直覺電腦 (INTU) 2013 Q1 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to Intuit's first-quarter fiscal 2013 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 Matt Rhodes, Intuit's Director of Investor Relations.

Mr. Rhodes you may begin.

Thank you.

Good afternoon and welcome to Intuit's first-quarter 2013 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 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, as well as our Form 10K for fiscal 2012 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've reconciled the comparable GAAP to 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'll turn the call over to Brad Smith.

All right, thanks, Matt, and thanks to all of you for joining us.

We're off to a strong start in fiscal year 2013.

We grew first-quarter revenue 12% and we are reiterating our guidance of double-digit top line and bottom line growth for the full year.

You will hear more on that from Neil in a minute.

The key driver of our performance continues to be in the secular tailwind that we're riding towards a connected services economy, backed up by continuous innovation and strong execution.

In the first quarter, our total Small Business revenue grew 18% with 13% growth excluding the benefit of Demandforce.

Our Connected Services offerings are powering this performance.

Financial Management Solutions revenue grew 20% with subscriber growth of 29% in QuickBooks Online, 25% in QuickBooks Enterprise, and over 60% in Demandforce.

Employee Management Solutions revenue grew 12% with our Intuit Online Payroll subscribers growing 20% in the quarter.

And our Payments revenue, it also grew 21%.

With customers growing 16% behind the strong adoption of GoPayment, our mobile payment solution.

As we shared at investor day in September, we have a refreshed approach to our Connected Services strategy.

To further capitalize on these structural shifts that will continue to serve as growth catalysts for many years to come.

Our refreshed three-point strategy is grounded in first, delivering awesome product experiences.

Computing devices have moved to the palm of our hands in the forms of tablets and smart phones.

And we are increasingly focused on reimagining our products with a mobile first, and in some cases, a mobile only design.

A key success factor to winning in this mobile world is ensuring that we deliver an amazing first use experience.

That means our customers get the value they signed up for as easily and as quickly as possible.

The second key tenet of our growth strategy is enabling the contributions of others while seeking to create what we call network effect platforms.

By moving to more open platforms with API that enable the contributions of end-users as well as third-party developers, we can solve more customer problems faster and more efficiently for our growing base of end-users.

As an early example, QuickBooks Online can now be used by small businesses all over the world.

Customers, wherever they live, contribute to localizing the product for the market in which they reside.

And our third core strategy is enabling data to create delight.

In a world where we all have mobile computers in our pockets with cameras, sensors, and always on access, our 60 million customers are generating incredibly valuable data that we can use to deliver even better products and to help them with break through benefits.

This refreshed Connected Services strategy marks the next chapter of Intuit's transformation.

And there is already real momentum behind it.

For example, our mobile products are contributing meaningful growth.

We've more than doubled the number of mobile customers in the past 12 months with average user ratings of 4.5 star for IOS and 4.3 for Android.

We generated $70 million in mobile revenue in fiscal 2012, which we expect to grow by more than 50% in fiscal 2013.

And the good news is our proven business models transfer well to mobile with around half of our mobile customers being new to the franchise, which is expanding our market reach and our category growth.

This momentum is despite the reality that we do see in the macroeconomic environment.

Our own internal indicators suggest the macro picture remains sluggish at best.

Our October Small Business Index reflected the seventh consecutive month of Small Business revenue decline, with Small Business employment levels on the decline since May as well.

While we are not completely insulated against these external challenges, we have proven to be resilient.

Our customers need our products most when times are tough because we save them time and money on the things they need to improve their business results and their financial lives.

As a Company we remain laser focused on executing against the principles that have guided us through these choppy waters.

At the core of these principals is customer acquisition, which remains job one.

At the same time, our teams remain rigorous in adjusting to external conditions, running our businesses efficiently, and delivering on our commitment to shareholders which you can see reflected in today's results.

So with that context, let me hand it over to Neil to walk you through the financial details.

Thanks Brad.

Moving to the results, for the first quarter of fiscal 2013 we delivered revenue of $647 million, up 12%; 11% on an organic basis.

A non-GAAP operating loss of $8 million compared to a non-GAAP operating loss of $20 million in the first quarter of fiscal 2012.

A GAAP operating loss of $69 million, a non-GAAP loss per share of $0.03 compared to a non-GAAP loss per share of $0.08 in the first quarter of fiscal 2012.

And a GAAP loss per share of $0.06.

A quick note about some changes we've made in our fact sheet.

Given our ongoing expansion beyond the US, we are now reporting our customer metrics on the fact sheet on a worldwide basis for all periods shown, which will be reflected in our comments today.

For Financial Management Solutions we've also broken out QuickBooks Desktop units and added more detail on subscribers.

And for Payments, we are now reporting total card transaction volume growth.

These changes are designed to provide more clarity on the factors driving our growth and profitability.

Now turning to the business segments.

Total Small Business Group revenue grew 18% for the quarter as reported and 13% on an organic basis.

Within Small Business, Financial Management Solutions revenue grew 20% for the quarter, 9% excluding the acquisition of Demandforce.

Customer acquisition in our Connected Services businesses continues to drive our growth in this segment with Demandforce subscribers grew more than 60%, QuickBooks Online subscribers grew 29%, and Enterprise Solutions subscribers grew 25%.

Employee Management Solutions revenue grew 12% for the quarter driven by improved retention, price, and mix.

Online Payroll customers grew 20%.

Payment Solutions revenue grew 21% for the quarter, card transaction volume grew 11%, and adjustments in rates and fees made up the balance of the revenue growth.

Consumer Tax revenue was $36 million versus $41 million in the first quarter last year.

We believe total consumer tax returns were also down year-over-year during the same period.

As you know, our Consumer Tax business is highly seasonal and our first quarter is a light one.

Accounting Professionals revenue of $32 million grew 19% for the quarter with our recently enhanced QuickBooks Accountant offerings helping to drive growth.

Financial Services revenue was up 4% in the first quarter, adjusting for the sale of our corporate banking business and the addition of Net IFS, Financial Services revenue grew approximately 11%.

The details of these adjustments are on our fact sheet.

New sales and strong adoption of online and mobile banking continue to drive revenue growth for IFS.

Other Business revenue grew 5% of the quarter.

Other Business revenue grew approximately 12% if adjusted for the transfer of Mint from this category to Financial Services.

Global Small Business revenue grew double digits.

We have more than 20,000 QuickBooks Online subscribers in larger markets outside of the US, as well as trial users in about 150 countries.

Turning to the balance sheet, our financial principles and capital allocation strategy have not changed.

We target double-digit organic revenue growth while growing revenue faster than expenses.

We also take a disciplined approach to capital management, and when it is the best use of cash, we return cash to shareholders via share repurchases.

We repurchased $100 million of shares in the first quarter with $1.6 billion remaining on our authorization.

We expect our share count for fiscal 2013 to be roughly flat year-over-year.

In addition, our Board approved a $0.17 dividend for fiscal Q2, up 13% from last year, payable on January 18, 2013.

Turning to our guidance, as Brad mentioned, we are reiterating our fiscal 2013 guidance.

You will find a summary of our Company and segment guidance for the year on our website.

As we said at Investor Day, the tables are set for late tax legislation which could impact the availability of forms, and push Consumer Tax and Accounting Professionals revenue from our second fiscal quarter to our third quarter.

We've assumed the impact is $50 million to $75 million in revenue and $0.10 to $0.15 in EPS.

For the second quarter of fiscal 2013, we expect revenue of $1.02 billion to $1.04 billion, non-GAAP operating income of $190 million to $210 million, GAAP operating income of $130 million to $150 million, non-GAAP diluted EPS of $0.40 to $0.43 per share, GAAP diluted EPS of $0.27 to $0.30.

To provide additional transparency into our expected results in the back half of the year, we are providing revenue and EPS guidance ranges for the third and fourth quarters.

We obviously can't predict exactly what will happen with tax legislation, but this is how our plan currently lines up by quarter.

For the third quarter of fiscal 2013, we expect revenue of $2.155 billion to $2.215 billion, non-GAAP diluted EPS of $2.78 to $2.83, GAAP diluted EPS of $2.65 to $2.70.

For the fourth quarter of fiscal 2013, we expect revenue of $728 million to $748 million, non-GAAP diluted EPS of $0.12 to $0.14, and GAAP diluted loss per share of $0.01 to GAAP diluted EPS of $0.01.

This quarterly guidance reflects the impact of late legislation we expect in our tax business.

We are assuming normal seasonality for all other segments.

And with that I'll turn it back to Brad.

Okay thanks Neil.

We've talked a lot today about our Small Business Group results and I'm very proud of these results, especially considering the macro environment.

We know from conversations with you that the focus is already shifting to tax.

So I want to provide a preview of how our refreshed Company strategy will be playing out in Consumer Tax in the coming seasons.

First by delivering awesome product experiences.

We talked at investor day about our site traffic.

Over 70 million unique visitors come to TurboTax.com every year, that is roughly half of the nation's tax filers.

So clearly we do not have it traffic or an awareness challenge.

In fact we have a huge opportunity -- to increase conversion of that traffic and to access filers with an amazing first use experience.

This year an increasing number of TurboTax users will be dynamically routed to a simple new interface, a very different experience than the standard TurboTax work flow.

This elegant new design will ease getting started and build confidence.

With the goal of converting a greater percentage of those 70 million visitors into TurboTax customers.

On the mobile first and mobile only front we have many exciting developments, including the ability for SnapTax to handle more types of simple returns this year, not just 1040EZ returns.

Second, enabling the contributions of others.

We've been ahead of the curve for a while in TurboTax when it comes to leveraging the wisdom of the community and the crowd.

Tax advice and live community are great examples of how we can delight our customers by connecting them to experts and each other to ensure that they're confident that their taxes are done right, and that they are receiving the maximum refund possible.

You will see even more this season.

We believe there are more than 40 million filers using tax stores and pros who are willing to use do-it-yourself software if they know they have someone in their corner when needed.

To attract these customers and reduce attrition we're again providing TurboTax customers with access to certified tax professionals.

And finally there's the opportunity to use data to create delight.

In fiscal 2012 we served more than 25 million customers.

With more than 18 million returns done in the cloud through TurboTax online, our ability to guide users to find maximum deductions based upon their unique circumstances is second to none.

As a result, users will have a more personalized experience this season which should in turn deliver better retention and improved conversion for us.

Of course this is all going to be occurring within a dynamic tax season, which includes the potential for late legislation as Neil just shared.

Our plans currently reflect a season where late legislation has been assumed.

But if that changes we will adjust our game plans accordingly.

In closing, across the Company we are building on a strong foundation while we're reimagining our products to capitalize on a rapidly changing environment.

This continuous innovation powers the consistent performance that we've been able to deliver, doubling our customer base over the past five years to more than 60 million users, transforming our portfolio with over 45 million of those users in the cloud.

And producing revenue growth at 10% on average, and non-GAAP earnings-per-share growing 16% in the midst of what has pretty much been a rocky economic environment.

With big market opportunities in front of us, and the tailwind of technology adoption at our backs, we expect to deliver similar results for years to come.

As always, I want to thank our employees for their hard work and their ongoing focus, and with that, let's turn it over to you for your questions.

Thank you.

(Operator Instructions)

Peter Goldmacher, Cowen and Company.

Brad, this mobile first and sometimes mobile only strategy is really interesting.

But I'd love a little more detail.

Oftentimes you see mobile either as a premium giveaway to bring someone to a desktop product, or you see a mobile product that is a subset of the functionality for a desktop product.

As you push more and more opportunity to mobile how do you balance traditional desktop price points with mobile price points, which are typically smaller?

And then how do you think about the cross sell opportunity with mobile relative to desktop.

Thank you Peter, I appreciate the question.

And the answer starts with, it depends upon the problem we're trying to solve for the customer.

So I'll give you a couple of examples of how a mobile first and a mobile only mindset has improved our ability to solve customer problems.

Think about SnapTax.

Up until SnapTax you sat in front of a piece of software, we would ask you questions, you would answer yes or no, and it would help you file your taxes, that's called TurboTax.

With SnapTax you have the ability to use the sensors and the unique devices on a camera -- I mean on the phone like a camera to take a picture of your W-2 and have that prefill a lot of your information and with a handful of questions your taxes are done.

That's helped reimagine how taxes can be done easily and help you get the maximum refund much more quickly.

We also have products that are mobile first and mobile only coming out in Small Business.

For example, we have the product Weave.

Weave has been downloaded by hundreds of thousands of customers since it's been released in the market and it's for those pre-accounting customers that simply want to manage their to-do-lists and eventually find a way to get more organized.

And so that is an incremental opportunity for us, it's purely mobile first and mobile only.

Sometimes we price those products the same way we would do it on the desktop or the mobile or the web world, so in SnapTax you actually do the same thing you do with TurboTax online.

You complete your return and then you pay us when you file it with the IRS.

And in other cases we use it as a lead gen that we have the ability to unlock and cross sell to other products which is more like what Weave is designed to.

Weave will eventually grow you into something like QuickBooks Online.

So it really depends on the problem we're trying to solve and the product that we're talking about.

But in a headline the thing that gets me most excited is that these mobile products tend to be about one out of two customers are incremental to the franchise.

They're expanding our category.

They're allowing us to convert what historically has been non-consumption and we are able to introduce them to additional services in our portfolio that allow us to monetize them over time.

Brad, let me just ask a quick, can I ask a quick follow-up question on Weave?

How comfortable are you with your data helping you understand what's cannibalizing an existing client relative to what is a brand-new opportunity.

Yes Peter we're pretty confident.

We have the ability with unique identifiers to know if you purchase another product inside the Company.

And we're able to cross match that back to see if you're incremental or if you're an existing customer.

And so when we cite some of the numbers like 70% of GoPayment's customers are new to the franchise we're pretty clear that whether it's Weave, it's GoPayment, SnapTax, who is an existing customer or who is a new customer.

Okay.

Thanks a lot.

Peter, this is Scott.

Let me add a reflection to Brad's very complete answer.

What we're finding is that our mobile offerings amplify our revenue models as opposed to replace them.

So when we provide a mobile extension to QuickBooks Online it makes it more valuable to have your books in the cloud so we get more QuickBooks Online subscriptions which is our core business model.

Same thing for QuickBooks desktop when they move to a subscription.

Brad covered how in TurboTax we get paid per return and the more returns we do, whether it's by phone or by web, the more we get paid.

And we will have mobile apps like Tax Caster, more like Weave, but they don't do what QuickBooks does.

So they pick up people, and then based on a different usage, and then some of those become users of our mainline products.

Same thing for our Intuit Financial Services division, when we bring out mobile versions of our online banking, we sell more online banking to more customers, and we get paid per use.

So, what we're finding is that mobile is amplifying our revenue models, not replacing them.

Well said Scott.

Thanks Scott.

Thanks guys.

Thanks Peter.

Brent Thill, UBS.

Yes, this is John Byun for Brent.

I had just a two questions.

One on the QuickBooks 2013, it was a price increase and I just wanted to hear the rationale behind it, whether it led to maybe driving more to the online product, and any color on the split between pricing and unit impact it had?

And then the second question was around Demandforce, you've had it for about six months now, are you seeing any synergy into the other Intuit portfolio?

Yes, thanks, John.

So, let me start with the first part of your question on the price increase.

We did take a modest price increase on QuickBooks Pro for $229 to $249.

It was not designed to try to drive more people online.

It was actually based upon a price value analysis where we felt we had opportunity in the market relative to the value we were delivering.

And so far we have not seen any sort of impact in terms of units.

We actually feel that this is a very good price for the opportunity and the value we are providing.

So, it's really not designed to try to force anybody into an online product.

The second part of your question around Demandforce, we just announced a couple weeks ago an integration between QuickBooks and Demandforce where you can take your customer data and your transaction history and use that as a way to basically help create a marketing campaign using Demandforce's services.

It's an exciting first step, it's still very early days.

We will have to wait and see how successful that can become over time.

But we are excited to see how quickly the team moved to get these products integrated using our partner platform and did that literally within the first six months of being a part of the Intuit portfolio.

So more to come there, but we're excited about the opportunity and the promise, and clearly Demandforce this quarter had another really good quarter, with 60% subscriber growth, and they just continue to grow quickly.

Thank you very much.

Thank you John.

Walter Pritchard, Citigroup.

Ken Wong for Walter.

Neil just a quick question on the tax guidance and the delay.

Looks like you guys are anticipating 50 to 75 versus kind of 40 to 60 a couple years back.

Should we view that as you guys thinking that the delay maybe kind of deeper than February 15?

You know Ken, we don't really know at this point.

I think the increase you see there just reflects the growth in the Business we've had since two years ago.

And so it's anybody's guess at this point, but I think this is a conservative estimate of what we think could happen if the filing deadlines are pushed back or if some forms are delayed.

But it's an estimate, we try to give you as much transparency on that as we could, and we will certainly keep you posted as we see what happens over the next few months.

And do you guys have any sense for if there's any kind of deadlines or any updates that may be coming from the IRS or is this just a wait-and-see approach?

We don't have any more information than you do on that level.

Got you.

And Brad, you mentioned $70 million in mobile revenue.

Is that from just your mobile apps or is it from combination of that and GoPayments?

How should we view that $70 million number?

Yes, so it's each of the products that we monetize directly through mobile.

So we have IFS banking products where you have the ability to use SMS or online banking through a mobile phone.

You have GoPayment, you have SnapTax, you have Mint where we have ways to save engine, so it's each of the products that we monetize through mobile add up to that $70 million.

And we see that growing at least by 50% in the coming 12 months, as well.

Okay great.

Thanks guys.

All right.

Adam Holt, Morgan Stanley.

Hi this is actually Jen Swanson Love calling in for Adam.

Maybe a follow-up first on the question around the pace of tax season and you talked about the revenue push out, it looks like the EPS impact effectively assumes that the revenue loss drops 100% through the bottom line ex tax effects.

But do you have any ability to change your strategy around the amount that you put behind the marketing push with TurboTax, and does that potentially offset some of the lost revenue on the EPS side at all?

Or how do you think about your marketing strategy versus when people will actually be going out and filing their taxes?

Yes, hi Jen, it's Brad.

We do have the flexibility of moving our marketing strategy around based upon what we learn, around late leg, and what we think is the most opportunistic time to get out and create demand in the market.

So right now what we've tried to do is we try to reflect what we think will happen with late legislation.

You will also see that we have moved some of our marketing spend up from Q3 and into Q2, and that is under the premise that if customers are waiting and having some confusion around when they can file we want to make sure we can help them with clarity and marketing messages.

But if anything changes we will certainly be fluid in moving our marketing dollars around to capitalize on the opportunity and to make sure we're driving the business results.

Great, and just switching gears a little bit.

I guess I have a two-part question.

First, it we look at the QuickBooks Online subscribers being reported now versus the way was reported previously, it looks like the delta is just the international subscribers.

So, first I wanted to clarify if that's the right way to think about it.

And then secondly, assuming that is, it looks like the growth there has been really dramatic over the last 12 months or so.

Could you talk about the growth trajectory there and how material that could be as a portion of the QuickBooks Online business overall over the next couple of years?

Yes, sure can Jen.

First of all you are correct.

The only delta from the way we have been reporting, and now we've added the global units in, the US global -- US QuickBooks Online numbers are growing very quickly on their own.

They have been.

We've been reporting them.

And the outside the US numbers, right now there's 20,000 filers, or basic QuickBooks Online customers rather that are actually paying customers, but we have many, many more in 150 countries that are in a trial period.

In terms of the opportunity for growth this is a growth catalyst for us, not only the US but around the globe.

And if you look at our total subscribers in the QuickBooks portfolio now, which not only includes QuickBooks Online, it includes QuickBooks Enterprise as well as QuickBooks desktop customers that have signed up for subscription and move their data in the cloud, those in aggregate are growing 27%.

So the subscriber model, whether it's QuickBooks Online or it's these other subscription services, will be the growth catalyst for our Small Business Group in terms of Financial Management Solutions.

Great, thank you.

Thank you.

Sterling Auty, JPMorgan.

Thanks, hi guys.

I just want to reconcile when you look at your guidance in this quarter you have the good Small Business results and metrics, but you talked about the surveys, both revenue and employment in the Small Index showing the macro -- tough macro backdrop.

What have you embedded into the guidance around Small Business, given that macro backdrop?

Sterling, we haven't assumed any improvement in the economy.

And yet our guidance, as you can see, for the full-year reflects 15% to 17% growth for total Small Business Group.

So without any help from the macro we see the opportunity to grow this business in the mid-to high teens.

If for whatever reason that broke the other way, we would clearly have a tailwind that we could capitalize on, but right now we're not banking on that, and that hasn't been reflected in any of our guidance.

Okay then one follow-up.

You mentioned the many trial uses in the 150 plus countries.

Is there any way to think about conversion rates on other things that you've done in the past that we might want to apply to that to give us a sense of how that might ramp going forward into revenue?

You know we're still very early days on that Sterling.

We're in a highly experimentation mode in terms of looking at how we can convert that into paid users.

So at this point in time I would say there's really nothing that we can share beyond what we talked about, but we certainly will be exposing more of that learning as we get further along the experience curve.

All right.

Great.

Thank you.

All right, thank you.

Raimo Lenschow, Barclays.

Thanks and congratulations to the great start to the year.

Two quick questions from me.

First of following on here on the international expansion side, do you have any sense already that you can share with us in terms of the price points that you get from these customers internationally, given that you're relatively new entrants into the market.

And then the second one is on the Payment side.

I can see that the Merchant Account Services customers growth has been picking up really nicely, can you just maybe talk about the drivers there and how that fits into the competitive environment with some of your competitors getting relatively aggressive on getting ready for some potential IPOs, et cetera.

Thank you.

Thanks very much.

Let me talk to the first one first.

Our pricing model for QuickBooks Online World is consistent relative to what we are charging in the US.

So there isn't really a big variation.

Now, when we go into different markets, obviously, we will tailor and tune that based upon what we see in terms of the opportunity for the customer and the competitive set, but right now I would say since there are so many countries to talk about, instead of going on a case-by-case basis I think of it as being relatively consistent with the United States model.

I have to say, I missed the second part of your question, so if you don't mind just repeating that, then we will make sure we answer that question as well.

Yes, I was just trying to gauge the Merchant Account Services on the Payment side have been growing really nicely and the growth rates there have accelerated, can you talk about any initiatives there and the drivers?

Yes, so the Merchant growth in our Payment side is being driven by two things.

First of all, we have moved in this year's version of QuickBooks to what we call payment as a feature.

When you sign up for QuickBooks, we automatically enable you to begin accepting payments instead of making it a separate decision where you would have to basically decide if you want payments and then fill out an application, we are able to use data in QuickBooks and basically prequalify you and enable you to accept payments.

That is really starting to help us drive what is our single biggest opportunity, which is increase attach penetration into the QuickBooks base.

And so that is the one big driver.

The second is of course GoPayment, our mobile payment product which continues to have success in the market and is bringing new customers into the franchise, and 7 out of 10 of those customers aren't using another Intuit product.

And those two combined have grown our Merchant 16% this quarter, which I think if you look back at the last couple quarters, it's continuing to accelerate.

Perfect, thank you.

Kash Rangan, Merrill Lynch.

Hey, thank you very much.

Brad, question on the tax side with the uncertainty about the taxes and the deductions I'm wondering if you could go back to, I'm not sure if you can, to the 2003 timeframe when I think the last set of tax changes were instituted.

Was that a positive catalyst or a negative catalyst for the business at the point in time?

And also if you could care to give any insights into how do you think this is going to play out if there are changes to the tax code and the deductions or what not.

Could this drive more people to the software side of the equation, or on the flip side, would this be a positive for some of the bricks and mortars?

That's it for me, thank you.

Yes, Kash, I would say anytime there is complexity in the tax laws, that creates opportunity for us because we're in the business of simplifying taxes.

And so when there is that sort of change happening from Congress, and I think it creates opportunity and that's the way we view each and every one of these situations.

Now it comes down to us to make sure that we're getting the message clear, we're providing a product that's simple and compelling, and we're creating such a great use experience that they tell their friends, their family members, and others to use the product.

But we think that this is a catalyst for us and that's why we've got ourselves set up in a situation where I believe we've got a really compelling product, backed up by tax expertise that we will be prepared for anything that Congress moves out.

In terms of the software side and tax legislation I always find that the opportunity for us increases when Congress goes in and makes changes.

Their intent is always something around trying to simplify it, but of course any change reproduces complexity and that helps us create an opportunity for our software to go in and solve that complexity for an end-user.

So I would say putting it all together it comes down to our ability to keep the message clear and simple and make the product compelling, but anytime there is changes in the tax law it creates opportunity for the software category.

And if you go back and look at the data over the last 10 years, you'll see the software category growing between 6% to 8% each and every year compared to the next closest alternative growing between 1% and 2%.

So, I think the proof points bear out there as well.

And in particular Brad, when changes were more pronounced would that result in more shift to the software category or was there more consistent growth regardless of the pace of change in tax codes?

Just a nuanced question.

Thank you very much again for taking my question.

I appreciate it, Kash.

I would have to go back in time.

Scott maybe you have the history of when they were more pronounced changes.

The most pronounced change that we've seen in taxes was in 1987.

The Pack Lloyd tax changes.

And that was pronounced growth for the tax software industry, it was before we entered but we were close to the firms in the business at the time, of which TurboTax was the ultimate winner.

And we've seen historically tremendous advantage when there are tax law changes.

But I agree with Brad's view on this.

While this is opportunity, it is up to us on how well we handle it.

And that's why you hear so much work in what Brad is covering in our preparation and the depth of expertise in the hundreds and hundreds of tax experts that we have on boarding to aid consumers through whatever the government will throw their way.

Thank you.

Gil Luria, Wedbush Securities.

Thanks for taking my question.

As a follow-up to that I think you've talked a lot about the stuff that you guys control, and clearly in 2010 tax season got highly compressed for you, and you guys were able to roll with that and end up having a very strong season, but there's a couple of pieces you don't control.

If I remember correctly Congress legislated well into December and it was December 23 when the IRS let everybody know that filings would only start being accepted with deductions on February 15.

Should we think of that seven week time frame as the timeframe to apply this time, so if Congress legislates into the end of December and the IRS then will push it out to maybe the end of February because the time it takes them to code?

So, anything beyond a resolution in Congress on -- in the third week of December means another week beyond February 15, and therefore kind of a proportional push out of revenue into your fiscal third?

You know Gil each and every time it's a little different.

I would say in this case it's going to be hard to tell what the magic date is.

If there's anything in the complexity of what Congress has to sort out, probably the singles biggest variable is AMT.

The sooner they can get that resolved the less risk there is for the IRS to have a struggle coding, and I believe that's pretty much the communication that's occurring between the agency and Congress and the industry right now.

And so, we'll have to see what Congress is able to do, but right now it's very hard for me to be able to sit and tell you given some of the things that are potentially going to expire what that magic date would be.

What I can tell you is that we're working very closely with the IRS, we've put together scenario plans and we basically have coded alternatives that we think could occur and we're going to be prepared either way to help customers begin to file, and then we will handle the complexity with the IRS on our side.

That's going to be the game plan we have is help customers go ahead and file their taxes and then we will handle all the complexity and take care of the rest of it with the IRS.

Is that the approach that you ended up using a couple of years ago, that you let all your customers file ahead of time and you held onto them until the IRS was ready, or did you just do that kind of mid season as you realized that that was the best approach?

Yes, honestly Gil, we learned in the season.

We did not start out that way and we got some very valuable lessons that I think will improve our execution this time around.

Excellent, thank you.

Scott Schneeberger, Oppenheimer.

Thanks good afternoon.

First off, Brad, you are addressing earlier and you highlighted this at investor day registering new QuickBook users on Payments, and then a goal was transferring them to become active.

Could you talk about when that effectively started, roughly a date and what type -- any quantification of progress you are seeing if there's been enough data, thanks.

Yes Scott, it is still pretty early in the season, but we rolled that out with the new version of QuickBooks, so the QuickBooks desktop release for 2013 that went into resale back in October included the ability to have payments as a feature.

And also the QuickBooks Online version of the product, we're in the process of making that as simple and easy there as well.

It's early days, but if you look at our first-quarter results we've seen a nice uptick in merchant growth and we like the early indicators so far.

And we think this is going to play out the way we hoped it would, which is removing friction and making it easy for small businesses to be able to property payments with simply purchasing QuickBooks.

Great, thanks.

And then if I could follow-up, it is basically three questions all in the tax space and I'll put them all out there, up front.

First one is you alluded to a new interface for TurboTax this year, and I saw in the release you also have the dates when TurboTax will come out in software and online form.

Any elaboration on that new interface would be appreciated here.

Question two is, Neil, is there any additional color you can provide us specifically on Consumer Tax revenue guidance in the second, third, fourth quarter beyond what's in the press release?

And then lastly, this is the first time I think we've ever seen the fiscal first quarter Consumer Tax down, and I realize it's seasonally light and not a big deal, but any discussion about why that growth trajectory has stopped versus prior years?

Thanks for taking all those at once.

All rights Scott, I'll take the first and third and leave Neil to the second one since you directed that one to him.

So first, on the new TurboTax interface I'll ask your indulgence to let us wait until November 23 when we release the product and the desktop, and December 3 online for competitive reasons.

Suffice it to say that we remain a highly experimentation culture where we're quickly putting things out in front of customers and making it better each and every time.

We are excited with the progress we are seeing and you will get a chance to see that product when it rolls out in a few weeks.

In terms of the fiscal first quarter being down in Consumer Group, what we basically saw was this year the number of people filing extensions using TurboTax was down versus last year.

If you go back and look at last year we had an unusual growth rate in the first quarter last year.

And we do not see that same spike this year.

And so, I would tell you that the thing I would keep in mind is this is actually a reflection of last year's product and last year's experience and advertising campaign.

It is nothing to do with our plans going into this tax season or the new refresh product that customers will be seeing, and so I would simply say that it's a one-time event, it's tied to last year's experience and the fact that we just didn't see as many people filing extensions as they did a year ago when we had a pretty tough comp.

And Scott, I guess to your question about additional color.

Let me be clear that we don't have a lot of insight into exactly what might happen when, in terms of late legislation.

But the approach we've taken in terms of how we build a product, with the engineering, with the marketing messaging, and with our financial planning, is to be prepared and to have as much flexibility as possible, and to be prepared for contingencies that might occur.

So, when we talk about revenue moving from one quarter to the next and the impact on EPS, those are our best estimates.

It's what we built into our planning for the year, but it's heavily dependent on what actually happens in Congress and what the IRS is able to accomplish.

And so, I don't want to imply a higher level of precision with what we think is going to happen, but also to leave you with the notion that we do want to be prepared, and that we've taken a number of contingencies into consideration to be sure that we have a good tax season overall.

Fair enough, thanks a lot guys.

Thank you Scott.

Kartik Mehta, Northcoast Research.

Brad, I just wanted to get your perspective on the tax business from a competitive spending on marketing.

Do you anticipate your competitors being more aggressive?

And will that force you to be more aggressive on marketing spend, or do you think you just get more efficient spending this year, so the level of increase this year is not going to be at an extraordinary rate?

Thanks, Kartik.

First of all we anticipate a highly competitive tax season as we do every year.

In terms of level of marketing spend we don't believe that we have a problem with how much we're investing.

We think we have an opportunity with how we make that much more targeted and efficient and effective.

I shared earlier that last year we had 70 million unique visitors to TurboTax.com, that's roughly half of all the people filing taxes in the US.

So, we have no issues with awareness and traffic.

Our opportunity is then to convert those into active users.

But I like our game plan going into this year, we've been spending a lot of time on our advertising, both online and off-line.

We've been improving the product and we anticipate it will be highly competitive, but we don't think that it's going to be an issue of being out spent, it's going to be an opportunity for us to be very targeted and effective in our message.

And then Brad, just a question on the Payment side.

As you look at customers that are interested in GoPayment and traditional, have you seen any kind of crossover yet where you are seeing you traditional customers wanting GoPayment products all by itself or vice versa?

Yes Kartik, actually one of the things we did with our payments as a feature is we're making it easy for you to sign up with Payments and use any of our Payments processing options.

Whether it's using merchant services through QuickBooks, using GoPayment, or using ACH capabilities that we have, as well.

So what we're trying to do is make it easy for you to take a payment anytime anywhere your customer chooses to pay you and that is an opportunity for us.

GoPayment for us -- the good news is, is it tends to bring people into the franchise for the first time and then that unlocks opportunities for us to expose them to other Payments options another Intuit products, and so we do see that as an opportunity over the long term.

Thank you very much.

I really appreciate it.

All right.

Thank you.

Jim MacDonald, First Analysis.

I have two questions on Payments and I'm not sure which direction they should go in, but they're both on Payments usage.

I know you are getting more customers, but you also have some initiatives to get those new customers to use the Payments engines, and maybe you could talk about how those initiatives are going.

And then could you explain on your fact sheet the card volume numbers that you're giving now are like 11%, and they used to be about 1%.

So there's obviously a big change in methodology there that maybe you could explain what you are giving us now?

Yes, Jim, I'll start with the Payments usage.

The opportunities for us is once as we have someone come in, sign-up for payments is to find a way to help them actively use it, and we have lots of initiatives going on now.

It's still early days but it's basically prompts, news feeds, opportunities for you to find other opportunities to continue to use the product.

I think you see that reflected in the results, even though it's still early days to have 21% growth in the Business and 11% growth in charge volume shows that we're starting to make some headway there.

But I would tell you we're not all the way to bright.

This is going to be greenfield for us as we continue to go in and work harder and more aggressively in this area.

The second area is the change in how we're reporting on the fact sheet.

We've been historically reporting on average charge volume per merchant, and quite frankly that gets muddied with mix.

As you bring customers in on GoPayment, they tend to be earlier stage businesses who process less charge volume and when you throw those customers in with the other same-store sales you end up getting a number that's down in the 1% to 2% to 3% that you referenced.

We decided now to go back and use what the industry typically reports, which is total charge volume process.

You look at Visa, MasterCard, others out there, they report numbers that way and that gives you a better sense of basically how many dollars are we moving through our Payments mechanisms, and right now it's up about 11% in total charge volume, and that's pretty much what you are hearing in the industry as a norm right now.

So we're getting good healthy charge volume, while we are increasing our customer base, and we simply moved the metric to be a little more reflective of how we're looking at the Business.

Great, thanks.

Thank you.

Ross MacMillan, Jefferies.

Thanks a lot.

Brad, the first question I had was just on the desktop subscription growth.

It's actually only slightly lower now than I think the online subscription growth, QuickBooks Online subscription growth.

Can you just talk to that?

And I guess I'm curious as to whether it's margin equivalent and whether you think the lifetime value of desktop subscriber is the same or different from a group of online subscriber?

Thanks.

Yes, Ross, it is improving.

One of the things we did this year with the release of QuickBooks 2013 is in the registration process, we made it very easy and compelling for you to choose to upload your data in the cloud.

We provide benefits statements that you will have automatic backup by having your data in the cloud.

You'll have access to your customer data and your transaction information through tablets and phones and we see an increasing number of customers signing up and going that route.

The good news for us is that moves them to a subscription model, it makes it easier for us to introduce them to other services, and enables us to get their data in the cloud so we make the product better for them and deliver better benefits.

So, this is a real win for the customer and a win for us.

In terms of lifetime value, the subscription service for QuickBooks on the desktop products is $34.95 a month.

And that ends up being equivalent to about $299 or $300 a year.

And if you think about that relative to what it would cost with Doc Pro on a standalone basis, which is by $249 a month, we're getting a higher lifetime value for our customer on a subscription.

And as you know, it's easier for us then to look at payments and payroll and other services attaching to that product when we have the data in the cloud.

So it is an upside for us in terms of LTB of about $50 a year, and of course, on a subscription basis that would carry over multiple years.

That's super helpful thank you.

And maybe just one follow-up on the tax season.

You obviously mentioned a number of initiatives this year.

You mentioned experts again.

I was just curious, the last year you'd introduced the free experts for the first time.

What is going to be different this year with the expert program.

I'm specifically I guess interested in whether just a volume of experts is going to be materially higher this year.

Thanks.

Yes, so what's going to be different about it this year is we are going to be very clear that this is embedded into the product experience, it's going to be easier for you to find an expert should you want them at the moment of truth.

In terms of the volume of experts, we feel we've got the staffing model equivalent to what we had last year when we had the ability to flex up or down if we need to.

And I would also say that our biggest opportunity last year was not the quality of the experience.

We actually saw Net Promoter scores go up if someone used a product with an expert.

We also feel our penetration of first-time filers go up because people knew they could use -- get somebody to help them if they needed.

Our challenge was awareness.

We just weren't that effective at helping market the fact that this was available and making it very obvious in the product, so that's what you're going to see different this year versus what we saw last year.

Great.

And very last one for me, obviously your seasonality has been getting such that your Q4 -- your fiscal Q4 earnings are moving higher.

I just wanted to make sure that -- there is no assumption of anything from tax season extending beyond your Q3 period at this juncture in your guidance.

Is that correct?

That's correct Ross.

Great.

Thank you very much.

Greg Dunham, Goldman Sachs.

Yes thanks for taking my questions.

When you look at the guidance from a spending perspective in your commentary on going forward with the sales and marketing initiatives earlier in the year, it sounds like the whistle to whistle comment that you made a year ago in terms of investment.

Should we be thinking about this year being a unit year again?

I mean should we expect that the ARPU growth that you got out of tax last year isn't going to be at the same level this year.

Is that the basis expectation?

Yes, Greg, first I'll reiterate what you just said.

We are definitely going to play whistle to whistle, we just have to figure out when the game is going to start, and that will be somewhat contingent upon what late leg does, but we're going to be out there helping customers from day one.

In terms of the prioritization, our priority remains extended the category and growing units, because we know we can maximize lifetime value over multiple years.

And so we always lean heaviest on getting as many customers in and growing the category, and increasing share, and that all comes down to units.

And then from there we get upside from ARPU, and the average revenue per filer ends up being primarily from mix and attach.

We don't rely on price to do that.

We basically tend to do that through mix and attach.

So the answer to your question is, we will continue to play heavy for share and for unit growth, and we will be playing whistle to whistle.

Okay.

And one quick follow-up.

The Online Payroll number was pretty strong and the Payroll numbers seem to be strong even in a bad macro.

What kind of expectation for the Payroll segment should we have as we go forward?

Thank you.

Yes, we see Payroll as a double-digit growth engine, as we see our total Small Business portfolio being.

We think that it is a real opportunity for us to continue to penetrate the QuickBooks base and get more of the customers to sign up for our own Payroll service.

We also think our standalone Payroll products including some newer ones we've released like Snap Payroll, which is a mobile Payroll product, enables us to get customers into the franchise that may not be using QuickBooks.

So, we do see it as a double-digit growth engine for us, and we're continuing to look at how we can grow our customer base in addition to grow the revenue.

Thanks.

All right, thank you.

Brad Zelnick, Macquarie.

Very much.

Most of my questions have been answered but just on operating margins, and specifically Neil, on Small Business.

If I look at the supplement, it appears margins are down about 300 basis points versus last year.

Can you just give us a sense of what's driving that, perhaps inclusive and exclusive of Demandforce?

Brad, the biggest item that it's a factor is the inclusion of Demandforce.

And clearly when you have a segment of the business that's growing their subscriber base north of 60%, there's some sales and marketing costs associated with that, and there's a G&A piece that's also included in Q1 for the very first time.

That's really the biggest driver, I would tell you, of what you're seeing in terms of Small Business margin.

Most of the other things are very positive as we get more customers and higher LTB in the online offerings.

Thank you very much.

Michael Millman, Soleil-Millman Research.

This year most of the late tax legislation is likely to affect 2013.

The AMT, something that's been done every year, I'm not sure why you expect a big change or a change at least in the 2012 taxes being done this year.

Could you also -- following someone's earlier question, the impact you see on the volume on February 15, March 15.

And the other question, could you update us on fraud discussions with IRS.

Michael I will try to give these a shine and let me know if I've hit the questions you're asking.

Let me start a little bit about the taxes.

There are dozens of expiring tax provisions that will affect forms this year that are basically in front of Congress now.

They include everything from earned income tax credit, child tax credit, adoption, student loan interest, there's Schedule A items like mortgage insurance premiums, there's the alternative minimum tax which I've talked about, there's education deductions.

So there's a lot of it out there that's basically been bundled up that Congress has to address.

Probably the gnarliest of those, in terms of implications for coding are, for the IRS and for us, are AMTs.

And as you said, each and every year that tends to be one of those conversation points, if Congress chooses to basically approve it, then it's a simple patch and you move forward and there's no issue, no foul.

If there is any meaningful changes to it or they choose to not continue it forward then there's some pretty serious coding that the IRS will have to do and subsequently the rest of the industry, so that's why I called it out.

But that is basically what is all going on behind-the-scenes on the taxes.

You asked about volume on February 15, March 15.

I'm not sure exactly what the question was there, so let me ask you just to clarify that a little bit.

I don't have a number offhand, but typically you show 10% or so increase in units when you report the March 15, February 15 data, and I was talking about unit volume.

Oh, I see.

Well obviously, we will have to see how our execution goes and how the season unfolds and we will release that information once we have it.

But right now we haven't provided guidance at that level at this point for the tax business, but I understand the nature of the question, and the real question is going to be is the season going to break early or later in the year, and we're going to have to do our best from an execution perspective and we'll certainly update everybody once we have those results.

We would anticipate giving the interim season update on units that we've done before.

Yes but in terms of how they're going to break, will they be 10%, 15%, which I thought I understand in your question, we don't have that level of precision right now that we're prepared to share.

Right, that was the question.

Okay, and Michael your last question was around fraud and I would say that this is clearly an industry question that the IRS has been dealing with.

All of us in the industry have been at the table with the IRS doing our collective best to say what can we do to help the IRS work with this issue.

And all the software players, all the professional tax prepares are all doing everything we can to help minimize fraud.

It's just the nature of cyber criminals these days and we are doing our very best to put a dent in that and we're doing it in collaboration with the rest of the industry and with the government.

Can you give us any idea of some of the steps that are on the table?

You know not at this point we can't Michael.

Okay.

Thank you.

All right.

Thank you.

David Togut, Evercore Partners.

Question.

Can you give us a sense as to whether you think GoPayment is gaining or losing share versus Square.

You don't specifically breakout the GoPayment volumes.

Yes David, I would say first of all that this market opportunity is really a huge upside opportunity for everybody.

About 55% of small businesses today accept credit cards and electronic transactions.

And what basically is happening now is with GoPayment with Square, and by the way there are many, many others, there is PayPal here, there is Google Wallet, you've got a new introduction coming out from the credit card companies.

Bank of America just launched their version of it, Group One launched their version of it, there are dozens of players in this space, and basically what's happened is, it is expanding the category.

Everybody is benefiting from the upside opportunity of getting more customers in, and I think you see that in our 16% merchant growth and our 21% revenue growth.

And so it's hard for us right now because some of these companies are public, some are private, some don't even report the data separately to know who is gaining share or not.

What I do know is that I like how our product is stacking up from a quality experience perspective.

I like the fact it is bringing new customers into the franchise.

And I love the fact our team continues to innovate to make it better, so as long as we stay focused on that I think it will all shake out positively in the end.

Just a quick second question.

You think Intuit Online Payroll is growing faster than the online payroll category or slower and do you have a good data on SurePayroll at Paychex and how you are doing versus SurePayroll.

Yes, there hasn't really been any precise data on Online Payroll as a category is growing.

We tended to be one of the early players in that space.

You've got some competitive alternatives out there that are getting into the space, as well.

But I do like the fact that our Online Payroll business is growing subscribers 20% and has continued to grow at that sort of level for many, many quarters.

SurePayroll, I do know of SurePayroll.

I knew them when I was in the industry before coming here about 10 years ago.

I don't know how they're doing inside of the Paychex organization.

I do know how we're doing relative to the alternative is we're continuing to grow customers when it appears their publicly reported data is not growing as robust in terms of customer growth.

And I know that our revenue growth is pretty solid too at 12%.

So I think our team is excited about the opportunities we have in the Payroll space, particularly with the Online Payroll space, and in terms of SurePayroll and others, that's pretty much all the information I have at this point.

Thank you very much.

Justin Furby, William Blair and Company.

Hey guys, thanks for sneaking me in.

Brad I guess for you, I realize you can't share much on the new user interface around TurboTax.

But at a high level I'm wondering, does it impact existing customers who have already filed with you, or is it really just trying to improve conversion rates around existing traffic on the site?

Yes Justin, it will have a positive impact on existing filers as we roll it out across the base over the year.

Right now it is definitely focused on helping people who are in the traffic phase move into an active user phase, but there will also be improvements for existing customers, as well.

Okay and then, Neil for you, on the cash flows quarter obviously it's not an important quarter on a cash flow standpoint.

But for the full-year, what is the best way to think about cash flow growth, particularly as you move into more of a Connected Services model?

Justin, we don't see a departure from our -- from the trend you've seen in the last couple of years where our free cash flow ought to grow roughly in line with our operating -- our non-GAAP operating income.

And we've been able to maintain that even as we've shifted more to Connected Services.

So, we're not really expecting a significant departure from that trend going forward, so you can apply roughly the same guidance growth rate around non-GAAP operating income to cash flow, as well.

Okay, and then it looks like you've got the $60 million there from the Website business.

Are there additional payments that you're expecting from that or was it a one and done type of transaction?

No, that transaction is closed Justin, and we've been paid.

Okay.

Thanks guys I appreciate it.

Thank you Justin.

Thank you, and I'm showing no further questions at this time gentlemen.

Would you like to close with any additional remarks.

Yes, thanks Sayeed.

I want to thank everybody for the questions today.

We are pleased with the momentum coming out of the first quarter.

We're confident with our game plan, we're looking forward to our peak selling season.

I realize that there's a lot more information that people would love to have us share right now about tax season, and we're sharing everything we know when it comes to late leg, or all the things we can share in terms of our new products.

But we are excited to get into season we look forward to talking to you again soon.

Ladies and gentlemen, thank you for participating.

This concludes today's conference call.