payroll, we've been selling into the accountant base and we've increased our year-over-year penetration.

And then last, but not least, is, it is a customer base that sees the increased value and is willing to take a price increase on an every so often basis and so some of that increase this year was price, as well.

But I would actually start with it's the quality of the service that our team's delivering.

The second is we're finding new problems we can solve for accountants and we're selling some of our products into their base.

And the third is, with that additional value we're able to get more price.

Thanks.

And online payroll, you said it was doing really well.

How are people coming into that service?

I know they can come into it a lot of different ways and it's independent of QuickBooks these days.

So what are you finding is your best entry point for people finding that service?

Yes, today it's primarily through the web.

So there's three big channels that we think online payroll can play going forward.

One is in the website itself.

The second one is through accountant recommendations because the accountants would also love to be able to view their customers' payroll reports and help them make sure there aren't any mistakes.

And then the third is online banking channel by Digital Insight.

We've started with our web presence being the strongest.

We're working with our accountants and with Digital Insight to make sure we have a more pervasive presence there.

But right now it's primarily web.

Thanks very much.

Thank you.

Thank you.

Our next question comes from Adam Holt from Morgan Stanley.

Good afternoon, guys.

My first two questions are about tax.

I understand that you have limited information at this point, but if you look at the delta between units and revenue through season to date and compare that to units versus revenue season to date last year, it looks like the gap has actually widened a little bit.

To the extent that your revenue per return is stable, does that mean that the delta is primarily just fewer returns per box, or are there other elements that are at play there?

Yes, you know, Adam, I think one of the things that we point to today is, as you see the shift away from desktop, where you can do multiple returns for every unit we sell, and you see it shift to the web where it's one for one, you buy the product and you can file once.

If you want to file a second time, you have to buy a second product.

You're going to see that gap between revenue and units get further apart.

And so right now if you see that online grew 36% while the desktop was down year-over-year, the math would lead you to believe that part of it is simply shifting to the number of people actually filing online now, as driving more units for every return.

And as a result, that difference between that and revenue shows up.

Okay.

So then the second part of the question would be, as we look forward then and you start to think about improving monetization of free, should we expect that gap to ultimately stabilize, or does that trend effectively continue, given the shift you just described?

Well, I think one of the things we're going to continue to try to do is maximize the revenue.

We shared earlier that the revenue this year certainly didn't come in as we had hoped, although a lot of the other indicators were positive.

I would believe that you're going to continue to see, as you shift from people filing multiple returns in desktop and into the web that you're going to see units continue to outpace revenue.

The question of whether the gap will widen over this year or not is one that I can't answer given the data we have right now, but we'll do our best when we provide guidance going into next year to let people know what we believe.

And if I could turn quickly to the payment side, you had obviously nice growth on the payments front.

The same-store sales, if you will, were down year on year, but if my notes are right, they didn't get any worse than last quarter.

Do you think you have seen a stabilization on the payment or the transaction side, or would you echo your comments on SMB more broadly, that it's just too early to tell?

Adam, it is too early to tell.

I would tell you that we've had a month that's bounced a little better, and then a month that went down a little lower and then another one that bounced back up.

And so on one hand, I could imagine us skipping on the bottom.

But on the other hand, since it's not improving on a month to month basis, it's hard to tell if we are at the bottom or if we simply are just, consumers are shifting back and forth.

So right now I would stick with what I said earlier.

It's too early to call.

We haven't seen anything that's trending any further down and nothing that's turning around.

Terrific.

Thank you.

You're welcome.

Thank you.

Our next question comes from Scott Schneeberger from Oppenheimer.

Thanks.

I would like to start out on tax.

This year from your report year to date, report mid-March to mid-April, that had been increasing for the last few years and that piece was a little lower.

Any thoughts on just the timing of when people filed this year?

Yes, we're currently trying to get our arms around the cyclical nature of this tax season, and I would tell you that it was the hardest one in my time being here to actually predict.

Short version is we continue to see people push later and later into the filing season.

The second is, however, this year as we looked back, it looked like we had some people who filed earlier in the season because they knew that they had money owed to them, they wanted to get it as quickly as possible.

Then we think we saw people file later in the season who expected they were going to have to pay.

Also, there was a group who we believe were still trying to sort through all the complexity of the stimulus package and all the other things that were being talked about and simply waited til the last part of the season.

If I had to talk about what I think a secular trend is, I think the secular trend is you're going to continue to see people take advantage of technology, as well as the fact we tend to be a little more of a procrastinating society and push later and later into tax season.

This particular year we had a lot of variables in play and we're trying to get our arms around what actually was causal versus correlated.

Sounds like you think going forward if we had reduced cyclicality, we would see, again, more and more at the back part of the year as far as a percentage of mix for the full season?

This is Scott.

Let me add to what Brad is saying.

The tax season is a double hump.

Early season filers are there early to get refunds and late season filers are typically there to pay as late as possible.

And it seems that it became even more of a double hump, accentuating each end, more of a barbell this season.

People -- bigger hump earlier and a bigger hump later and a little weaker in the middle.

Thanks.

You mentioned on online share that you had seen that increase, or at least taking more of the market.

Could you discuss roughly what percent of online share you believe you might have?

Yes, Scott, we haven't talked about the actual numbers.

When we get to investor day, we'll share a little bit more once we have the full season under our belt.

What we do believe, given our data and what we track with some external sources, that we picked up about 5 to 6 points of share and we said that our share is over 50% in the online.

It's not where we are in desktop, but we like the fact that last year and this year we've continued to gain share.

And this year in particular, we took it away from some of the lower price competitors and we like that trajectory.

Okay, thanks.

Finally, on tax, the tax community has been something that's been very successful for you recently.

Could you speak to that a little bit and any implications it has on margins?

Thanks.

Yes, so Scott, I'm assuming the question is the live community where customers answer each other's questions?

Correct.

Yes, it was another resounding success this year.

Not only inside of TurboTax, but also across 11 of our products in the Company.

For example, we put it in QuickBooks this year and of the customers who actually used the live community to answer their questions, 70% of their questions got answered by another small business owner.

We saw the same sorts of results happening in our Pro ax products and also in TurboTax.

In terms of impact on margin, we see it as a two-pronged opportunity.

One is it's a great way for customers to learn and engage with each other and add more value to our products.

And the second is it's a way for us to then take resources that would have otherwise been answering questions and shift them to either building new products or finding ways to enhance the value of the existing products.

So we don't really view it as much of a margin play as it is an opportunity for us to redeploy resources to help accelerate our growth.

Okay.

Thank you very much.

Thank you.

Thank you.

Our next question comes from Michael Millman from Millman Research.

Thank you.

Following up on an earlier question about R&D being more efficient, it was also down double digits and so is that decrease all from efficiency and better production, or indeed are you reducing projects?

Also, I wanted to ask about the tax, the online up 36%.

Can you give us some idea as to how much of that was a shift from FFA into the other category and how much is free?

And then finally, it looks like from some of the industry numbers that RT was down this year and yet your number of returns were up.

So are you seeing a reduction?

And maybe you can quantify some of your RT numbers in terms of the importance to the bottom line.

Michael, let me take these one at a time and we'll tag team on a couple of them.

I'll start with your R&D question.

It's really got two parts in terms of what you're seeing quarter over quarter.

One is the efficiency and effectiveness that I mentioned earlier.

We're simply getting better at getting a return on our investments.

We had not said that we're stepping away from investing in R&D.

What we're doing is deploying those assets more efficiently and we're getting better returns.

But the second is, there is an accounting adjustment.

Some of the costs that we had allocated in R&D actually are now allocated in another part of the Company in IT, And so you've got an apples and oranges comparison, so that drives that big year-over-year comparison that you're seeing that looks like it's down.

But I would say that right now we aren't looking to cut back R&D, we're simply looking to get a better yield on that investment.

Is that that $10.5 million or 10.8 million number, the TI number?

No, Michael.

This is Neil.

The license payment refers to a new licensing agreement that we entered into the third quarter.

The reallocation Brad is referring to of some R&D costs, some of which would have gone to the BUs, and some of which would have gone to general and administrative.

There was some reallocation, but also a continued focus, as Brad mentioned, on getting more efficient and getting more return for the dollars we're spending in R&D.

Thank you.

Okay.

So Michael, your second question is regarding our online growth, up 36% in TurboTax and asking whether that was a shift out of FFA.

There is some shift out of FFA.

Our year-over-year volume in FFA was down.

That's a very small portion of the total number of customers, and we suspect that we saw them shift over into either a free product that we have in the commercial market or into one of our paid products, which we're able to monetize.

But that certainly did not explain the 36% year-over-year growth.

Our organic growth rate in online was very strong year-over-year, and through our research, we've been able to show that we actually took share from others and it wasn't from our own redeployment from the FFA into our own product.

And how much of your online is free?

We don't break that out because it's hard to tell, as we have shared, when a customer comes in and first clicks on free, many immediately move over and start to buy a state product, so we make money off of the state attach.

Or some will start the process of the tax return and decide they want to move up to a paid version.

And so it's very difficult to separate the free from paid and our goal is to monetize all of those relationships, whether it's this year or next year, so we don't break them out.

I think the key to look at there is that price per return we mentioned, or revenue per return.

And if you look at where it was last year and where it was this year, that gives you a pretty good feel for how we're able to monetize those kinds of customers.

The third question you asked was regarding RT.

I'll hand this over to Jerry and let Jerry talk to you about the specific question around RT, returns being up and RT being down.

So that's a pretty easy one since we don't actually break out anything about RT.

So Michael, you have just got to live with the disclosures we've got out there.

So they don't want to answer that?

Yes, that's not a level of mix that we get into, Mike.

Okay.

Thank you.

All right, thanks, Michael.

Thank you.

Our next question comes from Brendan Barnicle from Pacific Crest.

Thank you.

Guys, you're making some nice progress on the QuickBooks online business and you also talked some about the intent to move into the CRM business.

Do you envision ultimately tying this all into an online product suite that's more broadly based than just the financial part of QuickBooks?

You know, Brendan, first of all, our Company strategy that we talk about is we help consumers and small businesses achieve their goals which are primarily saving and making money.

And the way we do that is easy to use products that are increasingly becoming connected services.

And so, when we mean connected services, we talk about either products and services like payroll and payments that will work with a desktop product or stuff that is hosted or a fast product.

And so when you put that together, as the customers' behavior starts to shift and they want to have products delivered that way, then we want to make sure we have the market leader.

The good news is, we aren't having to rush to catch up.

We've had an online version of QuickBooks and an online version of TurboTax out there since the late '90s.

And as you're starting to see and you pointed out, QuickBooks online edition is continuing to deliver some solid growth.

And as we're starting to look at some of the other services and products customers want around those kinds of products, they tend to be more hosted now.

So that's why you see us investing in some of these hosted applications.

Will it end up being a complete suite where everything is online?

That's going to bet customer's choice, not ours.

We're more than happy continuing to sell them a desktop product, but then having other products that work with it that may be hosted, but we'll let the customer choose which way they want it to be delivered.

So you ultimately envision where this may come out developing an underlying development platform to tie all of these together or to allow people to start building on top of these a little more aggressively?

You know, we have, over the last several years, gotten smarter about how we can do this and quite frankly the big opportunity is to make sure the data flows freely between our products and other applications and services we build.

It's not so much about building an entire platform that rewrites everything we currently have.

And so I think what you're going to see is a lightweight approach for us to be able to have products work well together and enable the customers to choose whether they want it to be desktop in some areas and web in others.

But as long as the data flows freely and the workflows are pretty seamless, you'll see us continue to deliver products that way.

The other one I would tell you, Brendan, is we announced an Intuit partner platform and this is our QuickBase product and it has Adobe Flex on top of it, and it enables third party developers to build web applications that will work well with our QuickBooks and related products.

And we're seeing very good uptake on that and I think you'll see that become more and more of a technology foundation for third party developers, as well as our own developers to build on.

But the key again will be to get the data to flow between the products seamlessly.

And just lastly, any numbers in terms of either ISVs or applications you've got on the QuickBase platform at this point?

We haven't broken out at this point how many are on that QuickBase platform versus our normal SDK.

I can tell you our normal SDK we have over 70,000 who have downloaded.

We have several hundred commercial applications in the market.

But I will tell you that our Intuit partner platform, which is pretty early in the market at this point, has more demand than we had anticipated and we're very excited about its prospects.

Great.

Thanks for the clarity.

Thank you.

Our next question comes from Gil Luria from Wedbush.

Yes, thank you for taking my question.

First of all, on QuickBooks, it looks like a lot more of your business model is now transitioning to monetizing your customers in other ways, except for charging them for the software.

What are some of those main ways that you're especially successful?

Is it getting people to upgrade QuickBooks?

Is it getting them to upgrade to website?

Is it consumables?

What are the key ways you're seeing people pay you, even though you're not charging them for the software?

So Gill, there's three ways that I would bucket it.

The first one is, they have come in on a particular offering, even if it starts out free.

And then as their needs become more sophisticated and they grow and they want to add product inventory, they will move up the QuickBooks line.

The second is they will come in with QuickBooks and they will have additional problems to solve, like they need to pay an employee or they need to accept a credit card from a customer or they want to printout checks and supplies, and they will start to buy what we call attach services or razor blades.

And those two in combination have proven that over a five-year period, we can increase the initial purchase price, which averages about $200, we can increase that 3X over five years.

Now, the third way is relatively new and that is we're introducing new front doors, primarily things that help small businesses get found on the web and get customers so that they can grow their business and that's where things like Homestead come into play.

And those we think will become a new set of razors that we'll be able to attach razor blades to and sell attach services to that.

So you put it together and it comes down to moving up the upgrade cycle and buying a more sophisticated version of QuickBooks as they grow, buying attach products and services that are meaningful to them, or us actually starting the relationship sooner than they need accounting by helping them do things like get a website or get customers.

And those are the three ways we grow our ecosystem.

Got it.

And then the second question is about, some of your innovation, a couple of your important innovations now are FinanceWorks and Quicken Health are based on adding value to your customers as opposed to end consumers, which is what you're really used to doing, and adding it in new ways to acquire new business models.

I understand that your business model that you've, at least initially gone with with FinanceWorks is to capitalize on the increase in adoption as opposed to focus more on license.

Is that something that you're going to shift more to license, especially as you sell it outside of your base?

And then the related question on Health is what business model have you decided on there?

You're adding value to a lot of different participants in the value chain.

Who are you going to be collecting from?

Let me break it down into a couple parts.

First of all, what we declared in our strategy, that we're a consumer and small business company.

We will serve anybody who has their primary target audience being either a consumer or a small business customer that they actually are a key value-added partner in.

So that takes us to banks, that takes us to healthcare providers, and it takes us to accounting firms, because each of them are very important relationships for a small business or a consumer.

But what we ultimately do and the way we add value is we build the easiest to use consumer or small business facing application.

That's where we add the value and the relationship.

And so what you'll see us doing in things like Digital Insight is the way we differentiate ourselves in the market is we try to build the easiest use online banking and bill pay front end that a bank could offer their customers or that customers would tell their friends to go use.

And that's really our impetus.

The good news is, when we bought Digital Insight, they already had the industry-leading sales force and so what we had to do is we simply had to bring the products to that sales force so they could actually sell more banks.

When you ask about the price, the pricing, the pricing tiers are the same as they have been in Digital Insight.

There's a license fee and then the bulk of the revenue is generated on usage or transaction, which is why we get excited, because if we can improve that end user ease of use, we can improve the number of transactions and drive the revenue and that's where the bulk of our focus has been.

In terms of healthcare, we have not at this point announced our monetization model.

We have several experiments that we're testing and we're going to continue to test to see the best way to create the best customer experience while also maximizing the revenue potential and once we land on one or a couple that we think are going to be meaningful, then we'll share those with the analyst community.

But at this point, we have multiple experiments going on.

To clarify on on FinanceWorks, now when you're working with partners and not just with Digital Insight customers, are you going on a license model, or is it also a user model in terms of revenue?

It's also a user model, Gil, very similar to what we do with the banks directly.

Got it.

Thank you very much.

Thank you.

Our next question comes from Ross McMillan from Jefferies.

Thank you.

I actually had three questions.

So the first, maybe for Neil, you did a great job on OpEx again, but actually gross margin was up year-over-year compared it to being down in 2Q and 1Q of this year.

Was that a reflection of some of the revenue shifts, or was there something else going on there that's really helped out on the gross margin in the quarter?

Ross, that's primarily related to the revenue shift from Q2 to Q3 in TurboTax.

Got it.

And then secondly, just looking at your QuickBooks units, the Simple Start activations exploded this quarter.

I think they were well up versus trend.

Was there a particular promotion or something else driving that?

I think as we got our advertising ramped up on TV and we talked about go to the website and check it out for free, and then you combine that with our small business united campaign, where we went out and said we're here to help small businesses get up and running and we have products that are free, it was all of that awareness and attention, plus the fact that small business owners right now are trying every way possible to not have to put a lot of money out of their pocket in these tough times.

That's what drove the Simple Start activation quarter over quarter.

Great.

And then just the last one, I'm just curious for your perspective on this.

The IRS data year to date has total receipts down 6%, but E filing up about 6% and the delta between the two is a bigger delta than last year.

In other words, E filing is holding up a lot better than aggregate receipts.

What's your perspective on that?

And, to what extent do you think you can benefit from that shift, if it's structural and not just transitional?

Thanks.

This is Scott.

On the E filing, we really make our money per return.

So the E file number's particularly relevant.

As consumers understand the greater benefits of E file, particularly getting your refund faster, that's going to generate more demand for E file.

If people file by pen and paper, you don't really get to E file.

So it's a good supporting trend for the gradual transition of this business in our favor away from manual or other methods.

Do you think that a bigger barbell to the season this year perhaps was also augmented by more aggressive E file adoption this year?

My guess is it's augmented by people wanting to hold on to their cash longer if they owed it and wanted to collect their cash faster if they got a refund.

Nothing as fancy as technology.

Okay.

Thank you very much.

Thank you.

Gentlemen, I'm showing no further questions at this time.

Would you like to proceed with any additional remarks?

I just want to thank everyone for dialing in.

I'm proud of the results that our team's delivered in this downturn.

I think that we're continuing to make good decisions and trade-offs to deliver the bottom line, while also investing for the future.

I want to thank our Intuit employees for all the hard work they are putting in and I want to thank you for your support and we look forward to seeing you again soon.

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

This concludes the call.

You may now disconnect.