直覺電腦 (INTU) 2012 Q2 法說會逐字稿

Good afternoon.

My name is Sahid, and I will be your conference facilitator.

At this time I would like to welcome everyone to Intuit's second-quarter fiscal 2012 conference call.

All lines have been placed on mute to prevent any background noise.

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

(Operator Instructions).

With that, I would now like to turn the call over to Mr.

Matt Rhodes, Intuit's Director of Investor Relations.

Mr.

Rhodes, you may begin.

Good afternoon, everyone, and welcome to Intuit's second-quarter 2012 conference call.

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

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

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

You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2011, and our other SEC filings.

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

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

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

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

Unless otherwise noted, all growth rates refer to the current period versus the comparable prior-year period.

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

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

Thanks, Matt.

Hi, everyone.

Thanks for joining us.

We had a strong second quarter and we continued to build momentum for the great start to the year.

For the first time ever, we generated revenue of more than $1 billion in our fiscal second quarter.

We grew revenue double-digits, driven by our core businesses, and we grew our operating income and earnings per share faster than revenue, which is consistent with our operating principles.

We remain confident in this growth trajectory as we continue to benefit from the long-term shift to Connected Services.

Each year at this time we recognize that you are increasingly focused on tax, and so are we.

It's still early in the season, but I'm pleased with how the business is performing so far.

There's still a lot of game left to play, and as usual, we've got some moving parts that are reflected in our results.

Our team continues the relentless focus to deliver great products that delight TurboTax customers.

Their efforts are validated by the market's reaction to this year's TurboTax product lineup, which includes PC Magazine once again naming TurboTax its editors choice.

This year, SnapTax mobile app is earning five out of five stars in the Apple App Store, and TurboTax for the iPad is currently ranking as the highest grossing iPad app.

In addition, our new free tax advice offering is generating positive customer feedback and it is helping TurboTax customers gain confidence that their taxes are done right and that they are getting the biggest refund that they are entitled to receive.

Stepping back to look at the yearly tax season results, we believe the total tax returns e-filed year-to-date are up slightly versus this time last year, but they are down compared to tax year 2009.

This means the trend that we've seen for the past few years is continuing.

Consumers are simply waiting until later in the season to file their taxes.

With that said, third-party data and TurboTax unit data through February 18 that we shared today give us confidence that the software category is growing and that we are performing well.

This is consistent with our plans for the season, and as a result, we are reiterating our full-year guidance for consumer tax revenue growth of 10% to 13%.

Now while tax is top of mind, let's not lose sight of the performance in our other core businesses.

Our Small Business Group continues to execute well.

Small Business revenue grew 9% in the quarter, and is up 11% for the first half of fiscal 2012.

We are on track to achieve our Small Business revenue guidance of 10% to 12% for the full year.

Fueling our growth in Small Business is the continued shift to Connected Services.

Examples in the second quarter include QuickBooks Online subscribers growing 35% year-over-year, Online Payroll subscribers growing 22%, and Payment customers growing 11%, driven by the growth in our mobile payments offering, GoPayment.

The secular shift to digital solutions is good news for customer acquisition overall.

More than 50% of the customers using the Intuit Online Payroll offering are new to Intuit.

And for QuickBooks Online and GoPayment more than 70% of the customers are new to the franchise.

The digital shift also continues to enrich our mix, as Connected Services generate recurring revenue stream and favorable lifetime value economics for Intuit.

For example, QuickBooks Online has a lifetime value that is 20% higher than QuickBooks Desktop.

And better yet, the shift to online is accelerating across the entire Company, with Connected Services representing 60% of total revenue in the first six months of this fiscal year, up from 54% in the first half of last year.

That shows up in the financial results that we are announcing today, and it demonstrates that our strategy is working.

Just as a reminder, our three-point growth strategy remains unchanged.

The first, drive growth in our core businesses, which benefit from high share, low penetration, and superior net promoter scores relative to competitive alternatives.

Second, to build adjacent businesses and enter into new geographies, which we expect to add 1 to 2 points of growth over the next several years.

And third, to accelerate our Company's transition to Connected Services, which now represent 62% of total annual revenue, with over 35 million customers using our hosted offerings.

I'm pleased with the results this quarter, but there's a lot of ground yet to cover in the remainder of the year.

And with that, I'll turn it over to Neil to discuss the financial details.

Thank you, Brad.

Let's start with total Company performance for the second quarter of fiscal year 2012.

Our financial results were revenue of $1.02 billion, up 16%; non-GAAP operating income of $249 million, up 52%; and GAAP operating income of $192 million, up 73%; non-GAAP net income of $0.51 per share, up 59%; and GAAP net income of $0.39 per share, up 70%.

We are certainly very pleased with our overall performance in the second quarter.

Turning to our Business segment highlights, total Small Business Group revenue grew 9% for the quarter.

Within Small Business, Financial Management Solutions revenue grew 6%, which compares to growth of 21% in last year's second quarter.

As a reminder, last year we benefited from a price increase for QuickBooks Pro and accelerating growth in QuickBooks Online and Enterprise Solutions.

Online and Enterprise Solutions customers continue to drive an improve revenue mix.

The revenue for those two offerings combined is up 31% year year-to-date.

Employee Management Solutions revenue grew 9% for the quarter driven by online growth, improved direct deposit attach and mix.

Online Payroll subscribers grew 22%.

Payment Solutions revenue grew 17% in the second quarter.

Revenue growth was fairly balanced between total Payments volume growth, which was up 10%, and adjustments in rates and fees.

The total number of merchants grew by 11%.

Our Consumer Tax revenue totaled $295 million in the second quarter, up 44% versus the second quarter of fiscal 2011.

As you will recall, the IRS was unable to accept certain returns until mid-February last year, which contributed to a year-over-year decline in Consumer Tax revenue in the second quarter of fiscal 2011.

The Accounting Professional segment revenue grew by 8% in the second quarter.

Our renewal rates remain strong, and we are confident in our full-year guidance for this segment.

As Brad mentioned, we are off to a strong start, and we are on track for the full tax season.

As we do each year, we will release additional tax unit updates in mid-March and late April.

The Financial Services segment also executed well in the second quarter, growing revenue 9%.

Internet banking end users grew by 3%, and Bill Pay end users grew by 9%.

Our growth in this business is driven by ongoing adoption of our online and mobile banking capabilities, with mobile users nearly tripling over the last year to 1.6 million.

Revenue in our Other Businesses segment declined 5% in the second quarter.

The decrease is primarily the result of a decline in Quicken revenue.

Our global business grew 8%, and Intuit Health grew 33% off a small base.

Shifting to the balance sheet, the sound financial principles that support our strategy and objectives have not changed.

Over the long term, we expect double-digit organic revenue growth, and we expect to grow revenue faster than expenses.

We seek to deploy the cash we generate to the highest yield opportunities, and we target risk-adjusted returns of greater than 15%.

Beyond internal growth investments and acquisitions, we consistently return cash to our shareholders.

On January 18, we paid a cash dividend to shareholders, and our Board approved a $0.15 per share cash dividend for our fiscal third quarter.

In the second quarter we repurchased $331 million worth of our shares, leaving a little over $2 billion remaining on our current authorization.

Finally, turning to our guidance, we are reiterating our fiscal 2012 guidance for revenue and raising operating income and EPS guidance.

We expect revenue of $4.185 billion to $4.285 billion for growth of 9% to 11%; non-GAAP operating income of $1.405 billion to $1.43 billion for growth of 12% to 14%; GAAP operating income of $1.19 billion to $1.215 billion for growth of 18% to 21%; non-GAAP diluted EPS of $2.90 to $2.97, growth of 16% to 18%; and GAAP diluted EPS of $2.43 to $2.50, growth of 22% to 25%.

For the third quarter of fiscal 2012 we expect revenue of $1.95 billion to $1.99 billion; non-GAAP operating income of $1.14 billion to $1.17 billion; GAAP operating income $1.095 billion to $1.125 billion; non-GAAP diluted EPS of $2.47 to $2.51; and GAAP diluted EPS of $2.36 to $2.40.

We are also reiterating EPS guidance ranges for the fourth quarter of fiscal 2012, which included non-GAAP diluted EPS of $0.06 to $0.08 and a GAAP basic and diluted loss per share of $0.02 to $0.04.

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

Thanks, Neil.

Each quarter, we share with you the long-term trends that are driving Intuit's growth, and for good reason.

These trends demonstrate the durability of our strategy and our favorable position in a fast growing market shifting to digital solutions.

Our strategy to grow our categories and increase our share endures.

Our core businesses are healthy with expanding customer bases and improving revenue per customer.

As I think longer term, our opportunity to grow customers and revenue by converting nonconsumption has never been stronger, as customers continue to adopt digital solutions and mobile devices.

Even in tough economic times, consumers and small businesses are demanding digital solutions to help them save time and money, and Intuit will continue to deliver on our mission to improve our customers' financial lives through easy-to-use, innovative products that are accessible anywhere, anytime, and on any device.

And to deliver on that mission, we recognize that it all begins with having talented and engaged employees.

On that note, I am proud to share that Intuit ranked number 19 on Fortune's top 100 best places to work in the United States, our highest ranking ever.

I want to thank our employees for making a difference in our customer's lives and for making Intuit a very special place to work.

And with that, let's open it up to you for your questions.

(Operator Instructions).

Kash Rangan, Merrill Lynch.

Nice quarter.

Brad, I guess the same question as we asked last time at the same time of the year.

The underpinning behind your Consumer Tax assumptions vis-a-vis the breakdown between category gain, share gain versus revenue per return gain.

I guess one broader philosophical question for Neil, the (inaudible) longer term had been the margin leverage from the move to SaaS.

And I'm wondering if you could just give us a snapshot of how it exactly played out in the quarter?

I noticed that you talked about potentially tougher comparisons on the QuickBooks side from relative to a year back, but I'm curious how the move online is causing upward pressure to margins.

Thank you very much.

Let me take the first one, and Neil can handle that second one, as you directed the questions to each of us.

The first on tax -- the key drivers remain the same.

The first is how many people will file returns with the IRS.

We still anticipate that number will be close to 1%, although to be frank with you, the IRS isn't publishing a lot of data this year, so we are operating on our own assumptions.

The second is to continue to grow the digital tax category.

If you look at what has happened historically, it has grown twice as fast as tax stores and other alternatives.

Our internal data suggests that we are continuing to do well in growing the category.

The third is to continue to expand our share.

And we like our game plan right now.

There's still a lot of season left to play, but we are laser focused on competing aggressively to take share.

And the last is revenue per return, which we get through mix and attach, and so far we like the early results we are seeing in there as well.

So understanding that the season is playing now out a little differently and there's not a lot of transparency in terms of the data coming from the IRS just given some of the systems things they've been converting to, we are operating on the same assumptions, and so far this season is playing out exactly the way we had hoped.

And we know there is still a lot of game left to play, and we're focused on bringing it in to a good close.

So that's how it's playing out in tax.

Let me hand it over to Neil to talk about the second piece.

Sure, Brad.

What we basically have seen through the first six months of the year is that we've been even more effective with how we've handled some of our marketing and some of our management expenses.

So we have opportunities both in terms of marketing and in terms of employee costs, the effectiveness and efficiency of those.

We have built some things, some assumptions, into our plan for the first half of the year.

And we were able to achieve revenue growth that we reported today without spending as much as we'd planned.

So we are passing some of that through to the revised guidance to the back half of the year.

Brent Thill, UBS.

Brad, just on Small Business, can you just give us a sense of -- it seemed like this bundled sale is really working well, and how you're seeing the cross influence of some of these other categories.

And if you could also talk about Payments.

That business continues to grow very well.

What's the next leg of growth there from your perspective?

We are very happy with what we are seeing right now in Small Business.

Just to give you some context, if you go back three years ago, we used to get 40% of our new customers outside of QuickBooks Desktop.

We're now getting 70% of new customers beyond QuickBooks Desktop.

So as we shift to more Connected Services and mobile apps, it's helping us get new customers into the franchise.

And it's easier for us to identify additional problems that we can introduce them to a product through a simple link, and so that drives cross-sell and upsell and attach.

That's why we're getting strong revenue per customer.

And the lifetime value economics as we shift away from desktop to online are 20% higher.

So right now we like what we are seeing.

Payments is benefiting from that as well.

Probably the single biggest driver in Payments right now, in addition to doing a good job of attaching it to QuickBooks and QuickBooks Online, is the introduction of GoPayment.

And as we talked about a few minutes ago, 70% of those customers coming in on GoPayment are new to the Intuit franchise, and that's really what's helping accelerate the growth rate in our Payments business.

The next phase for us is to continue to double down on looking for ways to get customers into the franchise, whether it's through an online version of QuickBooks or its Payments or Payroll, and then continue to do a better job of introducing them to other products to help them solve more of their problems so we can get a higher revenue per customer.

It's working, and we just have to continue to focus on it, and we think we can continue to drive the progress forward.

Adam Holt, Morgan Stanley.

It's Jen Swanson calling in on behalf of Adam.

Great quarter, guys.

I wanted to follow up on some of Kash's questions around the Tax business.

And I think you said this, Brad, but I just wanted to confirm it.

Is your sense so far -- I think last year you talked about mid-tax season where you thought you were tracking relative to the market overall.

Is your sense thus far in the tax season whether you're gaining share, losing share, maintaining share?

How do you think about your trajectory relative to the rest of DIY software?

And then more broadly, how has the competitive landscape shaped up thus far, and how are things tracking in terms of your own marketing push relative to maybe sales and marketing spending coming in a little lighter than some people had expected?

Yes, Jen, I will.

First of all, we'll readily admit that the transparency because of some of the data not being out there from the IRS is going to be subject to our own research or even some of our other competitors' research.

So this is what we are seeing based upon the data that we can see and the studies that we conduct.

Right now, we like how we are competing for share in the marketplace.

Our teams have a really good, strong plan in place.

If you look at some of the apps we've introduced, we've talked about five out of five stars in the Apple App Store for our mobile offering, which is SnapTax.

The iPad app for TurboTax is the highest grossing app in the Apple store.

We also have really good reviews coming in on Amazon and a lot of other sources.

And that basically speaks volumes for how customers feel about the products relative to the other alternatives in the market.

And we think that's showing up in our results.

In terms of competition, we really respect the competition we have.

They keep us on our toes; they are good.

It's fair to say that everybody out there is competing aggressively.

And I think at the end of the day, that's good news for the category overall, because more people out of the 142 million who recognize that digital tax is a great way to get your taxes done.

It's better for all of us, and ultimately, we are going to fight aggressively to get our fair share of that.

So it is a competitive season, but it's not anything that we didn't expect.

In terms of the marketing push, we upped our spending in the first half of the season in Consumer Tax, as we said we would, but we also have plenty of firepower left to play the second half of the season as well.

What we're getting, though, is better effectiveness out of our marketing investments.

We're getting a higher ROI, and so that's showing up in what you're seeing as more efficiency trailing through in our sales and marketing expense.

Net net, tax season right now is playing out the way we hoped it would, and we are looking forward to finishing up strong.

Great, thanks.

And just one quick follow-up on that.

In terms of -- and I would imagine mobile is still a relatively small piece of the mix overall, but are there any different behaviors from people filing their taxes by a mobile that we should be thinking about in terms of linearity of the tax season?

Well, SnapTax is targeted to an easy filer, and many times easy filers tend to file earlier in the season area, so we are seeing some good, rapid adoption there.

In terms of TurboTax for the iPad, so far we can't tell you of any particular trends that are different, other than the overwhelmingly positive feedback we're getting from the customers about the app and its ease-of-use, and their willingness to recommend it to other friends and family members.

And we like that for the long-term prospects of the business.

But right now, it's still early enough in the adoption curve that there isn't a lot of themes that we can call out today, but we will certainly be sharing more with you as we head into Investor Day in the fall.

Kartik Mehta, Northcoast Research.

I wanted to go back to your share in the marketplace.

And I realize that IRS data is not available, so I'm wondering, based on the analytics you have, which I believe are pretty sophisticated, how do you believe think you're doing relative to the competition?

And if you had to take a guess at what the category is growing on the tax side, what would you think that would be?

Wow.

This is going to be -- the second part will be conjecture; the first part I will give you based upon our analytics.

Our data right now suggests that we are taking share online.

It is still early enough in the season and there's a lot of game left to play, but right now we are where we hoped we would be in terms of online share.

And we use the same sources we've used in the past.

In terms of retail, you can see the NPD data out there, and it suggested in the last couple of weeks that we are pretty much at par.

I think they rounded down to having lost a point, it's really about 40 basis points.

But given where we are in the season, what we have planned in the second half, that doesn't concern us at all.

And as you know, 75% of the tax returns are now online versus retail.

And so we are picking up share where we want, and we don't plan to yield share in any channel.

So right now, the results for us suggest good news.

In terms of what we think is happening in the broader category, we do surveys, but usually we rely on the IRS data to also give us an independent source, and we haven't seen that data yet this year.

But based upon what we are seeing, we do believe that DIY is continuing to grow faster than the other alternatives.

And if you look at the last five years, we believe DIY has taken several points of share away from the stores as well as the low-end pros, and we don't see that stopping.

Just one other question, Brad.

How is the free tax advice -- how has that worked out?

Are you seeing the customer growth you wanted to for that particular product?

You know, Kartik, we are.

In fact, we are very pleased with the results.

The net promoter scores for our customers using the free tax advice are above our expectations.

We are getting great feedback from customers.

The adoption rate is what we hoped it would be.

It's given TurboTax customers the confidence to do taxes, and if they need help, they can reach out to us.

And as you know, we have certified professionals -- they are CPAs, they are enrolled agents and they are tax attorneys.

And the quality of help they are providing the customer is quite frankly, in our view, second to none, and so far the feedback has been very positive.

Peter Goldmacher, Cowen and Company.

Can you give us an update on the 700 tax accountants you've hired, and any early returns on people using them, any success you've experienced?

Yes, Peter, that's what I just talked about a couple of minutes ago with our free tax advice.

We are very pleased with the people we have on board.

More importantly, our customers are very pleased with the service they are getting from these 700 plus individuals.

The net promoter scores for that free tax advice offering is actually above what we hoped it would be from a forecast perspective.

It's having a halo effect on the overall product, so the overall product net promoter scores are up.

And we're getting very good pass-along or word of mouth to other people based upon people who are happy with the service.

So right now we like the results.

We think it's going to help us continue to grow the category, and we're looking forward to a strong second half of the season where we think it becomes even more important as people get into more complicated returns.

Scott Schneeberger, Oppenheimer.

Thanks.

A very nice quarter.

Just a couple of questions on different things.

With the release on the tax data year-to-date through February, you used the 18th, and then you said for last year just comparable prior-year period.

Could you clarify what you used there, please?

This year it's February 18 comparable.

Matt, prior-year period -- I think we sent the release out on February 12.

We reported earnings later this year.

And a couple of important points here, Scott, just to help clarify that.

One is, as you know, when you're on a 100-day tax season, every day is meaningful.

And so having that delay is going to give you a little bit of apples and oranges.

But the second piece is, keep in mind, last year the IRS had notified the industry and the taxpayers that they were going to hold certain returns and wouldn't be able to process them until around Valentine's Day.

So what we released last year reflected basically some returns not being processed, and this year we are actually growing over that big bulge of February 13, 14th, and 15th, when the IRS started accepting returns and we had to grow over that.

And so to be double-digits right now over that big surge, we feel good about through February 18.

Scott, it's Matt.

If you were asking the date last year, it's year-to-date through February 19.

That's the comparable period.

Okay, thanks.

And if I understand, Matt, what you just said, so you are comparing nicely in the last four or five days or six days and comparing versus the 19th last year?

Any comments you guys could share on maybe the 12th this year versus the 12th last year, or January 31 versus January 31?

I just want a feel for these first however many days it has been monthly -- month roughly, how your bell curve looks?

Scott, if you look at the fact sheet, you'll see the 31st through the 31st, and it is sort of a quarter close versus quarter close.

And then, I apologize, the 12th versus the 19th; that was my miss.

But if you look at the 18th this year versus 19th last year, you can see the year-over-year comparison.

What basically happened from the time the quarter closed until this first update on February 18 is this time last year a lot of people had been notified that they didn't need to file a return, because the IRS wouldn't process until around Valentine's Day, and so you had a little bit of a surge come in in that mid-February 14, 15th timeline.

And we had to grow over that from the end of this quarter to this first release.

And so the fact that we are still maintaining good, solid double-digit unit growth growing over that surge gives us confidence that we are where we want to be right now at this point in the season.

I hate to bring up one of the other blemishes -- not that that just was.

But the Quicken, could you speak to what occurred there?

Was that expected or was that a little bit of a surprise?

First of all, I hope you don't see that tax result as a blemish.

No, absolutely not.

That was a misspeak.

That was great.

That's okay.

Now, Quicken, on the other hand, quite frankly, what we see right now is the ongoing shift away from desktop software, particularly in that category, to digital solutions in the cloud and to mobile apps.

Mint is growing very quickly, and it's exceeding our expectations on customer acquisition.

We obviously have opportunities to continue to accelerate monetization there.

But in Quicken, we have a Windows-based version of the desktop.

We don't have a Mac version that's up to par for what our Mac customers are looking for.

And we have not been able to capitalize on some of the newer devices, particularly for customers that want to use mobile apps and tablets.

And so our team is basically taking a hard look at what do we need to do to breathe some new life into that franchise.

And I guarantee, if the teams on it right now, that that's really the disappointment is that business needs a makeover, and we are in the process of doing just that.

Gil Luria, Wedbush Securities.

First, I'll start with a follow-up to the seasonal question.

Last year, how long did that surge last?

How many more days in February did it last before you started getting back the usual patterns?

When we get the March update, will that be apples-to-apples versus last year?

It's hard to tell.

And to be candid with you, the surge last year came in -- there was a window of three days where we did see a little bit of a volume uptick that basically allowed us to get through some of that backlog of returns.

But as you know, the season continues to shift further out.

We went into this season fully expecting the seasonality to look more like it did two years ago, since there wasn't any delay in processing from the IRS anticipated.

So right now what we are seeing is this tax year is somewhere between last year and the year before, and so it's kind of hard to call the seasonality curve.

I can tell you right now what we feel good about is we are out of the gate strong.

And each day that we are able to monitor the results up through the release today, we are performing at or above the expected levels we had hoped for, and that's pretty much where we are going to play the rest of the season.

So I wish I could give you a little more information.

Until the IRS actually publishes data, we are all in the same boat.

We are relying on our own internal data, and right now we feel good about how the curve is playing out, but it's different than what we had originally anticipated.

And then in terms of your Small Business unit, for you to get to your guidance range, especially in the middle or top end of that, revenue would have to re-accelerate.

Which of the businesses there do you expect to re-accelerate in the balance of the year?

Well, a couple of things to keep in mind.

Payments and Payroll are doing very well right now, and FMS is doing well if you adjust for the fact that last year in the first half of the year we had some strong grow overs that we had to comp against.

We had a 15% growth in the first quarter last year and 21% growth in the second quarter, driven by a price increase in QuickBooks, and the fact that we had backed off on some deep promotional discounting through the recession.

As we look at the back half of the year, we expect strong performance across the Small Business franchise, and that's why we reiterated our guidance for the Small Business Group overall that we provided at the first of the year.

Raimo Lenschow, Barclays.

.

Following on that question -- first of all, congratulations, great quarter, and thanks for taking my question.

Can you talk a little bit about the dynamics that you see in Desktop/Online, especially on Desktop?

Do you see that being a stable business?

Is there a risk that at some point it goes into decline (inaudible)?

Are you asking specifically about a particular business?

Sorry, that's on QuickBooks.

Sorry.

Okay.

Well, what we're seeing right now on QuickBooks is year-to-date, the desktop customers -- the units are down about 2% in terms of the units sold.

With that being said, the online version is up 35%.

But you've got to keep that in perspective.

We've got 4 million installed QuickBooks customers, and we have 326,000 or either 230,000 on QuickBooks online customers.

So it's growing off of a smaller base.

If we had to take a look at what we think the future will be, you're going to continue to see a faster growth rate in online than desktop.

But a lot of customers really want to have their accounting information on the desktop, so we so don't see it going away anytime soon.

But we don't see it growing at the same rate as online.

And one of the things we're doing with our desktop customers is providing them the ability to get their data up into the cloud so they can access their information through their mobile phone or a tablet.

And we think that will also give some more continuity to the desktop customers.

So net net, online we expect to grow faster than desktop.

And we think that desktop is going to be around for many years to come, as well, as some customers prefer it, and as we make it easier for them to access it through mobile devices, they will get the best of both worlds.

Greg Dunham, Goldman Sachs.

I did want to follow up quickly on the free tax advice dynamic.

Are you seeing anything different in the profile of customers that are attaching to that program?

Anything that you've learned here in the initial rollout of that plan?

You know, Greg, it's still early.

I'll tell you a couple of things -- we just went through an operating review with the tax team on Friday, and then we had an update again last night.

Right now it's pulling the kind of customers in we hoped it would -- people who use tax software but have a little bit of concern that they may get something wrong, and those people who may actually have been using a competitive alternative, like a tax store, and they were simply looking for the confidence of having someone to call, and they were willing to do the work themselves.

The surprise so far is it has also helped us get even deeper into first-time filers, people that are coming into the category for the first time.

And that's good news for us because, as you know, in a normal year between 3 million to 5 million new people who enter the tax category for the first time.

And by introducing free tax advice that was a surprise that we are willing to step back and figure out how we can exploit even more.

But it's helping us get new customers who are coming into the tax industry for the first time.

Interesting.

And switching gears, one quick question -- Financial Services had another kind of 9% to 10% growth quarter, kind of the two best quarters that you've had in a while in that business.

What's driving that?

Do you feel that level is sustainable for the near to medium future?

Thanks for calling that out.

We are very proud of the performance that team is delivering.

First and foremost that performance, by the way, even included the fact that we had one of our larger banks get acquired by another bank, and that bank decided to take their services in-house.

And so we even had that sort of subtraction happening and still delivered those kinds of results.

I'll tell you right now the bookings we have in the pipeline, the people we have under contract in terms of the number of end-users is as much in the first half of this year as it was in the entire full year last year.

And so we've got a good healthy pipeline, we are going to have to get those customers implemented and activated.

What's driving it is our mobile suite.

We have 1.6 million customers now using the mobile app to do their banking, and that's 3X higher than it was last year.

And there's a real win for the bank here.

The average customer that does online banking visits their bank site 10 times a month.

Those that use our mobile banking product on the phone they come in 21 times a month, and for those that are using the tablet, the iPad, they are coming in 35 times a month.

And so it's increasing engagement, which is good for the customer and it's good for the bank, and that's why I think we are able to continue to grow and outperform what we are seeing happening at some of the other competitors in the market.

Walter Pritchard, Citigroup.

I wonder if you could just talk about the Small Business environment in general?

We've seen some green shoots in that market with (inaudible) numbers like NFID and so forth.

I'm just wondering maybe on a scale of 1 to 10 how healthy do you think your customer base is?

And enterprise has recovered large something because they have recovered much faster.

Are we -- do you feel like we've turned a corner in Small Business at this point?

And what signs of that are you seeing in your numbers here and in your forward-looking sort of things you monitor?

I'm sorry, we had a bad reception.

It was hard to hear the question.

If you don't mind, could you repeat the question?

Sure.

Can you hear me any better, Brad?

Yes, it's a little better.

The question was just on the Small Business side, I'm wondering -- you know, we've seen some signs of improving economic metrics around small business.

And NFID, for example, started to turn positive and show some optimism (inaudible) and hiring intentions and so forth that are better.

I'm wondering, where do you feel like you are on a scale of 1 to 10 in terms of the health of your Small Business' customer base?

And what do you see in the numbers here today and in your forward-looking things you monitor around Small Business health?

Got it.

Okay, thank you.

We are seeing some modest improvement in the indicators, just as you referenced the NFID.

We look at more tangible things in our customer base which help us see whether they are changing their behaviors.

Our Small Business employment index suggests that they are starting to hire modestly again on an annualized rate of about 2.9% in terms of hiring employees.

Total charge volume at our customers was up about 10% year-over-year, which means customers are starting to shop with their businesses.

But that being said, it's not robust.

But it's certainly moving in the right direction.

So on a 1 to 10 scale, with 10 being a full recovery like it was in 2007, I'd peg it somewhere in the 7 and moving north.

But it has still got a ways to go to get back to full health.

The good news for us is the kind of products and services that we create help small businesses in any condition.

They helped them basically get customers, help them save time and be more productive, and help them pay their employees in a way that's a much better alternative than a more expensive outsource provider.

So as long as we continue to get our solutions in front of customers, regardless of how quickly the recovery happens, we think we can continue to deliver the kind of results we been producing.

Jim McDonald, First Analysis.

Great quarter, guys.

Going back to TurboTax and the price mix, any feeling of whether you're going to be able to get as much price mix on TurboTax as you got last year with less outright price increase?

Hey Jim, it's Neil.

Our plan is still to continue to try to grow the category and to drive units.

We certainly enjoyed a favorable mix this year and last year -- so far through this year.

But our plan is to continue to try to attract new users.

And so we continue to build out the product, we continue to help the upsell process, but it's still about new units.

It's still about growing the category and growing our share of the category.

So if the favorable upsell comes, that will be wonderful.

But that's really not what we're solving for, we're really trying to grow the category and grow the units.

Great.

And then as a follow-up, for Accounting Professionals, did that business get affected much last year?

It didn't seem to show the bounce back of the firm's availability issues last year.

So is there any of that issue in the Accounting Professionals business that affected the year-over-year comparison?

Not really, Jim.

It's been a pretty clear second quarter for the Accounting Professionals Group.

As you know, most of those are on a membership basis, and their busy time really comes in our Q3, because they actually file the returns, but the compare there is pretty clean.

Philip Rueppel, Wells Fargo Securities.

Just another question on the Consumer Tax business.

You mentioned briefly, Brad, that the attach rate or the revenue per return you were quite pleased with the trend so far.

Is there any seasonality around that -- would that change at all throughout the rest of the tax season or is that something you think you can maintain?

Right now, we believe that what we are seeing is consistent with what we wanted to see in the first part of the season, and it should maintain throughout the season.

So there is nothing fundamentally different what we've seen in the first part of the year that would lead us to believe it will be different in the second part.

As Neil just said, our first opportunity and our first focus is to grow the category and get customers.

And then if we're successful in getting them matched up against the right tax product that helps us drive favorable mix.

And our teams are getting better and better at helping the customer identify which tax product is right for their situation, and we don't see that changing for the back half of this season, either.

Laura Lederman, William Blair.

Congratulations on the quarter as well.

Can you talk a little bit about the free tax advice and a sense of how widely people use that, and long-term how you expect that to affect the profitability of that business and how you know to hire the right amount of people?

So I'd like to understand that concept a little bit better.

And then I have one follow-up.

Do you want to take this one, or do you want me to take this one, Neil?

You go ahead and start, and I'll talk about how we allocated and -- okay?

So, Laura, right now one of the things that we were talking about in Friday's operating review with the Tax business is just how closely they nailed the demand for that and how prepared the team was in terms of having the right number of agents hired and the quality of the agents.

So, so far for us, the good news is the customers really like the service.

It's helping us do a good job of taking customers from the areas that we had hoped we were going to be able to get customers from.

And it has also helped us strengthen our value proposition for people who are filing taxes for the first time, which is great for the franchise long-term.

So we like everything we are seeing with free tax advice right now.

And also, the demand in terms of the people adopting it is pretty much on target with what the team had forecasted.

I think as you get into the second half of the season and people move from the easier returns to the more complicated returns the service will be one that will be even more readily in demand.

And our team is fully prepared for that.

So so far, everything is playing out the way we had hoped, and we are very pleased with the results.

We are glad we have this as a part of the value proposition this year.

Do you have anything you wanted to add to that, Neil?

The only thing I would add to that, Laura, is we talk a lot about the number of people actually performing the work, but I would tell you, this is a much more holistic effort to make sure we have good tools to use, to be sure that we can find the answers readily and quickly, and to incorporate all the devices that we've built over the last few years, including live community, our internal folks who work while you're working on your return, as well as the free tax advice.

So there are a number of tools and processes we put in place to really improve the effectiveness and efficiency of the free tax advice experts, the people that are actually fielding the call, as well as our own internal team.

So there're lots of improvements and innovation we've put in place around this to provide the free tax advice.

Does it impact the profitability much of that business, or is it such a small usage, because you're using people in other ways -- I'm just trying to understand its impact on profitability short-term and also long-term?

Well, Laura, the impact of that and the cost shift is included in the guidance we've given for the full year and for Q3, so you can see the impact that we expected to have this year.

But this is a very profitable business for us longer-term, and so again, the name of the game for us is to grow the business, and there're plenty of opportunity, we think, for us to grow and to invest in the business and continue to attract customers at very profitable returns.

So it's more, again, about customer acquisition and less about being defensive about our profit margins.

Fair enough.

A totally different question -- could you talk a little bit about the acceleration of the monetization of Mint?

And maybe just status of some different things you're doing with that technology and where it is at so we can get a sense of return on investment from buying it?

Yes.

So right now the monetization for Mint, when you look at the online version on the Web, continues to perform very well.

One of the things that we've noticed is as more and more customers begin to access Mint through their mobile devices the monetization models aren't readily transferable.

And so we're getting very rapid customer adoption, really good feedback in terms of the customer experience, but we're having to innovate to look for creative ways to continue to look for monetization models there.

By the way, I am really happening happy this is happening in Mint, because this is the precursor to pretty much any businesses that continue to see more adoption of mobile devices.

You want to make sure that you have all the opportunity to experiment with monetization models.

And so right now, what we are seeing with Mint is a really good adoption and a shift to mobile devices.

And how can we capitalize on that is a way to also find monetization models that will keep pace with the customer growth?

So far, it's good.

If you actually look at how Mint is helping me the rest of the Company, one of the primary focus areas we talked about at Investor Day was improving our first use experiences of all of our products.

For every 100 customers that come in and use a product for the first time, how many come back and use it a second time?

Mint is the best in class, and they have been basically inspiring the rest of the Company to reduce the number of clicks to get to the outcome quickly.

They're also helping us look at some new services in healthcare as well as in Small Business that you'll hear more about later when we announce those.

So net net, Mint is playing a very strategic role for us, and we're excited about the growth rate of the Company -- or the business unit and we're also looking at ways to continue to accelerate the monetization models.

Brad Zelnick, Macquarie Research.

As we march further into tax season, Brad, it seems like there's a lot of competition for eyeballs.

Just qualitatively, it seems your competition is a bit more visible this year.

So my question is around the ROI on your marketing spend, which I think you touched on in an earlier question.

But can you maybe share specifics on how the ROI is tracking versus your expectation?

And is this a improving along with a shift to an online business, and should we therefore expect it to continue indefinitely as that trend plays out?

First of all, I think your qualitative assessment is consistent with ours.

It is certainly a nice competitive tax season to have a lot of people out there talking about the value and the benefits of digital path solutions.

And that's good news for us, because I think that gets more people looking at digital solutions, and we think we can compete once we get people into the category.

In terms of our marketing efficiency and effectiveness, our TurboTax business, I would argue, is arguably probably the best and most sophisticated marketing team we have.

They are very good at understanding the ROI on every dollar they spend.

They are an experimentation machine.

They run AB tests.

They are able to figure out which ones have the highest yield.

And that's why you heard some of the responses from me and Neil about our marketing efficiency and effectiveness in the first half.

And so right now we are seeing a good ROI on those dollars.

And we plan to compete aggressively for the balance of the season, which was already in our plan.

And in terms of the other people out there with us, I think that's only good news for the category long-term.

Just the last part of my question -- is this reflective of a shift in the business to online?

And is it fair to assert assume that the ROI in online marketing dollars is better than for traditional media?

It's probably easier to match it up and to adjust it more quickly.

As Brad mentioned, the TurboTax team is really good at understanding and testing different approaches and different ideas, and investing in those that work and pulling back on those and adjusting.

So the thing we like about it is the ease of which you can expand or contract based on the responses you're getting and based on your test results.

So from that standpoint alone, the online offering is much more effective and allows you to invest much more effectively.

Thanks, Neil.

If I could just follow up with one other.

17% growth in Payments was stronger than we had expected.

It was a great result, but the number of merchant account customers were up less sequentially than they had been in many quarters.

So following up on Walter's question earlier, I guess this, along with charge volume per merchant, seemed a bit weaker than we'd expect looking at trends in small business optimism and the other various indicators that we look at.

So I know this is a huge opportunity, but how did this compare to your expectations, and how do you feel about your share here in this category?

Well, certainly the last part first.

We think there're lots of opportunity for the share.

Our penetration in the QuickBooks space with our Payments offering is certainly not where we need it to be, and it's not where other offerings like Payroll are.

So we think there're tons of opportunity there, and I can promise you, we are laser focused on that.

In terms of the processing volume and the volume per merchant, I think what you're seeing is a reflection of the GoPayment merchants we are adding.

We love that as a way to add merchant accounts and add new customers to the franchise and bring them in, but they don't bring the same level of processing volume as our more traditional QuickBooks merchant services type customers.

And that's just the way the business is evolving.

That's fine with us.

So that is what I think what you see reflected in the merchant growth and processing volume factors.

Ross MacMillan, Jeffries.

Brad, I know there is a lot of noise in the compare in the Consumer Tax business thus far in the season.

But as you think about the digital category, do you think there's actually a chance for the digital category growth this year to be better than last year, i.e., acceleration in digital this year?

You know, I will tell you what I can fall back on and then I will answer the question that you put on the table.

I can fall back on the last half a dozen years when you look at the data reported by the IRS that showed that the digital tax category is growing 6% to 7% on an annualized basis, and that is twice as fast as the second closest alternative.

And I can also fall back on other analogs and ask the question of what has happened in book sales or what has happened in video sales, or what has happened in banking?

And what you see is more and more of an adoption to digital solutions to do the most important things in our lives or to make the kinds of purchases that we are looking to make.

And so I look as I look at that trend, and you introduce new things like mobile apps and products on the tablet and you look at our five-star ratings and the fact that we have the highest grossing app in the App Store with our tablet, I think that this shift to digital is only going to continue.

Whether it will show up this year as faster growth than last year it is hard to tell, because we don't have any real data to fall back on.

But I sure like the trend over the next 5 to 10 years, and I'm glad we are in the position we're in right now.

That makes sense.

Thank you.

And then two quick ones.

I noticed QuickBooks units picked up.

I think it's the first positive growth number we've had there for some time.

And I was just wondering if you could talk to that, whether there was any promotional activity or any other shift in that number.

And then I had one for Neil.

Just on the guidance for the full year the non-GAAP operating income is up only a little bit -- I think $5 million -- but we're getting a $0.05 increase on EPS.

Could you just bridge the two?

Thanks.

Let me take the QuickBooks question.

So what we're seeing is continuing strong performance in QuickBooks Online, QuickBooks Enterprise, and all the Connected Services that are coming in that Financial Management sector.

It is growing 35% in online, 22% in enterprise, and that just continues to build momentum.

We are also past the grow over of the free sample start that we had out in the market for some period of time, and so we are now starting to get more of an apples-to-apples compare, and we're starting to see that positive momentum build.

And quite frankly, our QuickBooks Desktop offering this year was one of the best quality offerings we have put in the market in several years.

And our ratings on the Amazon stores and in other key channels are reflecting that.

And I think you see that showing up as well.

So it's a combination of those things that are helping us post positive overall unit growth, and our plan is to continue to push in that direction.

On the EPS question, the thing you have to take into account is we guided to a share reduction this year of about 3.5% or 4%, so that's going to cause you to have a little better outcome in EPS than you see in operating income per se.

Beyond that, there are just a few items dealing with rounding and dealing with the fact that Q1 of the year is a period that would show a loss, and so we use primary instead of fully diluted shares.

But the primary driver there is reduction in the share count.

Great.

Congratulations.

Thank you.

Yun Kim, ThinkEquity.

Congrats on another solid quarter on your Small Business Group, especially on the margin front.

For Payments part of the business specifically, can you qualify how were you able to improve your margins there quite a bit in your Payment business despite GoPayment driving much of the growth, which I'm assuming is not yet a high-margin business or is that a wrong assumption?

No, I think that's a good assumption, Yun.

I think the biggest driver there we talked about and we called out is some pricing changes we made this year early in the season.

And you may recall, last year the card networks passed along some price increases that we waited about six months before we passed through to our customers.

So we were a little late repricing our services and getting the full effect of that last year.

Those price changes are in this year and so you're seeing about half of the growth rate you're seeing in the revenue come from rates and adjustment changes we made, some in the last part of last year, some early part of this year.

But really catching up with some of the network fees and charges that had been passed through.

Okay, great.

And then just if you guys, if you talk about the attach rate or the ability to cross-sell additional products or services to the GoPayment customers, which I am assuming is fairly lower-end of your core QuickBooks installed base, but perhaps more tax savvy than the rest?

One of the first jobs that a small business has is to get a customer, and then the second job is to actually get that customer to pay them.

And so what we are finding is that GoPayment and Payments are nice front doors to get people into the franchise, and that's playing out in the fact that 70% of these customers are new to Intuit for the first time.

Now, our ability to help them grow and become successful enough that they then they need accounting solutions is our next game.

As once you've got that customer and you've got a payment, you want to record that in an accounting package, and that's why we're working with QuickBooks Online and the lower-end version of QuickBooks to be able to have that solution unlock into a QuickBooks product.

So right now, early days, it is bringing new people into the franchise as we'd hoped.

And we do have a suite of other solutions we'll be looking to cross-sell into that GoPayment customer base as they continue to grow in size and start to have additional needs that we can help them solve.

Do you expect to offer more of a low-end version of your core products and services to better target GoPayment customers?

We do have services today that we work with those smaller customers, and we have lots of small experiments going on, as we speak, looking for other ways to make it simple for them to solve just a piece of a problem as opposed to a full accounting product.

You'll hear more about that from us in the future.

But right now, we have solutions that help very small customers do the important things they need to do, once they realize that they want to move beyond just accepting a payment.

So, yes, we do have those solutions, and you are going to see us focus more in that area as we go forward.

Sterling Auty, J.P.

Morgan.

It's Saket here for Sterling.

Two quick questions, if I can.

So first, just to dig a little bit deeper into the ROI question, can you maybe point to one or two things the TurboTax marketing team did differently in the quarter that drove the higher ROI in sales and marketing?

And do you think it will continue for the remainder of the year?

And then secondly, you talked about at the Analyst Day how you're improving some of the sticking points in TurboTax as filers navigated through their filing.

Do you think those efforts have helped in the retention rate so far this season?

Let me answer the first question by talking about the approach and process as opposed to the specific things that have actually happened, because I don't want to tip our hand as we are in the middle of a tax season out there and give anybody else a hint.

Our team has gotten very good at developing hypotheses and running AB tests to see which outperformed the other.

And this is a lean startup methodology that early-stage startups do that we really continue to practice and try to refine across the Company.

And what it basically does is it removes what we call hippos, which are highly paid personal opinions, where people think they have a great idea and then you go execute it to actually running fast experiments and putting them in front of customers and being able to run a little traffic through it and see if it outperforms the other alternatives.

And as Neil said, in a Web-based world, that is so much easier to do.

And we can literally run quick volume through, and if it outperforms, we shift over the total volume of that particular implementation.

So that's what we are doing is we are getting faster rapid experiments up and we are able to prove through real data whether or not it's going to outperform or not, and that's what's driving the efficiency and effectiveness.

The second part of the question was on --?

Just kind of improving the retention rates from some of the sticking points that you've improved in TurboTax.

Thank you.

Right now we are seeing good results in the funnel.

It's hard to tell until we get through season and look at next year whether it will have the impact we believe it will have on retention, but all the leading indicators that we can see in the middle of the season are actually performing the way we had hoped in terms of customers getting through the screens or getting past the areas that last year we noticed them struggling with.

So far, the early indicators are good, and we hope that will show up in the retention numbers as we roll into next year and customers have to make their decision once again.

Michael Millman, Millman Research.

Thank you.

I have some more tax questions.

One, can you tell us what the number of forms that are generated from the software -- from one software is and how that compares with what it was over the past couple of years?

And then secondly, you did indicate on the TurboTax that you've seen increase in new filings, and maybe you can quantify that, and also possibly the same for shift from other methods and the shift from pen and paper as well?

I will be the first to admit we can't answer the question -- or I can't answer the question on the number of forms and software.

I do know that we have a very robust product that handles federal, state, and local taxes, and so we are able to handle those situations.

I couldn't begin to quantify the number of forms.

And I can't tell you it's materially different year-over-year, because that legislation happens in all the local markets.

But I know that our team has a product out there that basically is able to address those situations; unfortunately, I can't qualify that quantify that for you.

In terms of the source of the new customers, I alluded to this earlier -- I don't want to get too precise right now because we are still halfway through season, and I want to be able to play out the full season to see if it basically finishes the way it is right now.

But we are seeing the ability for us to convert from competitive alternatives, not just software but also tax stores and low-end pros.

And we are seeing better results and we are excited about the better results of continuing to build on our own track record of getting first-time filers in the software.

Software has always been a very strong solution for that digitally savvy group, so with the introduction of free tax advice, we are seeing a little acceleration in that area.

So far we like what we are seeing in terms of our sources of new customers.

In terms of manual, you know as well as we do the number of people who are filing in paper and pencil have gone down each and every year.

Last year the IRS helped push that a little further along by not mailing the forms out.

And so did the sources of people coming from paper and pencil are down versus where they might've been in years past.

But we shared in our September Investor Day, despite what some people may have thought, we've never had a predominant portion of our customers coming from paper and pencil.

In fact, we showed a pie chart in that PowerPoint that showed that showed it was a lower number than I think many people attributed.

So the fact that it's declining has not shown up in terms of our unit growth that we just reported, because we've been able to get customers from other sources as well.

So that continues to decline?

It does.

Thank you.

I am showing no further questions.

I would like to hand the conference back over for any closing remarks.

I want to thank everybody for their questions.

We feel good about the second-quarter and the first-half results.

Obviously we're halfway through a busy season here.

It's an exciting time on the Intuit campuses at this time of year every year.

We appreciate you hanging in there with us, and we are looking forward to speaking with you again in May.

With that, we'll wrap it up, and we'll look forward to talking to you soon.

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

This concludes our program.

You may all disconnect.

And have a wonderful day.