直覺電腦 (INTU) 2009 Q4 法說會逐字稿

Good afternoon.

I will be your operator.

At this time, I would like to welcome everyone to the fourth quarter and full-year fiscal conference call.

All lines have been placed on mute.

After the speaker's remarks, there will be a question-and-answer session.

(Operator Instructions).

With that, I'll now turn the call over to Jerry Natoli, Intuit's Vice President Finance and Treasurer.

Mr.Natoli?

Thanks, Patty.

Good afternoon, and welcome to Intuit's fourth quarter and fiscal year 2009 conference call.

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

Our remarks will include forward-looking statements.

There are a number of factors that could cause 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 other SEC filings.

All of those documents are available on the investor relations page of Intuit's web site 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'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 available on our web site after this call ends.

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

Thanks, Jerry, and thank you for joining us this afternoon.

Today, we announced fiscal year 2009 results with revenue growth of 4% and non-GAAP operating income growth of 9%.

These results were at the upper end of the guidance we provided you last quarter.

I'm proud of what we accomplished this past fiscal year.

We had a good year.

We responded quickly to the challenging macro economic environment, we defined a game plan to play offense in the downturn, and we executed well.

In doing so, we grew our customer bases, we gained share in all of our key businesses, and we generated top line revenue growth.

We also delivered solid operating income growth with margin expansions and double-digit EPS growth through our relentless focus on operational discipline.

Throughout the year we kept our eyes on the horizon, and we made the necessary investments to build the foundation for what we believe is even stronger future.

We made smart internal investments in R&D, and new product innovation, and we closed on several strategic acquisitions that better positioned us for future growth.

And finally, we continued our evolution to become an increasingly connected services company.

Over 56% of our Company's revenue comes from these services, and they grew 14% in fiscal year 2009.

Like I said, we had a good year.

But not a great one.

We can do better.

We learned a lot this past year, as we look ahead, we're applying the lessons we've learned.

We're entering this new fiscal year with a stronger foundation of assets, a robust pipeline of new, innovative ideas, and an increased intensity in our operational rigor to deliver even stronger results.

I'll share more of my perspective later, but first let me turn it over to Neil to walk us through the financial highlights.

Thanks, Brad.

Let's start with total company performance for fiscal year 2009.

Our financial results were revenue of $3.2 billion, up 4% on a year-over-year basis.

Free cash flow, defined as cash from operations minus capital expenditures, grew 20% to $630 million, non-GAAP operating income of $930 million was up 9%, non-GAAP diluted EPS was $1.82, up 14%, and GAAP diluted EPS was $1.35, down 4%.

As you may recall, last year we recorded a pretax gain of $52 million for the sale of certain payroll asset to ADP which added approximately $0.10 to GAAP EPS.

We also had an $0.08 gain in GAAP EPS from discontinued operations from the sale of IDMs.

Without these items, our FY 2009 GAAP EPS would have grown 10% in line with our non-GAAP results.

In FY 2009, both our GAAP and non-GAAP EPS benefited from certain tax items.

We had a GAAP effective tax rate of approximately 31% due to tax benefits from a favorable settlement of prior year issues, and a retroactive reinstatement of the R&D credit.

These benefits added $0.08 to our 2009 EPS.

Fourth-quarter result were revenue of $476 million flat to last year, a non-GAAP operating loss of $49 million versus a loss of $41 million in the prior year.

Both the GAAP and non-GAAP result include the $9 million charge we took for the writedown of assets and consolidation of work forces associated with the Pay Cycle acquisition that closed July 23.

The operating charges associated with the acquisition were offset by our resource allocation efforts.

Fourth-quarter results also include a $10 million charge we took for severance and facility closures related to a reallocation of resources, primarily in the small business group.

We expect margin improvement in that segment as we see the benefits of these decisions going forward.

As Brad mentioned, we applied the discipline necessary to achieve strong operating results in 2009.

We're not going to let up on that as we enter the next fiscal year.

Before we turn to the segment results let me tell you about decisions we made that affected our results.

In the fourth quarter, we aligned our small business group into the following three operating segments.

Financial management solutions, formerly known as QuickBooks, employee management solutions, formerly known as payroll, and payment solutions.

Beginning this quarter, we will report the results of all three main businesses in the small business group.

Guidance will be provided only at the small business group level.

Please refer to the fact sheet to see these changes and the associated metrics.

Now let's look at the results.

Total small business group revenues grew 4% for the year and 1% for the fourth quarter.

Within the small business group, our financial management solution segments, which we used to call QuickBooks finished the quarter with $135 million in revenue or a 5% decline over a very strong quarter a year ago.

Our relative share in the category has improved, and we've successfully focused on growing the category over the last few quarters.

We had 12% unit growth in the fourth quarter.

The employee management solutions segment, formerly payroll had revenue of $91 million in the fourth quarter or 5% growth.

Organic customer growth was flat, up 9% with the additional Pay Cycle.

We completed the acquisition of Pay Cycle in the fourth quarter, expanding our online payroll capabilities and strengthening our position as a leader in small business staffs.

The acquisition is expected to be neutral to FY 2010 earnings.

The payment solutions segment had $76 million in revenue in the fourth quarter, or 10% growth.

Customer growth continues to be strong at 14%.

Charge volume remains lower than last year, but seems to be stabilizing with a 9% year-over-year decrease in the last three quarters.

In the tax segments, our consumer tax business ended with 7% revenue growth and 12% unit growth.

Remember that this past year we eliminated charges for multiple returns prepared with Turbo Tax Desktop.

We executed well and took share on line and from tax stores.

We also learned that this tax season was somewhat atypical.

Historically, we've seen about 1% to 2% growth in overall tax filers.

It appears that this year the number of filers didn't grow as it had in past years, similar to what we've seen in past recessions.

Our accounting professional segment executed well, ending the year with $352 million in revenue and 8% growth.

We continue to focus on increasing accounting professionals' productivity and growing their practices.

Our financial institutions segment achieved 4% revenue growth for the year, and is exiting the fourth quarter with a 6% run rate.

Not as strong a finish as we expected earlier in the year, but strong performance, considering the overall state of the financial services sector.

We're pleased with the success our finance works products enjoyed in their first year of release, and we're entering the new fiscal year with momentum.

We generated $812 million in cash from operations this year, we've repurchased $100 million of Intuit shares in the fourth quarter, $300 million for the full year.

We invested $187 million in the strategic acquisitions Brad referred to earlier, and $182 million in capital expenditures.

We ended the fourth quarter with $1.4 billion in cash and investments.

Our financial operating principles served us well in fiscal 2009.

Going forward, we expect to continue to grow revenue faster than expense and generate operating income leverage and strong cash flows, in line with our operating income.

Discipline is key.

We've weighed both internal and external investment carefully.

We expect all our investments to generate a risk-adjusted return of 15% to 20% over a five-year horizon.

Internal investments include R&D, specific initiatives related to selling and marketing, and infrastructure.

Within the investment horizon, we have explicit milestones that have to be met before we release further funding.

External activities may include strategic acquisitions, partnerships, and joint ventures.

We expect to maintain approximately $1 billion of cash and investments to ensure we have the liquidity we need to run the business and to take advantage of strategic opportunities as they arise.

This amount may fluctuate by $500 million, based on the seasonality of our business and on other changes in business conditions.

Resources that are not invested as I described earlier or maintained for general liquidity will be returned to shareholders.

In the past, share repurchases have proved to be the most effective way for us to do this.

As we provide guidance for the coming quarter and fiscal year, let me be clear.

Our plans for 2010 assume that general economic conditions remain much as they are today.

We are not expecting a strong rebound or significant weakening.

Until we see sustainable improvement in indicators such as retail sales and new business starts, we will continue to utilize our game plan for managing in a downturn.

With that caveat, our fiscal 2010 guidance is revenue of $3.3 billion to $3.43 billion.

which is annual growth of 4% to 8%, non-GAAP operating income of $985 million to $1.025 billion, which is annual growth of 6% to 10%, non-GAAP diluted EPS of $1.89 to $1.96, which is annual growth of 4% to 8%, GAAP EPS of $1.49 to $1.56, or growth of 10% to 16%, and capital expenditures of $150 million.

We expect the following revenue growth by segment.

Small business group, 4% to 8%, consumer tax, 5% to 9%, accounting professionals, 3% to 7%, financial institutions, 6% to 10%, other businesses.

6% to 10%.

For the first quarter of fiscal 2010 we expect revenue of $479 million to $493 million or a growth of 0% to 2% versus the year ago quarter, a non-GAAP operating loss of $79 million to $ 60 million versus a loss of $30 million in the year-ago quarter.

A non-GAAP loss per share of $0.19 to $0.15 versus a loss of $0.09 per share in the year-ago quarter.

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

Thanks, Neil.

As we've said all year, good companies find ways to capitalize in difficult times to strengthen their position.

And that's exactly what we've been doing.

We even quote internally, We haven't waited for the storm clouds to pass, we simply figured out how to dance in the rain.

And I think we've seen tangible results this year from the game plan we put in place last fall.

We grew our customer bases, we expanded our share, and we continue to drive revenue and operating profit growth.

Through it all, we didn't lose sight of our long-term objectives.

To be an innovative growth company that helps consumers and helps small businesses achieve their dreams.

We contribute to the customer success by solving the most important problems and helping put more money in their pockets.

And we do it with products that are easier to use and a better value than any other alternative in the market.

While we have strong leadership positions in all of our core businesses, we still have plenty of headroom for growth.

Many of our flagship products are category leaders.

But we have low penetration relative to the overall market opportunity.

That's why we focus on growing the categories, bringing in new users so we can grow our revenue and our operating profit as a result.

As we look to the future, we see several growth catalysts that we believe will serve us well if we can capitalize effectively.

The first catalyst is the demographic shift.

This next generation of customers entering the market are 20-something do-it-yourselfers.

They grew up with technology as a part of their lives.

They typically look first to software and services to address the kinds of problems that we solve, and that fuels growth in the categories in which we participate.

I'll give you an example.

Many of the five million new tax filers entering the market each year are younger, first-time filers.

And they tend to turn to the web to solve most of their problems.

That's one of the primary reasons why the tax software category has grown four times faster than the next closest alternative for the past five years.

Now the second catalyst is the technology shift to more connected services.

End users expect to be able to work on a desktop, over the web, or using their mobile devices.

Our leadership positions in both desktop and on line combined with our recent expansion on to mobile devices positions us well for this transition.

A case in point is our lineup of software as a service offering which now accounts for about $900 million of our Company's revenue, grew 22% this past year, much faster than the company average.

The third catalyst is a shift to increasingly open environments.

Where more value is created as the user bases grow.

With more than 40 million end users of customers combined with our own push to more open platforms and services, our large customer bases are a valuable asset.

This year our introduction of life community support in 11 of our flagship offerings enabled millions of questions to be answered by other customers in ways that we could have never delivered on our own.

The fourth catalyst for growth is global expansion.

As the economy becomes more global, and the ability to localize products becomes easier using hosted technologies, our ability to move into new markets is even more opportunistic and more compelling.

You'll hear more about these global opportunities as we share greater details around our end-market tests, and our new product launches in India and southeast Asia in the coming fiscal year.

Now with these four external catalysts playing in our favor, our business strategy is clear -- our first strategy is to continue to drive growth in our core businesses, but we still have lots of headroom.

This is a good time to be in the business of helping your customers manage their financial lives, and to do it in ways that are easier and a better value than any other alternative.

The formula simply works.

And we've shown that we can grow our core businesses even in a tough economy.

Our second strategy is to build adjacent businesses and enter new geographies.

We won't stray too far from what we're good at, which is helping customers put more money in their pockets.

Instead, we'll look to repeat the success like we've had in small business payroll or small business payments by finding other related areas that help users save and make money.

To give you an example, one of the ways we're going to monetize our new Quicken Health Expense Tracker product is by having customers make online payments using our payment capabilities.

By finding that intersection between their health care needs, their financial decisions, and our core payment capability, we believe we can create a new business.

I'll give you another example.

Mobile card acceptance.

As you have probably seen, we've introduced GoPayments, which help small businesses turn a mobile device into the ability to accept electronic payments.

It worked on the iPhone, it works on the iPod Touch, it works on the Palm Pre, it works on any mobile phone with a web browser.

Finally, our third strategy is to continue our transformation into a connected services company.

As an industry analyst recently reported, Intuit is already the third largest cloud computing software company in terms of revenue, and we're growing very quickly with leadership positions in most of categories we serve.

Let me be clear -- we're not playing catchup here, we've been leading the way.

Now like the products we build, we like to keep our growth strategies pretty simple.

As a result, our highly engaged work force, our customer-driven passions, our technical flexibility, and our operational discipline have enabled us to build a strong and a durable company.

And if we capitalize on these four growth catalysts and continue to execute our game plan effectively, we believe our future remains quite promising.

Now in closing, there's no question in my mind that the coming year is going to be just as challenging as the past year has been, but I believe we're well-positioned to deliver another strong year in fiscal year 2010.

I want to thank all of our employees who worked tirelessly this past year, and have continued to execute with enthusiasm and dedication.

In my book, they're second to none.

With that, I'd like to turn it over to your questions.

Thank you.

(Operator Instructions).

Our first question comes from Bryan Keane of Credit Suisse.

Hi, good afternoon.

My question -- the first one I have is on the consumer tax guidance of 5% to 9%.

Traditionally, that's been an 8% to 12% grower.

And normally you would think of it being not really susceptible to economic conditions.

So can you talk about why the lower guidance there?

Yes, Brian, it's Brad.

I think in a headline, if you look at the last several recessions, the number of tax filers entering the market tends to be flat year over year.

And we're assuming no uptick in the economy in the next 12 months in our plans.

And so with that ability to basically have year-over-year flat filing, we think that the guidance we provided continues to show that we're growing faster than the category.

But it is also reflected in the fact that we aren't going to see any upside from new filers entering the market.

So that's basically what's driving the guidance that we've provided in consumer tax.

But in previous recession you were still able to grow double digits.

Is that because there was less penetration in the market?

I think - the way to view the effective recession is reducing the growth rate by about 3 points.

Normally you've got market growth of about three points in the tax category.

And in the recession you don't get it.

Take whatever the growth rate was at the time in a recession, take off about three points.

Okay.

And then I don't know if Neil -- if you can break out the acquisitions that's in the guidance Pay Cycle and anything else that's -- that will add to fiscal year 2010 revenue growth.

Yes, Brian, Pay Cycle's clearly the -- far and away the most significant one.

You may recall we had some other small technology acquisitions earlier in the year that add to our capability in our small business group offerings.

So they're part of what we have baked in for our small business business revenue guidance.

How big is Pay Cycle?

Revenue that we -- that we had coming in was $30 million in annual revenue.

But remember, the plan is to integrate that with our own online payroll offering.

And accelerate the growth of those.

So I'm not sure their historical run rate is terribly relevant.

Okay.

Last question from me.

It looked like the organic growth of the customers in payroll was flat.

Is that finally showing some signs of the recession, or do you expect that the organic growth in the payroll client list to pick up?

Yes, Brian, it's Brad.

It's actually reflected as a change in definition.

You may recall that one of the things we did with our online payroll products is we went into a period where we had six months free and we've now got a common defining of what an active customer is across the Company, which is someone that's actively using the product, someone who's registered for the product, or someone who's paying for the product.

What we've simply done is we've wanted to make it an apples-to-apples comparison.

As we move forward and we're starting to move forward with other free products, you'll see us have more of an apples-to-apples measurement over the year to.

To answer your question it about the opportunity in payroll, we still only have 40% penetration into the QuickBooks base so we certainly are not tapped out.

The bigger exciting idea sudden with Pay Cycle now we can go after 7.5 million small businesses who don't use QuickBooks who do have payroll needs, so we've essentially opened up a new growth channel for our payroll business.

Okay.

Thanks for the color.

You're welcome.

Our next question comes from Sarah Friar of Goldman Sachs.

Thank you very much for taking my question.

Neil, first on the guidance next quarter on the margin front, it seems a little bit lower than what we in Street have been expecting.

Is there a front end loading of costs around Pay Cycle or anything in particular that would weigh on margins in Q1 because your year guidance is actually much more in line.

Yes, Sarah.

As we've said a number of times, you can see a lot of movement between the quarters.

And in the first quarter of 2010, we have our data center and Quincy owned for the first time in the first quarter that wasn't there last year.

So there's depreciation pickups from that.

There's amortization of software.

It's less about Pay Cycle.

It's more about some of the investments we made in 2009 that are coming on line in 2010 in the first quarter for the full time.

But as we've said before, our expenses do tend to be frontloaded as we prepare to get some of the products into market later in the fall.

Got it.

And then Brad, broadly I know you don't want to call any turn, you're very much guiding to things staying as is, but as you look through the quarter, what was the linearity?

Did you start to see anything showing some signs for optimism in the SMB sector as you got into the last month of the quarter versus the beginning?

Sarah, I think you nailed it with your opening statement.

Until we see the indicators that we look at, which is primarily charge volume of shoppers who are shopping at these small business customers, and we can measure it through the payment business which for three quarters has been down 9% year over year.

We've basically seen a stabilization.

We don't see a further deterioration, but we haven't seen any signs of recovery.

What I would tell you is we've gotten better at execution.

In the fourth quarter, we're able to find the sweet spot between price promotions and unit lift.

As a result, I think you saw a good 12% unit growth, but you saw better performance from a revenue perspective.

So the headline here is we're getting better at executing.

Right now we haven't seen anything that suggests that we've seen the economy turn.

Got it.

And one very final quick one.

You made the comment on the use of cash and clearly you see the best way to return that excess cash to shareholders through stock repurchase.

Is there anything that would draw you to thinking about a dividend?

I know that would open the door it a different class of shareholders, as well, or is that just a no for now?

Sarah, this is Neil.

We think about dividend all the time, and we think about the best way to allocate cash and capital and return money to shareholders.

There's no built-in bias necessarily against it.

It's all about, you know, the opportunities we have and the highest and best use of the cash.

So I would say it's something that we're open to and that we discuss from time to time.

But we don't see it at this point.

Got it.

Thank you very much for taking my questions.

You're welcome, thanks, Sarah.

Our next question comes from Kash Rangan from Merrill Lynch.

Thank you.

To expand on what Sarah raised, in Q1 it seems like you're experiencing more expense drag.

I was wondering if you could talk about what is causing that expense drag.

Is it just pure depreciation amortization or do you have relatively one-time expenses?

It seemed to suggest this there's some product launch activity that depresses the margins year over year in Q1?

Second and final, wondering if the guidance I would assume based on no economic recovery and if you do get one, what kind of upward levers are we assuming and are we trial experience in the business model as the year progresses?

That's it for from me, thanks.

Thanks, Kash.

I'll take the first one about the first quarter, then I'll let Brad talk about the leverage as the economy improves.

Really there's not anything in the first quarter guidance that we see at this point that I would think of as a one-time major or a big pot.

It's statistically as I mentioned related to our data center in Quincy coming on line and for the full year in 2010.

Some of it relates to software that we've purchased mid-year or intellectual property that we've licensed for mid-year 2009 that's in the plan for full year in 2010.

So there's nothing unusual or significant that I would point to as a one-time charge in the first quarter testimony's just as we've talked about before, our revenue and expenses report necessarily evenly balanced throughout the quarters.

Yes.

So you want to speak about it --

I'd be happy to.

What I would tell you the key levers would be, as we start to see the economy turn -- again, we don't have any of this baked into our thoughts and plans for the next 12 months.

In small business it would be two key levers.

The first is the number of new business starts.

If you look at the Kaufman study, the last data I saw is it's running 50% of what it typically averages on a regular year.

About 500,000 net new businesses a year.

Right now we're running about 250,000.

You'll start to see new businesses enter the market.

As a result we'll be able to sell them products like Quickbooks get them into the franchise.

Today there aren't that many starting.

The other lever in small business is charge volume.

As we say after three quarters in a row in our payments business it's down 9% year over year.

But we're continuing to grow the number of new merchants double digit.

We grew at 14% in this last quarter.

Once that charge volume starts to come back, that is just real upside for us across that entire base of customers.

So that's small business.

If you look at tax it goes back to the answer we gave Brian earlier.

If we get that typical 1% to 2% increase in tax filers entering the market, that adds that several points of growth that Scott mentioned earlier in terms of that opportunity for our tax revenue.

And then finally is digital insider, I said.

We've continued to the financial services sector struggle, and they've been very cost conscious.

We've been able to fight our way through that.

As you know, we've seen delegation and implementations with new banks starting up.

If things turn around we ought to be able to see that implementation model kick back in on a regular rhythm which allows us to continue to grow our business in Isid.

Those would be the key levers that I would look at.

Great.

Thank you very much.

You're welcome.

Our next question comes from Jim Macdonald of First Analysis.

Yes, good afternoon, guys.

Hey, Jim.

Could you talk a little bit about your integration plans with Pay Cycle and also how you would view payroll growth in -- in this type of economy and then longer term.

Thank you very much.

Yes, Jim.

First of all, I have to tell you I am very pleased with the integration process so far in Pay Cycle.

We're doing something fundamentally different with Pay Cycle.

What we bought was not only a great product and a great technology, we got a great team with talent and the skills that we're going to need going forward.

We're doing a reverse integration which means we're bringing the Pay Cycle team into the small business division, working for Nora Deville, she lead that business.

And we are sunsetting our own product that was on line so we have one platform.

So that will be our future go-forward platform for online payroll.

In terms of the opportunities in payroll, I think there's nothing but upside frankly.

One of the fastest growing segments in payroll is the online space.

And with Pay Cycle in our fold now we're able to get much more traffic through our web property.

We're able to sell that product through our digital inside relationships and are able to work that product through accountant relationships which is important in a payroll decision.

The top three channels you need to make a payroll decision which is web sites, banks, and accountants, we have strong assets that we think we can utilize to grow the Pay Cycle business.

And then in terms of overall payroll growth, it's not only about penetrating the QuickBooks space, it's about also going against the 7.5 million customers that don't use QuickBooks, and that's what Pay Cycle will allow us to do.

Lots of opportunity here.

It comes down to us executing and right now the integration's going very well.

Okay.

Thank you very much.

You're welcome.

Next question comes from Gil Luria of Wedbush.

Thanks for taking my question.

You helped us quantify the impact of a recessionary environment on taxes, three percentage points.

Could you try to quantify what the impact has been for the tax year that is wrapping up from the bundling of e-file and desktop products.

How much of a drag that caused on last year's results?

Yes.

Gil, the rough number -- because we're able to offset some of this, somewhere in the neighborhood of $50 million to $60 million in revenue.

We thought with the ability to actually grow units we'd be able is on offset that.

And as a result of the recession not bringing new tax filers in, while we gained share, we weren't able to offset the revenue bundling we did.

We think it's the right decision long term.

It's the right thing from a customer experience perspective, it's the right thing in terms of helping make sure you can electronically file your return and get your money back in seven days from the I.R.S.

But in terms of a one-year execution, we didn't have the tailwinds we thought we would get from typical tax filing growth, so we could not run it.

That's the short answer.

Somewhere in that $50 million to $60 million range.

That sounds like about 5% or 6% points of growth that you were missing this year.

So if I took 7% and added 5%, that's 12%, less 3% for the recession -- you think think you'd get 9% growth this upcoming year.

Yet you're guiding the 5% to 9% growth.

Good math.

I'll take that to mean that that's a little bit conservative.

And then on the financial institutions business, one of the exciting things that you have going on there is the finance works and the fact that you've already been able to stretch that product outside of your installed base for digital insight with a partnership with Metavante.

Are there other partnerships that you see that you could get with other online banking providers to expand the reach of that product?

Yes.

It's a great question.

It's obviously a conversation we're asking in real time with other players in the industry.

I think it's a real opportunity as people begin to realize that we have come up with a solution that's very easy to use.

And helps the banks win by having a product that consumers and small businesses will adopt.

Metavante's clearly the one that we've announced and we're excited about that partnership.

But yes, I believe there are other opportunity to partner as we have with Metavante.

Great.

Thank you.

Thank you.

Our next question comes from Adam Holt of Morgan Stanley.

Hi this, is actually Jen Swanson calling in on behalf of Adam Holt.

I just had a couple quick questions on the QuickBooks business.

First I just wanted to ask about the new versus upgrade units.

And I think last quarter you said that upgrades were holding steady where new units were coming under pressure due to slowdowns and new business starts S.

that still the case, or are you seeing upgrades starting to come under pressure, as well?

Actually our upgrades continue to hold firm, coming in exactly as we thought they would when we set the plan last August, and the pressure continue to be the new business starts, as I said earlier, run being half the normal rate according to the Kaufman study.

Okay.

And then just also on the -- on free to pay conversions and the revenue that gets pulled through with some of the customers who might be free on QuickBooks but are using other services, has that continued to see kind of the traction that you saw in past quarters at all, has that changed at all?

Are you still seeing good uptick on add-on services?

We're still seeing good uptake.

We're able to monetize those free customers.

And as we've shared the incremental to the franchise, we like what we're seeing with free.

We'll carry that forward into the new fiscal year.

Okay.

Then just finally real quick on financial institutions -- you mentioned in the prepared remarks that the momentum there continues to be good.

Your guidance is calling for revenue acceleration in that business.

But it does seem like there continue to be delays in terms of implementation times.

How are you thinking about the timing of when we can start to see that acceleration in the business?

Yes, I think it comes down to what financial institutions feel like the economy is -- is stabilizing and they're able to start to play offense again.

But as you know, the biggest lever we have in the business is increasing the penetration of end-users in the banks we already have installed, so getting more consumers to adopt online banking and using more bill pay services.

That's why we're able to grow that business and improve its quarter-over-quarter results.

Once the economy turns it's one of keep levers that I shared earlier that will be a tailwind for us in terms of getting more banks on board.

Thanks.

Thank you.

Our next question comes from Ross McMillan of Jefferies and Company.

Thanks.

A lot of mine have been answered.

I guess a cost question.

And gross margins.

Maybe you could just help me understand what's driving the lower gross margin in Q4 and how that's going to play out.

I know you don't guide specifically to it, but I presume some of this is amortization of some of the costs around the new data center.

But if you could add some color to that, help us understand how we should think about gross margins in fiscal 2010, that would be great.

Thanks.

Russ, this is Jerry.

I'll take that one.

What you're seeing is a steady shift in our business fro from product to services, and the mix of expenses that are associated with those product streams show up in different places on the P&L.

So the gross margin is -- is likely to continue to go down a little bit as services grow.

Even though the operating margin for the Company we expect to continue to improve.

Okay.

So truly a shift above the line more than anything else?

I'd say so, yes.

And then just one other one.

You had last quarter maybe -- maybe for Brad, a nice spike in fee simple start activations in fiscal -- the third quarter.

That's still -- it's still above the level that it was in -- Q1 and Q2.

In Q4, but it was down sequentially.

What sort of moves that around?

Is it just proposals or is there anything else that moves that number around a lot?

Thanks.

Yes.

Thanks for the question.

First of all, we felt pretty good with our fourth quarter growing 54% in terms of fee simple start.

That was a good, healthy growth year over year.

I think what you also saw, though, is we got much better at our value messaging.

Being clear that the products that you can move into in QuickBooks will return good ROI for you, that's a $13,000 on an average basis for a small business owner.

And so customers began to see the pay versions of the products in the fourth quarter represented that way, and so more of them moved into paid.

You saw the paid unit growth grew 12% in the fourth quarter, and our free grew 54%.

And I think it's simply us getting better at helping people understand free doesn't necessarily end up being the best value.

You can buy a pay product and get a good ROI.

Thanks.

Maybe a final one.

I recall originally we thought about a double digit growth exit rate for the -- the FI business.

And clearly the economies got in the way of that.

Is there anything structurally changing to make you believe that it couldn't grow at 10% plus?

No.

There's not.

In fact, if anything, our confidence, my personal confidence in our digital insight, financial institutions business and their execution just grows every day.

We have gotten very good response in the market from our finance works and our small business finance works product.

In fact, they've driven the penetration into the base, that's at 20 perfect.

We're excited about the opportunity going forward.

Obviously the deal fell with Metavante out of the digital insight base is exciting.

We're getting better at the ease of use of product, which is driving internet banking and bill pay usage.

You saw bill pay up again 20% in the fourth quarter.

So as soon as the economy begins to strengthen that business like most of our core businesses is a double-digit growth opportunity if we execute well.

Thank you.

Our next question comes from Jeff Keene of William Blair.

Hey, guys.

Could you guys talk about your expectations for TurboTax unit growth and give us an update on the health product and when that should start to hit the top line.

Yes, Jeff.

We don't provide guidance for unit.

We provide it at the revenue level.

But if you take a look at what the past couple of years have been, you've seen units tend to outpace revenue as you start to see free become a bigger piece of the mix in our able to grow the category and get customers in.

So right now we'll stick with the guidance we've given you on the revenue side and just know that typically units are a little ahead of the curve there.

In terms of health care, we are excited that the product is in market with CIGNA and United.

You may have seen a press release this quarter where United has rolled it out to 700,000 of their end users on their plan.

And by then of this year they'll be rolling -- by the end of this year they'll be rolling it out to 20 million.

We've gotten good feedback.

We also have interesting tests underway that I alluded to where we're looking for ways to monetize relationship using the ability of electronic payments.

And so far we think that it's promising in living up to what we hoped it would be but not anything that I will have put into your financial models until we know more.

Great, thanks.

Thank you.

Our next question comes from Scott Schneeberger of Oppenheimer.

Thanks, good afternoon.

Couple-- couple questions on spending.

First one on the P&L side.

With regard to marketing and R&D, I realize you guys are obviously intending to grow revenue faster than the cost lines.

But could you just speak a little bit to where the focus of spend will be this year, where you're going to pull back and push forward on the reins?

Yes, our overall principle which Neil talked about a little earlier, Scott, is to grow revenue faster than expense.

We do see opportunities to continue to invest $1 to get $1 in sales and marketing so we'll continue to invest in growing the top line and getting customers into the franchise.

From an R&D perspective, we like to see about 17% to 18% of R&D expense as a percent after revenue.

We think that keeps us on the leading edge of competitive.

But we are getting much better at getting an ROI out of every dollar we invest.

And we're also finding efficient ways to get high-quality R&D done.

For example, we've expanded our facility in Bangalore, India, and we're getting really good result from our region there.

You see -- engineers there.

You see greater efficiency in R&D but we don't have a plan to reduce R&D spend level.

We simply plan to get mother nature out of every dollar we spend.

Where we are get something leverage here is continuing to focus on our general and administrative expenses.

And over the next several years we'll continue to get more efficient there so as our Company grows we'll have G&A get more to where we want it to be as a percent after overall revenue cd that answer your question?

Yes.

That was very helpful.

Along the same theme, I noticed the CapEx guidance this year is lower than what you delivered in FY 2009.

Could you speak to some of the puts and takes there?

Yes, Scott, there is Neil.

As we've talk -- this is Neil.

As we've talked about in prior calls, 2008 was a big investment year for us in infrastructure.

With the data center in Quincy we've talked about before and with some office facilities.

And so we think that those investment have been made.

We're shifting into realized mode now.

And you're seeing that the CapEx guidance come back more in line with what our normal depreciation or what -- what our typical amortization would be.

So I think we're getting back to what we might consider more of a run rate than what you saw in the last couple of years.

Great.

Thanks.

Thank you, Scott.

Our next question comes from Michael Milman of Millman Research.

Thank you.

Historically, a great priority of the Company was double-digit, top-line growth for the year.

Can you talk about what kind of sensitivity there is to -- to GDP in order to get you there?

And then I have several other questions.

Yes, Michael this, is Brad.

I'll go back to our principles haven't changed.

We still fundamentally see this Company as growing double digits organically, supplemented with acquisitions, and will we'll grow revenue faster than expenses.

I think the reality we're dealing with now, the same reality that most companies are, we're in a pretty tough macro economic environment.

So when you don't have the new data for starting up at the normal rate, you see the charge volume down in our payments business, you see banks struggling to stay afloat, 77 have failed in the first part of this year alone.

And you don't see new tax filings entering the market.

We're able to execute through most of that.

We gain share in every single business this year, and we grew customers.

But we just aren't able to offset that larger macro economic environment.

I think the short answer to your question is if we continue to execute the way we are, and the sun comes out between the clouds, you'll see this Company return to its normal double-digit growth levels.

Okay.

In tax -- I guess a couple of things have been touched upon.

More specifically, is there plans to raise the price -- last year you raised the price on the desktop.

I can talk about whether you plan to do that also on the commercial web.

And you talked about how a recession cuts tax returns, but on the other hand, it looks like in this past year recession got a lot of trading down, presumably from paid retail preparation into doing it on line, and whether that improve comedy going to improve and then there was -- economy going to improve and then theres health care.

You're looking at a 20 million uses.

Is this a business in which you don't get -- don't expect to get revenue generation from direct use of the product?

And if so, what is the cost of those 20 million units that are going to be used?

Okay, Michael.

Let me try to take those one at a time if I could.

First of all, in terms of our pricing strategy we'll talk more at investor day when we actually roll out what our product and pricing lineups tend to be.

As you know, we don't want to foreshadow too far in advance because it's a highly competitive industry.

I would say we price for value and on the low end the entry price is free.

And we're actually able to disrupt the higher price alternative.

Where we're able to create value and capture higher price.

That's our philosophy.

We'll talk more to that in the tax season.

In terms of the shift from retail to the web, that wasn't necessarily an economically driven thing.

That's been going on for the last half a dozen years.

And for us, it's actually neutral because if you buy the desktop product you can do multiple returns for every unit you buy.

If you move over to the web, you have to pay each time you file a tax filing.

So we don't lose in that equation, we actually win.

That's why we're excited about being the leader on the web and growing that business 30%-plus and picking up share.

That's the tax portion of it.

In terms of health care, the beauty of the product that we've introduced so far is the consumer pays nothing.

At the end of the day what we want to do is have lots of consumers using this product to try to manage their health care decisions, and to be able to make sure that they're paying payments when they owe the payments to the right doctor or to whomever they owe the payment to.

But we're finding different ways to monetize that product.

And one of the ideas is actually our ability to do electronic payments.

At this point the reason we wouldn't put anything into a model is we're early in the adoption curve, and we haven't at this point seen enough sustainability to say, okay, this is what the business impact will be.

Once we see that I assure you it will be the first to talk about it.

It's been a 2.54-year slog and we can't wait to produce the results that we believe this thing is capable of.

How much of these 20 million usage costs do you currently to put out there, and are the United or CIGNA paying you anything for the usage?

Yes.

So let me start with the first.

Most of our effort have been the R&D effort.

Right now what happens is these plans are doing the marketing and the selling directly to their employers and to their end consumers.

So they're putting it on their web site.

If you go to CIGNA and you go into myCIGNA.com, you'll be able to see quick health expense tracker there, the same thing on United's web site.

So's not costing us to do the sales and marketing because it's a benefit to the end user for the plan to offer it.

And in terms of whether we're getting paid or not, we haven't disclosed that at this point in terms of what our relationships are with those first two plans.

This Neil, Michael.

One thing I would want to clarify though, is that Brad said it would be available to 20 million users.

He didn't say that we would have 20 million users.

So the insurance companies make it available to their customers, but it's too early to know how many of those are going to adopt and actually use the product.

And the cost of providing the software and services at this point is not significant to our expense run rate.

Good point of clarification.

Are the insurers going to charge the companies whose employees are using this anything for this?

Too early to say.

That would be my, Michael.

Until-- be my point, Michael.

Until we know more about the value consumers really derive from this, and how well they like to use it and how often they use it, those questions are still to be answered.

I'll give you one quick point here.

One of the big benefits here for a plan to provide this to the employers is it eliminates the explanation of benefits, that piece of paper that comes in that people don't know what it mean, it says "This is not a bill." That drives 40% of calls into the HR department and the plans.

So by having this product that we've developed that turns that into plain English and lets you know what you owe and what you don't owe, their hope is that they're actually actually going to reduce some costs on the back end.

Just like bank do with things like bill pay services, the plans today have simply said, hey, I want to get this in the hands of the employers because it's good for the consumer and it reduces my costs on the back end.

So free is not an issue at this point for them.

Great, thank you.

Okay?

Our next question comes from Phillip Ruple of Wells Fargo.

Great.

Thank you very much.

And good afternoon.

Couple questions.

Just a clarification on your last response on consumer tax.

Is the guidance for next year, is it really just to assume kind of a have similar economic environment where you have the fewer filers, or is there some price degradation associated with your guidance?

It assumes the same economic environment we're dealing with today.

Thanks.

And just a little bit more on QuickBooks.

Could you give us any idea on pricing in that arena?

Is there any change from last quarter?

And kind of the continued differential between revenue realization and unit growth, is that really just the shift from free to paid and that will wash through over the course of the next year or so?

Yes, Phillip.

Similar to what we talked about with tax, at this point we're not announcing our pricing decisions before we roll the product out.

We'll talk a little more at investor day, analyst day in September on that.

But I'll tell you what you are starting to see is better execution of price promotions relative to unit growth.

So we have reacted very quickly and very aggressively when the economy turned.

And then we've gotten much wiser by doing tasks to say, if you discount the product by X you can get the same unit list and you don't have to go as deep.

So you'll see a better execution in our side in terms of getting the right value-price equation, but in term of our actual pricing for the product for next year's lineup we'll talk about that as we get closer to the analysts day.

Great.

That's it from me.

Thank you very much.

Thank you.

Our next question comes from Sasa Zorovik of Janney Montgomery Scott.

Hi, this is Robert Simmons for Sasa.

Was wondering about your thoughts on cost containment and how you're going to pass that on to investors or invest back into the business.

And also, the tradeoff for EPS growth versus revenue growth.

Robert this is Neil.

First of all, I think as Brad mentioned we are trying to get sharper and sharper in our measurement of our return on the dollars we invest.

And making sure that all the dollars we spend for operating expense or investment dollars are well spent and are driving customer solutions and customer satisfaction.

So there's a lot of work going on in the organization.

And as we've said it's not a one-time program or a one-tomb shot.

It really is an ongoing process to be much more disciplined and diligent about the dollars we've spent and match them up to product categories and to services that are growing quickly and growing revenue from customers.

As I described we really look at opportunities to use cash either for investing in initiatives, for making external investments, or returning cash to shareholders really through a very similar lens of what is the return to the Company.

Focusing on a longer term growth potential, a five year investment horizon typically, and on trying to grow the Company.

So as we demonstrated in this most difficult year in 2009, we have been able to improve the margins at a time when revenue is under extreme pressure.

If we can do that and we continue to do that in 2010, when the revenue comes back through payment or retail sales or whatever venue, the leverage model works well in our favor.

When revenue is going up, we're going in great shape.

So that's the way we think about the expenses and investments in this environment.

Okay.

Thank you.

A final question comes from Dan Cummins of Lime Rock.

Thank you.

I had just a couple quick ones about Pay Cycle.

Could you tell us what's the acquisition impact that you assume in the 4% to 8% revenue growth guidance for fiscal 2010.

I believe they had 85,000 accounts.

So just, you know, two related questions.

One, is this a $30 million to $35 million business currently, and the increment in terms of your payroll account quarter on quarter, I think it's only $79,000.

Were you having or you had recently some account attrition in your existing payroll business.

Thank you.

Yes.

Let me start with the second part of the question first.

And we'll come around to the impact on Pay Cycle.

First of all, on the payroll customer count, our retention remains at best-in-class levels.

So what we had was similar to when I described earlier.

We changed the definition of what we wanted to use as a customer count and pulled out those that are free, that were trialer and weren't actually becoming active users, and we did that out of both numbers.

So net-net it was roughly flat year over year, and I think that's akin to what you're seeing in the payroll industry overall.

We've been able to hold a little better than most.

But we weren't able to get the growth we had been getting in terms of new payroll customers.

I think Pay Cycle's going to give us a whole new opportunity to do that.

The second part of the question which was around what is the uplift of having Pay Cycle into the 4% to 8% guidance, I think you asked for next year.

Right.

It's I guess -- Jerry, you want -- go ahead.

Sure.

Pay Cycle is running a little less than $30 million in revenue in the last year.

And as Neil said earlier, we'll see how fast we can grow that in the coming year.

We're not going to break it out certainly in the FY 2010 results.

Could you give us a sense of -- (technical issues)

Sorry, Dan, you're breaking up.

Oh, sorry.

I was looking for color on whether share from what type of competitors.

It's really going after the unpenetrated market.

That's really the opportunity here.

The folks who have payroll needs who don't have QuickBooks today or aren't using a service.

All right.

Thanks.

Is that it, Patty?

Yes, I'm not showing any further questions.

Would you like to proceed with any additional remarks?

I just simply want to close by thanking everybody for the questions today and for your continued support.

I feel good about the results we had in fiscal year 2009, again, I think we can do better, and we've got a clear game plan to win, we've got some catalysts that if we can capitalize on them will continue to accelerate our performance.

We aren't counting on any rebound in the economy in the next twelve months, but as you heard, if any of that starts to turn, hopefully that's going to be upside for us, and again, I want to thank our employees, because our employees have weathered the store, have continued to execute, and our customers have benefited, and hopefully our shareholders feel the same way.

So with that, thank you very much, and we'll talk to you soon.

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

This concludes the call.