直覺電腦 (INTU) 2010 Q3 法說會逐字稿

Good afternoon.

My name is Patty and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Intuit third quarter 2010 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 will now turn the call over to Jerry Natoli, Intuit's Vice President, Finance, and Treasurer.

Thanks, Patty.

Good afternoon and welcome to Intuit's third quarter 2010 conference call.

I'm here with Brad Smith, our President and CEO, and Neil Williams, our CFO.

Before we get started I would like to remind everyone 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 a press release we issued earlier this afternoon, our Form 10-K for fiscal 2009, and our other SEC filings.

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

We assume no obligation to update any forward looking statement.

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

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

Note also that the sale of our real estate solutions business completed in January is accounted for as a discontinued operation.

These results are excluded from the operational results, operational guidance figures, and non-GAAP EPS for all periods presented.

A copy of our prepared remarks and supplemental financial information will be available on our website after this call ends.

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

Thanks, Jerry.

Thanks to all of you for joining us.

We realize the market is a little volatile today so we appreciate you taking the time to join us on the call this afternoon.

We just announced another quarter of strong results, with both revenue and non-GAAP earnings per share growing 13%.

Both measures exceeded the top end of our guidance, and we drove strength across the board, highlighted by a great tax season, a return to double-digit revenue growth in small business, and continued strong performance in financial institutions.

These results lead us to once again raise our revenue and earnings guidance for the year.

We now expect full-year revenue to grow 10% compared with our prior guidance of 6% to 9%.

And we expect full year non-GAAP EPS to grow 12% to 13% compared with our prior guidance of 8% to 12%.

We're clearly pleased with this performance.

While a lot of things in the macro environment have changed over the past couple of years, our Company's mission has not.

We remain laser focused on improving our customers' financial lives and doing it so profoundly they can't imagine going back to the old way of doing things.

This sense of purpose and the value proposition that we deliver resonates in any economic environment, and it generates the kind of results we're sharing with you today.

Now, we've also worked hard to position Intuit to take advantage of the secular market trends that will serve as catalysts for long-term growth.

These trends include the demographic shift to the digital generation, the increasing relevance of social networks and user contribution within large user bases.

The emergence of web and mobile technology as a primary means to manage key tasks and the potential of new market opportunities in the rapidly developing economies.

The end result is a global market that is shifting from traditional services that were paper based, human produced and brick-and-mortar bound, the one where people understand, demand, and embrace the benefits of truly connected services.

This shift from traditional to connected services provides a tail wind for our businesses, and it positions us really well to execute on our three-point growth strategy which, as you know, includes, the first, driving growth in our core businesses.

Second, building adjacent businesses and entering new geographies.

And third, accelerating our transition to connected services.

Here's a look at how we're performing in each area.

Beginning with driving growth in our core businesses.

We had an excellent tax season across the board.

Consumer tax revenue was up 12% in the third quarter.

The software and online category grew nicely and we increased share in both the desktop and web-based units this year.

Our accounting professionals business had a strong season as well, and our successful introduction of TurboTax online banking added about 12 points of growth to our financial institution segment.

In small business, financial management solutions revenue increased 16%.

We saw strong growth in QuickBooks for the desktop, QuickBooks Online and QuickBooks Enterprise.

The improved mix and fewer promotional discounts have continued to strengthen our average revenue per user.

Employee Management Solutions, also known as Payroll, grew revenue 13% as we continued building momentum and adding online payroll subscribers.

So overall I'm really pleased with how each of the core businesses is performing.

The second part of the strategy is building adjacent businesses and entering into new geographies.

In the third quarter we made really good progress here as well.

Intuit websites grew the number of small businesses using these services by 80% in the third quarter.

We now have more than 300,000 website customers, and most of them are new to our small business franchise.

This gives us a new front door to cross-sell other products and services like electronic payments, online payroll, and eventually QuickBooks.

In healthcare, we recently announced that we have signed an agreement to acquire Medfusion, and their patient to provider communication solution.

Now, think of this as a small business portal that doctors and other healthcare providers can use to make it easier for their customers to schedule appointments, look up information, exchange secure messages and pay their bills online.

This transaction expands our portfolio of software as a service offering with a solution that is currently used by more than 30,000 healthcare providers, the majority of whom are small businesses.

Medfusion also gives us a new recurring revenue stream that capitalizes on this shift from traditional services to connected services in the medical community.

The acquisition strengthens our Intuit payments capabilities which are offered inside this portal today to enable online bill payment.

In addition it is going to open the door to sell Medfusion services into the 75,000 medical practices that currently use QuickBooks.

When you roll it all up, it presents a range of exciting new opportunities in the healthcare space.

And with respect to new geographies, our global business remains on track.

We're gaining traction with our Intuit money manager product in India and now have more than 35,000 users, and we're in test markets with our second offering, as we speak.

Though our efforts in the emerging marketsdon't generate significant revenue today, we're excited about the longer term opportunities and believe global could add a couple of points of growth at the Company level in the next few years.

The third and final part of our strategy is accelerating our transition to connected services.

As you recall, we define connected services as three types.

The first is software advantaged services.

Where offerings like payroll or payments gain a competitive advantage by working seamlessly with our software.

This reduces our cost of new customer acquisitions and improves the customer experience through ease of use.

The second type of connected service is software as a service where Intuit currently holds the number one share position in each of our core businesses.

And the third is the emerging platform as a service where we see increasing opportunity to open our technologies for end user and third party contributions like our recently announced Intuit partner platform.

These connected services have been fueling our Company's growth and it's where we believe we can continue to grow faster.

Software as a service by themselves generates roughly one-third of our revenue.

This includes Turbo Tax Online, our online banking, small business accounting, online payroll, and Intuit website offerings.

There are only a handful of companies that earn more than $1 billion in software as a service revenue annually, and even fewer who do it profitably.

We're one of those companies.

Combined, the three types of connected services generate almost 60% of our revenue.

That's up from 56% just 12 months ago.

This revenue has grown 18% year to date, and it is profitable.

You can see that our operating margins have expanded over 200 basis points in the past two years as this shift to connected services has accelerated.

So with that context to explain what's driving our performance I want to turn it over to Neil to share the financial results.

Thanks, Brad.

Let's start with Company-wide results for the third quarter.

Revenue of $1.6 billion, up 13% and above the top end of our guidance range.

Non-GAAP operating income of $938 million, up 12%, and non-GAAP EPS of $1.89, up 13%.

On a GAAP basis, operating income was $888 million, 16% above last year.

GAAP diluted EPS was $1.78, up 21%.

Growth in our GAAP earnings is higher than non-GAAP because acquisition related charges and noncash stock compensation, which are classified as GAAP only, are growing slower than revenue.

Year to date, the non-GAAP operating margin is up 90 basis points.

The margin for the third quarter of 2010 reflects an increase in incentive compensation directly related to our financial results and an increase in our bad debt expense.

The change in both of these accounts from the same period last year totals about $30 million.

You will notice an increase primarily in our G&A expense as a result.

Still, we expect to deliver more than 100 basis points of year-over-year margin expansion for the full fiscal year.

Turning to the business segments, our Consumer Tax group generated revenue of $871 million in the third quarter, up 12% from last year.

Total units were up 11% for the season with web units up 18%.

We grew revenue per customer by driving improved conversion from free to paid and improved product mix as well as by increasing attach rates.

We're pleased with our performance in a tax season when it appears that the total number of individual returns declined for the second consecutive year.

By our estimates, we gained a couple of share points in both desktop and online.

The Accounting Professionals segment topped off a solid season with revenue of $205 million, up 15% from last year.

We previously told you about a revenue shift of $9 million that was deferred from the second quarter to the third quarter.

The segment would have grown roughly 10% in the third quarter if not for that change.

In our Small Business group, total revenue grew 13%.

The growth was driven by financial management solutions up 16%, the employee management solutions up 13%, financial management solution revenue grew for the first time since the first quarter of fiscal 2009.

Revenue per customer exceeded last year's level driven by fewer promotional discounts on QuickBooks and a better product experience as indicated by improved net promoter scores.

QuickBooks Online and Enterprise also had strong quarters.

And Intuit websites continues to grow exceptionally well.

As we have noted previously we believe the most cost-effective way to bring small businesses into the franchise is through these online channels.

We have de-emphasized free QuickBooks Simple Start and those unit numbers have declined accordingly.

Intuit Online Payroll continues to power growth in our employee management solutions business, and payments grew 8% year-over-year driven by a 16% increase in merchants.

Charge volume per merchant was up 1% in Q3, and that compares to a 3% decline in Q2 and a 9% drop a year ago.

We're clearly seeing improvement in consumer spending, and we expect growth to accelerate as the economy continues to recover.

The financial institutions segment continues to perform very well with another strong quarter of double-digit growth.

Revenue grew 21% and bill pay users grew 16%.

Over 1,100 financial institutions actively offered TurboTax for online banking this tax season which added roughly 12 percentage points to the segment revenue growth in Q3.

We report revenue for TurboTax for online banking in the financial institutions segment though the units are included with the TurboTax web totals.

Looking ahead to the fourth quarter, financial institutions won't have the benefit of tax season revenue so revenue growth will likely return to single digits.

Our other businesses segment posted revenue growth of 20% in the third quarter driven primarily by strength in personal finance and a favorable foreign currency impact in our Canada and UK businesses.

The personal business segment continues to benefit from a strong new Quicken desktop release and the Mint.com acquisition.

We continue to generate strong cash flows, in line with our operating income.

Free cash flow increased more than 40% through the third quarter, and we exited the quarter with $1.9 billion of cash and investments.

We first look to invest our cash in the business to generate growth.

We weigh both internal and external investments carefully and expect all of our investments to generate a risk adjusted return of 15% to 20% over a five-year horizon.

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.

We purchased $200 million of Intuit stock in the third quarter and have $150 million remaining on our current authorization.

As Brad mentioned, we are updating our outlook to reflect the stronger than expected tax season.

For fiscal 2010 we now expect revenue of $3.41 billion to $3.425 billion, growth of 10%, non-GAAP operating income of $1.065 billion to $1.075 billion, growth of 15% to 16%, GAAP operating income of $840 million to $850 million for growth of 23% to 24%, non-GAAP diluted EPS of $2.03 to $2.06, growth of 12% to 13%, and GAAP diluted EPS of $1.69 to $1.72 for growth of 25% to 27%.

For the fourth quarter we expect revenue of $492 million to $507 million, an operating loss on a non-GAAP basis of $29 million to $39 million, a GAAP operating loss of $77 million to $87 million, a non-GAAP loss per share of $0.10 to $0.11, and a GAAP loss per share of $0.20 to $0.21.

As mentioned earlier we now expect Consumer Tax full year revenue of $1.12 billion to $1.125 billion which is growth of 12% to 13%.

All guidance figures include the impact of the purchase of Medfusion which is $0.01 dilutive in fiscal year 2010.

We're also assuming the R&D tax credit will not be renewed during this fiscal year, which is a change from our prior outlook.

In addition, our share count will be slightly higher than we originally expected.

Excluding the impact of these three items, we would expect EPS to be about $0.03 higher for 2010.

And with that I will turn the call back over to Brad.

Thanks, Neil.

Let me share a few closing thoughts before we open it up to Q&A.

When the economy turned south, we said that we were going to deliver against our current period expectations while continuing to make strategic investments to ensure that we could exit the downturn even stronger.

Over the past two years we have done that, and made the necessary investments in skills, products, and capabilities that will benefit our Company for years.

These include the leaders and the technical talent that we've hired.

We've strengthened our engineering talent over the past two years through a mix of internal promotions and external hires in the US and globally.

We've brought in talented new engineers with software as a service, data analytics, and mobile platform experience.

Some through recruiting, and some through acquisitions such as Mint, PayCycle, and when it closes, Medfusion.

We've become more effective and efficient with our R&D investments.

We've internally developed technology that improves the usability of our products, adds mobile capabilities, and readies them for global deployment.

As a result we've improved our net promoter scores across our major product line, we've increased our revenue per user through the additional value we built into the products, and we've gained market share in our core businesses.

And perhaps, as important, if not more important, we've continued to do this while improving our R&D efficiency as a percent of overall revenue year-over-year.

When you put it all together, we're stronger now than when the recession began.

Our customer base is larger, our new product pipeline is deeper, and our operating margin is healthier.

I'm proud of the performance we've turned in this quarter, and I know we can do even better as we take full advantage of the shift from traditional services to connected services and continue to deliver the revenue growth and the margin expansion for our shareholders.

I want to thank our employees for another great quarter and for all they're doing to position the Company for continued success in the future.

And with that we would like to turn it over to you for your questions.

Thank you.

(Operator Instructions).

Our first question comes from Adam Holt of Morgan Stanley.

Good afternoon.

Great quarters.

My first question is about the financial management business.

Obviously the best numbers that we've seen in a long time there.

Two questions for you.

You pointed to some Company-specific execution in terms of what you thought was a driver there.

But have you seen any signs that would lead you to more optimism from some of the key indicators that you look at in terms of whether it's job hiring or starts or what have you?

And then as you look forward, how do you think about some of the key leading indicators for the SMB market in general?

Yes, Adam, thanks for the question.

Yes, we are seeing some leading indicators that lead us to believe things are getting healthier, although more modest than many people would like to see.

For example, the first thing we look at is whether small businesses have customers shopping in their stores and our best proxy is average volume per merchant through our payments business.

And as you heard it was up about 1% this quarter compared to being down three points last quarter and being down nine points a year ago.

So we're starting to see a healthier improvement of consumer spending.

The second is whether that's leading small businesses to begin hiring again.

As you know we have our own small business employment index based on 55,000 small business customers that use our online product.

We've been able to see that starting about June this past summer they've begun to hire again at a rate of about 4% a year, and they added 66,000 jobs in the month of April.

So that's good news.

I will still admit that we haven't heard the ease of getting loans and getting access to credit really loosening up so there's still a little head wind there.

But despite that we're starting to see a little more healthier signs in the market from a macro perspective.

If I could shift to the payments business, because you brought it up, it sounds like you had well into the mid teens in terms of merchant adds.

You had same-store sales growth of 1%, but I think the combined number for total payments was not what it would be if you added the two of those numbers together.

Can you maybe help me with the math there as to what I am missing on those elements?

Sure can.

There's two things at play.

The first is we're starting to open up new front doors to our franchise, like attaching payments to our Website product, or actually selling through non QuickBooks channels.

And the good news is we're capturing customers earlier in their life stage.

We're getting them when they're in the early formation and they don't always carry the average volume per merchant that a more established small business will.

But, as you know, we're in it for the lifetime value and we see these customers are profitable today and they will only continue to grow as they get healthier.

So that's one piece that you see is a little bit of a mix change in the payments merchants we're bringing in.

The second is we actually have as a part of this payments business a point of sale product.

It's a bundled hardware and software product, and we report it as a part of this business.

In the second quarter, it attributed to about five points of our 14% growth because last year in the same quarter had a pretty easy compare.

So this quarter it may look like sequentially this business is going down, but it's literally where we thought it would be as charge volume continues to improve and we continue to add new merchants.

We've got a little bit of a mix change in terms of some smaller merchants coming in but this business continues to get healthier and it will only do so as charge volume improves.

Just a last quick question.

You are going to have a lot of margin expansion this year.

As we start to think about fiscal next what kind of broadbased margin target should we be thinking about?

We'll be providing our outlook for fiscal year '11 in August.

As we continue to talk our goal is to grow our revenue faster than our expenses and we see operating leverage in this business for many years to come.

We'll talk about the specifics of exactly how much margin leverage and expansion we'll get in fiscal year '11 when we come out in August.

Thank you.

Our next question comes from Gil Luria of Wedbush.

This is actually Nick Setyan for Gil.

Couple quick questions.

Would you please remind us again what the international portion within the other business segment is and maybe tell us what the contribution from PayCycle is in the quarter?

Thanks.

I'm sorry, can you repeat the questioning again?

We missed the first part.

Sure.

Would you please remind us again what the international portion within the other businesses segment is.

Then maybe tell us what the contribution from PayCycle was in the quarter.

Thanks.

Nick, this is Neil.

The contribution from PayCycle is about 9%.

So we would have been up about 4% organically without PayCycle.

And the international portion is about 3% of our total revenue, 3% to 4% comes outside the US, and most of that is Canada and the UK.

Thank you.

Patty, next question.

Thank you.

Our next question comes from Kash Rangan of Merrill Lynch.

Thank you very much.

Brad, I know that for a few quarters you have been talking about how you had this pipeline of deals in the financial institutions sector and the implementations were lagging the customers' intentions to go ahead with these projects.

Can you give us an update on whether you are seeing a thawing of those deals in the financial institutions sector?

Then I have one follow-up.

Sure, Kash.

So we are starting to see that pipeline move through.

We continue to have a robust pipeline.

We don't report backlog, like some other businesses do, but in this particular business we're starting to see the financial institutions move forward with their implementations.

The good news is, as you heard, with TurboTax Online Banking, we had 1, 100 institutions sign up for that product this year which is unheard of on the base that we have.

We have about 450 financial institutions that have signed up for the FinanceWorks product, and that continued to increase.

So we're starting to see the implementations happen, and that's good news because that gives us a feeder base to continue to sell online banking and bill pay and other services.

Got it.

Also, following up on Mint.com, although it's not material enough to break out revenues, what kind of impact is it having on the Quicken business and other ancillary businesses as they really try to leverage the web-based interface and functionality with other parts of your product family?

That's it for me, thank you.

It's on track.

In fact this year, this quarter, the number of new registered users is two and a half times greater than it was this time last year, so it's getting a real benefit of being a part of the Intuit family.

This year the first integration we had was integrating it with TurboTax.

Now the team is focused on making sure we continue to look for new ways to monetize the product opportunities as well as looking at global opportunities.

So today its impact in that other financial services segment, or the other business segment, is relatively modest but growing quickly, but the strategic opportunities are just as exciting as we thought when we brought them into the Company.

Next question, Patty.

Thank you.

Our next question comes from Heather Bellini of ISI.

Thanks, Brad.

Wanted to ask you a question.

You guys were very successful this year, it looks like, gaining a lot of share in the consumer tax market.

I just wanted to know, I know next year is a long ways away, but just wanted to know if you see that having potential for the share gains to continue, or do you just think you took advantage of some hiccups in your competitors business model this past year?

Thanks, Heather.

I would say, first of all, I go back to what we talked about when we had our investor day meeting in September.

There are four levers in this business.

The first is the number of tax filers filing with the IRS.

The second is the growth of the category, which is the online and desk-top software category.

The third is our share within that category.

And the fourth is the average revenue per user that we can capture.

This year, the number of people filing with the IRS was down what we thought it would be, about a point or two.

That's a few million filers.

Despite that, we saw a continuation of what has been a six-year trend, which is people are moving out of tax stores and into the do it yourself category, and the category this year grew nicely again.

In addition to that, we've continued the trend that we focus on, which is capturing share within that category.

We picked up a couple points in desktop, we also picked up share online.

Finally, we were able to increase our revenue per user by continuing to get better at free to paid conversion as well as having more favorable mix and attach.

So we'll talk more about fiscal year '11 in August, but I would say that the secular trend of moving the category, growth will continue to happen in the category and we're going to continue to execute and try to gain share as we have for several years.

We continue to get smarter at how we can drive better free to pay conversion and better mix.

So we are looking forward to a continuation of what has been the reality for the last few years.

Thank you very much.

Our next question comes from Brian Keane of Credit Suisse.

Good afternoon.

I just wanted to follow up on that question.

The price gap widened two years ago and some of the competitors gained some share.

This year it tightened.

I think price was pretty close, especially on the desktop, and you've gained a lot of share.

What are your thoughts about price sensitivity?

I know HRB struggled this year.

Do you think they're likely to cut price again to try to gain back share going into next year?

Brian, I would first separate the two categories of the self-prep tax.

As you know, there's the desktop category, with is primarily us and Block in retail, and then there's the online category which is a whole cadre of competitors.

The entry level price there is free.

As you know, we've got a pretty good free model out there that we've been able to continue to increase revenue per return and not have anyone undercut us on price.

In the desktop category it's the category that is now just about a third of the tax filings for us, and it continues to decrease year over year.

We have a pretty good sense for what the price premium is that we can command over our competitors in the retail segment and continue to hold share or grow share.

So, net-net, in terms of price sensitivity, on the Web it's harder to go deeper than free, and we feel like we've got enough learning under our belt after four years of doing this that we can continue to grow our share and grow that category.

And in terms of the desktop, we like the fact that we have a pretty good product in the marketplace relative to others, and we know what the price premium is that we can command, and we'll make those decisions to continue to keep our share at the retail category as we go into next year.

That's helpful.

Just turning over to QuickBooks, the strategy for a long time was to drive units in QuickBooks, push Simple Start, and then cross-sell and promote the small business set of products.

It really feels like the strategy has changed.

Now it's let's not promote free, let's not promote Simple Start, and let's drive less units but at a higher price.

So just looking for some color on if I got that right and just the strategy behind it.

Why the switch?

Yes, I will tell you, you did get it right in terms of what our historical strategy has been, but it's not a shift in strategy.

It's a change in how we execute it.

Let me say it simply.

We've learned the best way to get someone into the franchise with a low-priced product and then help them unlock more value that they're willing to pay for is in the online product versus desktop.

Just like we do in TurboTax, just like we do in Payroll Online.

And we had a blunt instrument with Simple Start.

It was a desktop product, and then we had to try to get at you in different ways to get you to move into a paid category.

So we've shifted the emphasis from Simple Start over to our QuickBooks Online edition.

And we're seeing really good growth.

That product was up 32% this quarter in terms of new customers over a year ago.

Our strategy in small business remains the same, and that is to get you into the franchise and then we've proven we can increase the revenue per customer over three times over a five-year period.

And that's going to be the same strategy going forward.

We're simply leading now with other products, like Websites and QuickBooks Online instead of leading with Simple Start.

Okay, that helps.

So was the unit numbers that you got in the third quarter, was that what you were expecting or what you were hoping for, or do you still hope to drive more units?

We're seeing a continuing strengthening of unit growth both in the pay category and the desktop as well as online, and I would tell you that it is exactly as we thought it would be in terms of the shift from Simple Start to online, and it was a little healthier than we had anticipated in terms of the total number of units, and we think that's going to continue as the economy continues to recover.

Last question for me.

Neil, the operating margin was down, I think year-over-year, and you had an explanation.

I just didn't catch all of it.

There are two pieces to that.

In the third quarter last year when it was apparent we weren't going to make some of our operating targets we took our incentive compensation accrual down.

This year we've got it at a more normalized level so that's a pretty significant swing in the third quarter.

The other item I mentioned is that we had some bad debt expense related to our Consumer Tax business that in absolute numbers is minuscule, but it's a pretty big increase from last year so that drove part of it.

In summary, both these items are about $30 million.

So that's not a big number.

But they both show up in the third quarter, so it makes for kind of an awkward impairment.

Like I said, on a year-to-date basis, you are still going to see over 100 basis points of margin expansion this year.

Okay, great quarter.

Our next question comes from Ross MacMillan of Jefferies.

Thanks.

I think a lot of mine have been answered but maybe a couple.

Just going back to payments, would you expect over time that the combination of merchant additions and charge volume growth would effectively combine to, if you will, adding those two together, longer term would drive the right assumption around growth rate?

And maybe if you could just talk to some of the puts and takes.

You mentioned the POS system, but any other things we should think about in terms of influencing the growth there?

I'm going to take a stab at this and then if Neil or anybody has anything to add, I will ask them to join me on the answer.

We see this business as a good double-digit growth business over the long term.

It continues to be one of our fastest growing businesses in the franchise.

And we have tons of head room.

As you know, we have low single digit penetration into the QuickBooks space, and we're starting to introduce new front doors like Medfusion, or Intuit Websites that we can attach online payments to.

So it's got nothing but lots of opportunity ahead of it.

The head wind we've been fighting is the fact that consumers have simply been using their credit cards and debit cards less through this recession and now are starting to get a little more confident, they're starting to use those again when they make purchases.

So when you combine the fact that we continued to grow our new merchants at double digits through this downturn, and add to it the fact that the charge volume is starting to recover, and finally the fact that we're continuing to open new front doors that we can attach payments to, that spells really solid opportunity for us, and we think it's a good double-digit grower for many years to come.

And on the payroll side how levered is that to improving employment within SMB as opposed to just net new payroll customer acquisition?

As you know, our pricing model is a fixed fee versus a per employee fee, which is what ADP and Paychecks and a few others offer.

So if you have volatility in terms of either hiring or layoffs, we feel less of that impact than they do, because we're literally, you pay a price if you have fewer than three employees, or you pay a price if you have more than three employees.

So the good news is we have a hedge.

With that being said, if there are small businesses that are starting up today and they're starting up as a sole proprietor without employees day one, we're going to feel that impact in the payroll business for a period of time until they add that first employee and they decide they need to find a way to pay them.

So that's why we've been able to remain relatively strong in our payroll business and others have had a little more of a tough time in this downturn because we have a business model we think resonates well even in a tough economic environment.

Great.

Then maybe just one for Neil.

Your gross margins this year have been pretty strong relative to last year, particularly in Q2 and Q3.

Is that something which could be a continuing trend, or how should we think about gross margins as we go forward in the business?

Thanks.

Yes, Ross, there are a couple things driving that that you need to be thoughtful of.

One is the shift to online services and connected services that we talked about is clearly enabling some expansion of the gross margins.

So as we see more customers shift over, where we're able to leverage our existing ecosystem, our customer acquisition costs are relatively low, that's going to be a help to us.

The other thing, too, is we've been on a resource allocation journey for a couple years where we're trying to get better and better about matching the dollars we spend to things that really do generate revenue.

And we've made some pretty big adjustments the last couple years.

I think you are beginning to see those pay off.

We're continuing to look at the dollars we invest internally, to make good decisions about returns that we get and make good decisions about where to adjust those allocations, based on what we learn.

So I think it's couple factors that are paying off for us.

Great, thanks very much.

Good quarter.

Our next question comes from Michael Millman of Millman Research.

Thank you.

A few questions.

This year it looks like you're getting back to that magic double-digit revenue growth.

Do you think that Intuit is there to stay over the next several years?

Also, regarding the tax, this year, and you touched upon it, your revenue was greater than your units.

Does that mean you were doing less free or more modernization of free?

And maybe you could give us some quantification of that.

And on tax as well, this year do you think you benefited from the restricted RAL environment, and if we should have generally available RALs going forward, do you think that would be somewhat of a headwind?

And then complicate that, we might have RALs next year but we might not have DI, and how might that affect the opportunity to increase TurboTax?

Thanks, Mike.

So a couple of things.

Let me go first to the double-digit question.

You know our goal is to grow the Company double digits organically and to continue to do that faster than expenses so we get good operating leverage and it produces operating income that's in line with that good cash flow in line with operating income.

So the net-net is we'll provide the guidance for next year in August, but I think what you see is what we believe, and that is that we have good core businesses that have high share relative to their competitors but still low penetration relative to the total market opportunity.

And that if we continue to execute well, we can grow this Company double digits organically and generate good operating leverage while we do it.

In terms of tax, you asked about revenue growing faster than units and what the source of that was.

I would tell you that our primary goal continues to be to get more people to move into the do it yourself category.

That's always going to be our first priority.

So we want to get more of that 138 million people filing taxes either with desktop or online software.

At the same time, we've gotten smarter and better about how to do free to pay conversion or actually how to get customers to understand the value of some of our higher priced products so the mix is favorable.

And that's what's helping drive revenue this year, relative to units.

Going forward, we'll have to see if that continues to play out but our goal will always be to grow our units and make sure we're getting maximum revenue per unit.

You asked also about RALs and whether that benefited us.

I would honestly tell you that I think the primary driver of the benefit this year is the secular change that continues to be people moving to do it yourself solutions and away from some of the higher priced alternatives.

That's not a new phenomenon this year.

And in terms of RALs, they've been in the market for many years and we actually pulled out of the RALs business about half a dozen years ago, and we've been able to grow this business double digit without having a RAL offering.

So I don't believe that having the RALs back in the market materially changes the landscape for this business.

I will admit that it certainly had a tough impact on a few of our competitors this year but I think the overall structural change in the market and our ability to offer a solution that is as good a value at a lower price is what's going to continue to drive growth for many years to come in this business.

Was your free tax offerings growth in line with the total this year, or was it more or less?

I was just going to say that we don't break out mix.

Our Investor Relations team is always able to keep us straight and narrow here.

My short answer to your question would be, Michael, in addition to what I was just coached on, that there were no surprises in terms of how things shook out for us this year in our tax business.

Thank you.

Our next question comes from Brad Sills of Barclays Capital.

Good afternoon.

Just a question on payments.

You had 16% growth in merchants, very strong.

Could you comment on where that's coming from?

Is that non-QuickBooks customers, is it cross-sell into QuickBooks?

Also just a little color on how the cross-selling activity is within the installed base of payments.

Yes, I'd love to.

First and foremost, the biggest source of the new customers are coming from better penetration into the QuickBooks space.

It's a ripe opportunity for us.

We have single-digit penetration today, and we continue to get better at end product discovery so customers will actually have someone paying them, can sign up very easily to accept credit cards or debit cards.

The second source is the new front doors that we're introducing into our franchise.

We have Intuit Websites that you can now have online payment capabilities.

And when we acquire Medfusion, it will be an owned asset but today we have a partnership with them, we also offer our payments capability through their medical portal.

And today about seven out of ten customers who sign up for Medfusion are signing up with that payments capability embedded.

The last source is we've been introducing new payments products that now represent about one out of five of all the new customers we're selling.

An example is GoPayments which is our mobile payments offering that can take your cell phone and turn it into a payments processor.

So those are the three sources but it starts with QuickBooks penetration.

It starts with attaching it to other products like Websites, and it introducing new payments capabilities like mobile phone payments.

Got it.

Thanks.

That's helpful.

Is there any displacement in the installed base of what they're currently running, or are these customers that weren't running Payment Solutions prior to?

It's about a 50/50 mix.

Many are for the first time enabling themselves to take an electronic payment.

The others are finding the value in having an easy to use solution that works seamlessly with QuickBooks, doesn't require any additional terminal and doesn't require training of their employees, and so they switch over to our offering.

It's a 50/50 mix.

Thanks very much.

Our next question comes from Scott Schneeberger of Oppenheimer.

Good evening.

First off, obviously some nice share gains in tax.

Brad, could you speak a bit to retention in TurboTax, just how it compared to years past and an indication of the absolute level?

Thanks.

Yes, Scott, thank you for the compliment on the quarter.

We feel pretty good about the execution in tax, as well.

We will talk more about the retention and some of the other key metrics when we get together for investor day.

I will tell you, though, that the continued improvement in our products and our continued execution in terms of our online marketing capabilities are showing up in terms of improved Net Promoter Scores.

As you know, Net Promoter Scores are a pretty good indication of which way retention is going to go.

We'll talk more about that in the fall but we feel good with the share gain and the improved customer experience this year.

Thanks.

Free File Alliance, it came on a little bit at the end of the season but it's fallen off.

Presumably because you and others are very strong with the free offering.

In your discussions with government what do you see as the future of Free File Alliance?

The good news is that the industry and the IRS reached a five-year agreement to renew the Free File Alliance.

And so that's the longest extension we've had since the program was originally started back in 2002-2003.

In terms of the opportunities to grow that, I think it comes down to the fact that continuing to have the IRS and the government help market it, make sure that we've got really good offerings in there that are truly philanthropic so people don't get cross-sold or up-sold, because that really is a philanthropic effort.

But I think the other point you made is, in the commercial market there are also free alternatives available from lots of competitors, and that's another way for people to get access to free tax software.

So net-net, I think the government's commitment and the industry's commitment, we continue to push forward with this philanthropic effort, and at the same time we've found that a free model in the commercial market is also equally viable.

Two more if I could.

One, refund transfers, how was your relationship with your partners there?

And how material is that?

And then one for Neil.

Just curious what the board's view is on dividend right now.

Thanks, that's all for me.

I'll take the refund transfer, then hand it over to Neil for the specific question for him.

We have an assured supply line for us in refund transfer.

We've worked with our partner.

Things had worked out the way we had hoped.

Our customers continue to see real value in the ability to pay for their tax software out of their refund.

So we feel good about our viability of refund transfer today.

As to the capital allocation questions, Scott, we talk to the board about that every year when we do our financial plan in July, and we'll do that again this year as well.

We're very serious about applying all the cash that we generate, first of all to growing the business internally and investing for internal organic growth.

We look at other opportunities that come along, and I've mentioned to you before about our returns that we expect and what we require there.

Thirdly, the cash that we have that's left over we certainly want to return to shareholders, and depending on the valuation of our stock where it is today, we think that share buyback is probably the most effective mechanism for that.

We never say never so we'll talk about all of the alternatives with the board in July but so far the approach we've taken is the one that seems to work best.

Our next question comes from Jim MacDonald from First Analysis.

Good afternoon.

Most of my questions have been answered but on Medfusion that's an interesting space because there is a major player in that space.

Could you talk a little about that because you're usually the big gorilla in a space, and how that might shake out.

First of all, we like the business a lot, and for three reasons.

The first is it's a customer base we understand.

96% of the outpatient providers out there have fewer than ten employees so they are small businesses.

And the patients are consumers.

And this is a portal business.

And so we know portal businesses, we know online services, and we know consumers and small businesses.

So we like that it's right in our sweet spot.

The second is we love the business model.

It's a fast business and it's recurring revenue.

The third is, we see real opportunity to create synergy between our other offerings.

You've heard us talk about putting our payments offering inside of that portal, and already 70% of the customers who are buying Medfusion's portal are using our payments capability.

The other is we're able to take Medfusion and sell it into the 75,000 practices that use QuickBooks today.

So there's a really good strong business opportunity for us.

In terms of the competition this is actually a very highly fragmented space.

Today, if you look at Medfusion's share, they have a 65% share of this space for the outpatient provider market we're focused on.

I realize there's a lot of other names.

There's GE with their offering, there's RelayHealth.

You hear a bunch of different names and they're in multiple parts of the business.

But if you actually look at the market data, they have a 65 share of a market that's only 5% penetrated today.

Only 5% of doctors' offices have actually implemented a patient portal.

And so this is like online banking ten years ago.

We see this actually going to be growing quickly as people move to electronic records, and we actually are the share leader today with 65 shares once Medfusion joins the Company.

Just to follow up on that, how do you define that segment?

Because I would have thought RelayHealth was larger.

If you look at the specific offerings that RelayHealth may offer, and others, we're looking at the patient portal itself which delivers the capabilities we talked about, the ability to offer the information on the doctors' offices, the ability to do secure messaging, to be able to do pre appointment forms and scheduling, and to do online payment.

When you look at that, that market and that particular niche of the market, that's the market we're defining today.

Okay.

And just one follow-up.

You didn't repurchase that many shares in the quarter and your cash built up a lot.

Any reason for that?

Jim, we purchased the shares we get in our plan.

Couple reasons.

We had a much better quarter than we expected so that accounted for a lot of the cash that came in.

And clearly where our stock has been, it's enabled a lot of our employees to take advantage of the stock option exercises, which was another big source of cash for us.

So this is the high point in our year in terms of cash accumulation, so we're not getting too excited about that.

But this is the time of year, and with a great quarter, and with the stock price we've enjoyed over the last few weeks it's been good for our cash in a couple different ways.

Thanks very much.

Our next question comes from Sarah Friar of Goldman Sachs.

It's Stephanie Withers on for Sarah.

Couple quick ones.

The payroll business, could you give us an idea there of the penetration, or an update there of the penetration of the QuickBooks user base?

Secondly, it looked like there was a bit of step-up in G&A this quarter.

Just wondering if there's something extraordinary there or what we should expect for the rest of the year.

I'll take the penetration for payroll and I'll let Neil jump in on the G&A explanation.

Today, out of the 4 million small businesses who use QuickBooks, about 2.5 million have employees that they pay payroll to.

And we currently have about 1.1 million to 1.2 million of those.

Call it roughly 40% penetration with plenty of room to go.

The other exciting thing is there's another 7.5 million small businesses in the market that don't use QuickBooks that do have employees and do payroll.

That's why we bought PayCycle, and we're excited about that because it opens up an opportunity to grow into the other 7.5 million customers that we don't currently serve today.

So those are the penetration numbers.

Exciting opportunity and lots of head room.

Stephanie, on the G&A, that goes back to what I mentioned earlier.

The increase in our incentive plan accrual versus the third quarter of last year when we actually took the accrual down, coupled with some collection expenses in TurboTax are the two things that make G&A off-trend for the third quarter.

There's some other dogs and cats in there, but those are the two big drivers of the increase in Q3.

Okay, great, thank you very much.

Our next question comes from Yun Kim of Broadpoint.

For the financial management segment, if you can tell us, at least at the high level, how much of the revenue growth there was driven by new customers buying paying versions initially or versus existing customers just simply upgrading to higher pay versions.

Sorry, are you in the tax business?

No, I'm talking about the QuickBooks.

There really wasn't much of an impact from free folks.

We've got a real nice surge in desktop product, as Brad mentioned, and that's all paid.

And then as a continued growth in both QuickBooks Online, the Enterprise edition, and in our Websites business, all of which may start with a discounted first month but then it goes quickly to a paid model.

So a lot of that growth was driven by users upgrading to a pay version?

No, no.

It's existing users who may be upgrading from a paid to a new paid, to get into a current version.

And then also new folks coming in on a paid version.

Also, when you look at the adoption curve of desktop and online users for QuickBooks, I am assuming that you are seeing a faster adoption of online users for higher pay versions of QuickBooks, and also for Payments and Payroll Solutions and other stuff.

Is there some lever that you guys can control to speed up that adoption curve by running more aggressive promotions, like free to pay?

Do you feel comfortable with the current conversion rate?

Yun, actually what we really feel good about is we have a choice for customers to decide which way they want to do it.

We are seeing a faster ramp online but that ramp is off a smaller base so the percentages are misleading.

We'll still come in the neighborhood of 1.4 million to 1.5 million units on desktop this year and there will be in the neighborhood of about 200,000 that will be QuickBooks Online subscription.

So it is growing fast and we do believe that's going to be the future, that if we're sitting here today we would tell you, you've got another good decade of QuickBooks Desktop out there, while you also see online continue to get more and more available.

What we are doing with desktop customers, as you know, as part of our connected services strategy, is to create services that are more web-based connected to the desktop product so you can access your information through the website or through a mobile device.

That will also start to give the desktop customers benefits that online customers can have.

But we like the model that we have which is offering them two alternatives.

And we do see the future going more online, and we'll be ready, and we're here with them when the customers are ready to make that change.

Great.

Quickly, Neil, if you can quantify the exact R&D credits that you are no longer expecting in your Q4 guidance.

Thanks.

It's $0.015 to $0.02 on a full year basis.

That's what we had in our forecast in the early part of the year that we took out for the guidance that we put out today.

Great, thank you.

Gentlemen, that's all we have time for today.

I will turn the call back over to you for any final comments.

Thank you, Patty.

And again, thanks, everybody, for joining us today.

I know it has been a wild ride for everybody in the market.

Obvious we feel good about our quarter.

We feel good about the outlook for the year.

The important thing we want to leave you with is we're starting to see strength across the board in all of our major franchises.

While there's subtle improvements, we still have a ways to go to get to a full roaring economy again, but I think between the improvements we're seeing and the execution we feel good about our prospects and are looking forward to talking to you next quarter.

So thanks again.

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

This concludes the call.