直覺電腦 (INTU) 2014 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to Intuit's First-Quarter Fiscal 2014 Conference Call.

(Operator Instructions)

With that, I'll now turn the call over to Matt Rhodes, Intuit's Director of Investor Relations.

Mr. Rhodes, you may begin.

Thank you very much.

Good afternoon and welcome to Intuit's first-quarter fiscal 2014 conference call.

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

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 2013, 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 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, and the business metrics and associated growth rates refer to worldwide business metrics.

As a reminder, all reported results exclude Intuit Financial Services and Intuit Health, which have been sold and reclassified to discontinued operations.

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

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

All right.

Thanks, Matt, and thanks to all of you for joining us this afternoon.

We're out of the gate strong in fiscal 2014.

We grew revenue 11% in the first quarter and we're reiterating our guidance for the fiscal year.

You'll hear more on that from Neil in a minute.

As you know, we realigned the organization on August 1, focusing the Company on two strategic outcomes: to be the operating system behind small-business success, and to do the nation's taxes in the US and Canada.

Over the past several years, Intuit has successfully transitioned to become a leader in cloud solutions for small businesses and consumers.

Two-thirds of our 45 million customers use cloud solutions and nearly two-thirds of our revenue comes from higher-value cloud and connected services with predictable recurring revenue streams.

In our tax businesses, 75% of our consumer tax customers use TurboTax Online and we have a first mover advantage with our cloud-based professional tax offerings.

An aggressive shift to the cloud is building momentum in our small business segment as well.

More than 1 million QuickBooks customers are now in the cloud.

QuickBooks Online crossed the milestone of 500,000 subscribers, up 29% and accelerating from the fourth quarter.

Global distribution is helping to drive this growth, with QuickBooks Online subscribers up more than 80% to over 37,000 paying customers outside the United States.

In fact, on average, a new QuickBooks Online subscriber is signing up every minute around the globe.

We also have an additional 500,000 QuickBooks desktop customers who have moved their data to the cloud.

When you include QuickBooks Enterprise, our total QuickBooks subscriber base is up 25% year over year.

This growth is no coincidence.

Cloud-based offerings provide superior benefits for small businesses and we want all of our small business customers to adopt cloud solutions.

In support of this goal, we've been aggressively reducing friction across the ecosystem to make it easy for QuickBooks customers, accountants, and developers to embrace the next chapter.

The new QuickBooks Online that we unveiled on Investor Day in September is now available to all new customers and we're rolling it out to existing QuickBooks Online and desktop customers over the next several months.

Just a few ways that we're driving adoption include a new three-step, three-minute conversion process for the QuickBooks desktop customers to transfer their data to QuickBooks online.

We're marketing this capability more aggressively to our desktop base as the new QuickBooks Online rolls out more broadly.

For new customers, we're using the power of big data to customize their QuickBooks Online experience based upon other small businesses who look just like them, completing their setup process in a matter of seconds.

We're complementing these efforts with strong promotional incentives for accountants and small businesses to drive adoption of QuickBooks Online, and we'll continue to target and test promotions in different markets around the globe.

To accelerate the global adoptions, we strengthened our Intuit partner platform for third party developers in the United States, in Canada, in the UK, Australia, and India -- the five priority countries where we're currently focussed.

We've strengthened our APIs, making it easier for developers to build solutions that seamlessly integrate with QuickBooks Online, and we've upgraded our apps.com distribution that showcases our developer partners now making their apps easily discoverable from within the product at the moment of need.

Finally, we've modified our pricing to attract the best developers and we are proud to announce the addition of American Express, who's built a new app called ReceiptMatch for QuickBooks.

The app allows small businesses to take pictures of their receipts and match them with their QuickBooks chart of accounts in a matter of seconds.

The app's going to be available in early 2014.

While we have encouraging momentum in small business, we are looking forward to the upcoming tax season as well.

Fiscal 2014 is a pivot year for consumer tax.

I like the changes the team is driving and I believe this year will represent a strong initial step toward the multi-year journey to achieve our vision of taxes are done.

In the upcoming season, we are laser-focused on driving improvement in three critical areas.

First, we intend to improve the conversion of new users with a simpler experience to help customers through their tax return with increased speed, ease, and confidence.

Second, we're streamlining the returning user experience, unleashing the power of customer data to simplify the tax prep process and help them easily understand year-over-year changes in their tax returns.

Third, we're creating a unified help and answer experience, driving TurboTax customers to clear explanations on everything that is tax-related, including the Affordable Care Act.

In the professional tax business, we're off to a strong start early in the season and our shift to the cloud is picking up steam.

We intend to build on our lead and capitalize on this once-in-a-generation shift to the cloud for the accountants as well.

Now, as you've likely heard, the IRS anticipates some delays to the start of the tax season again this year.

It's too early to know the exact impact on our business, but we will keep you posted as we learn more.

With that context, let me turn it over to Neil to walk you through the financial details and our guidance.

Thanks, Brad.

Let's start with overall Company results.

For the first quarter of fiscal 2014, we delivered revenue of $622 million, up 11%; non-GAAP operating loss of $20 million; GAAP operating loss of $77 million; non-GAAP loss per share of $0.06; and a GAAP loss per share of $0.04.

In the first quarter, we accelerated some investments in data and small business marketing to drive growth throughout fiscal 2014 and beyond.

As a result, expenses grew slightly faster than revenue, consistent with our plans for the quarter.

Turning to the business segments, total Small Business revenue grew 11% in the first quarter.

Within Small Business, Small Business Financial Solutions, or SBFS, revenue grew 9%.

Within SBFS, QuickBooks revenue also grew 9%, driven by increased adoption of our cloud solutions.

QuickBooks Online subscribers grew 29%, with modest benefit from the new QuickBooks Online, which became available to all customers late in the first quarter.

QuickBooks desktop subscribers grew 17%.

QuickBooks Enterprise subscribers grew 21%; and our small business deferred revenue grew 13%, driven in part by the subscriber growth I just mentioned.

Payments revenue grew 8% in the first quarter.

As a reminder, we had two months of benefit from the Durbin amendment in the first quarter of fiscal 2013, creating a tough comparison.

Merchants grew 10% and card transaction volume grew 6%.

As Brad mentioned, we also recently announced partnerships with Square and American Express, which will provide easy integration with QuickBooks Online.

Let us move to Small Business Management Solutions, or SBMS, where overall revenue growth grew 15%.

Within SBMS, Employee Management Solutions revenue grew 12%, driven by strong growth in online customers.

Online Payroll customers grew 18% and within online payroll, full service payroll customers grew 85% to over 13,000.

In addition, Demandforce subscribers grew 36%.

We recently acquired Full Slate, a leader in online scheduling capabilities for small businesses, which will join the Demandforce team.

Within the consumer segment, consumer tax revenue was up 11% versus the first quarter last year, driven by late season filers and additional attached services.

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

The first quarter is also relatively small for our professional tax segment, where revenue grew 16%.

It's early in the year, but we've seen strong customer acquisition and renewals for the upcoming tax season.

As we told you in September, we made some product changes in this segment.

The second quarter guidance that we reiterated today includes a shift of approximately $70 million in ProTax revenue from the second quarter to the third quarter, as compared to fiscal 2013.

Turning to the balance sheet, we continue to take a disciplined approach to capital management, investing the cash we generate in opportunities that yield 15%-plus ROI.

So far this fiscal year, we've made four small acquisitions, with a total investment of around $90 million.

These were talent acquisitions that provide Intuit with innovative teams of highly skilled data scientists, engineers, and designers, who will add great value across our businesses.

In acquiring these companies, we used a mix of cash and equity in order to align the seller success with Intuit's over the long term and as a way to retain top talent.

We also returned cash to shareholders via share repurchases.

In the first quarter, we entered into an accelerated share repurchase agreement to buy back $1.4 billion worth of shares and about $2 billion remains on our authorization.

We expect to reduce our share count 4% to 6% net in fiscal 2014.

Our Board also approved a $0.19 dividend for the second quarter of fiscal 2014, payable on January 21.

Moving to guidance, we iterated our guidance for the second quarter and fiscal 2014.

You can find the details in our press release.

As Brad mentioned, we expect a late start to this tax season.

That can impact form availability and push consumer tax and ProTax revenue from our second fiscal quarter to our third fiscal quarter.

We'll update you as the season approaches if our expectation for the timing of revenue has a material impact on our guidance for Q2.

One housekeeping item: as a reminder, we'll provide tax unit updates in February in conjunction with our second-quarter earnings release, and in late April after the tax season is over.

With that, I'll turn it back to Brad to close.

Okay.

Thank you, Neil.

It's obviously early in the fiscal year, but we're off to a great start.

As you can probably sense, we're excited about the new QuickBooks Online, which is accelerating our transition to the cloud, creating value for Intuit and for our shareholders.

We're also gearing up for tax season and looking forward to getting our new offerings out into the market in the next couple of weeks.

As always, I want to thank our employees for their hard work and their ongoing focus.

And with that, let me turn it over to you to hear what's on your mind.

(Operator Instructions)

Gil Luria, Wedbush Securities.

The success of QuickBooks Online internationally started even before you put a lot of emphasis on it.

But can you help us a little bit in terms of what your approach is for helping that go to the next level?

Are you working with accounts internationally in a different way than you have before?

Is that any different than the way you work with accounts in the US?

Yes, thanks, Gil.

First of all, yes, there are some things that are different.

First of all, the new version of QuickBooks Online, which we referred to at Investor Day, as Harmony, is now available across the globe and with our new changes to the Intuit partner platform, we have the ability for third party developers around the globe to build on the QuickBooks Online platform.

Then what we did differently this year is we focused in on the four priority countries in addition to the United States: Canada, the UK, Australia, and India.

In doing that, we prioritized what was the best go-to-market plan for each of those four countries.

The emphasis is clearly on online and websites and it's also the accountant channel.

In each of those four countries, we've been getting underneath the hood.

In fact, I was just out in each of those countries in the last two weeks, sitting with accountants understanding what was it they were looking for from the product, what was it they were looking from a services and program perspective, and what could we do more of to help them to be successful?

In each of those four countries, our teams are tailoring the go-to-market offering.

Sometimes it is about offering them incentives to sell.

Sometimes it's about offering them the ability to be found by small business inside a product, find a ProAdvisor.

But in each country, it's slightly nuanced and we have a right for me approach for each of the four markets.

That's what's helping us getting accelerated traction in the markets.

Got it.

Very good, thank you.

Greg Dunham, Goldman Sachs.

Also, following up QuickBooks Online and asking it a different way, more on the US performance, if you look of the growth in subscribers in the US, it looks like it's in the high teens at 17%, but obviously, you released it with only a month left in the quarter.

The question is, how much lift did you get in October from the release and what kind of growth rate of QuickBooks Online subscribers are you seeing post the release?

Thanks.

Greg, first of all, in the United States, QuickBooks Online in the quarter was up 26%.

So, if you exclude the global numbers, it was actually up 26%.

The second part of the answer is exactly what you hypothesized, that we got very minimal lift from the new QuickBooks Online in the first quarter, because we were just rolling it out in a phased approach to new customers, so we expect to see the incremental impact of this new version of QuickBooks Online as we head into Q2 and then into Q3.

All right.

Thank you.

Peter Goldmacher, Cowen.

Brad, I wanted to ask you a quick question.

Usability, obviously, is a core focus for you guys and obviously an important one and the examples you gave were good examples of how to help make conversion easier.

But QuickBooks has pretty high churn.

Can you talk a little bit about usability in the product that is being aimed at reducing that attrition?

Yes, I sure can, Peter.

In fact, with QuickBooks Online, the challenge we had was getting people into the actual product and having them be productive as quickly as possible.

It used to take as much as 40 minutes in the old QuickBooks Online classic to get your product set up for you and to be able to customize what tabs you would need if you had inventory or if you were more of a services-based business.

Now by using the data in the cloud and finding customers who look like you out of the 500,000 other subscribers, we can get you set up in seconds.

The other thing we've done is we've erased the organizational scenes between payroll and payments.

You're inside of QuickBooks, you add an employee, and in a three-step process, you're literally paying your employee with payroll.

We're seeing a much stronger uptick in the early indicators for Attach, which we think will hold promise as we go further into the rollout.

The one thing you'll see us doing in the next four to six weeks, is we're on a six-week release cycle and we're addressing other areas in the product that we know have the opportunity to continue to be further enhanced.

Things like banking fees and bank reconciliation, as well as other areas that will continue to help the customers move through the product and as you said, a cleaner usability experience.

Net-net, what we're seeing right now is we smoothed out the navigation.

We sped up the actual setup process.

We've made it easier to cross-sell and buy products.

We've made it easier for third party applications to be found inside the products.

In the areas where we aren't all the way to bright, we're on six-week cycles to knock those down, as well.

That's great, Brad.

Thanks a lot.

Kartik Mehta, Northcoast Research.

In your prepared remarks, you used the word pivotal for the tax season.

Did you mean pivotal, as in it is a pivotal time for Intuit, or are you expecting some change in the industry and that's why this season becomes pivotal or very important?

Thanks, Kartik.

Actually, the word I had meant to articulate is the word pivot and the pivot is away from relying heavily over the last several years on advertising to a very significant shift towards a new product vision, which we describe as Taxes Are Done.

That's going to be a multi-year journey that we talked a little bit about at Investor Day, but this is going to be that first initial foray into making this product frictionless.

In fact, the team aspires to basically have a product that is no effort, no risk, no doubts.

We're focusing on simple filers this year, for the first time filer.

We're focusing on saving more of those 5 million customers that are returning users, who may end up not coming back the second year, and we're focusing on simplifying the use experience to get answers to questions.

It's basically what we're calling a pivot year, which is internally we've really geared up our engineering efforts, our product efforts, and we're basically looking to lean more into having a great product experience that leads the way in the market.

Last question, Brad, on QuickBooks Online, as you move to the cloud, there seems to be a greater number of competitors in the market.

Does that change in any way how you have to market the product?

Does that change your emphasis on consumer versus accountant, or anything else you'll do to make sure that the product gets the proper recognition?

Kartik, actually, when new competition comes in, and especially if they generate press, it truly creates an opportunity for us to accelerate the category growth to get people out of spreadsheets and shoe boxes, which is still 42% of small businesses still do their accounting, and gets them to consider a solution.

What we've been able to do is we've been able to capitalize on that.

We've been at all the major accounting shows, we've been at all the major trade shows, we're out there on the web.

We obviously have an exciting program with small business big game, where we have the six month social campaign and there's going to be a winner who's going to get a 30-second TV ad in the third quarter of the biggest game of the year.

All of that actually is good news for us in terms of getting people to raise their head and say, hey, it sounds like there's something in the market that may be different.

As long as our product is superior to every other solution in the market, then we think this is nothing but good news for us.

There isn't anything we've had to do differently, other than make sure people know that we have a leading cloud solution that has been completely reimagined and if you give it a test drive, even if you tried it a couple years ago, you're going to find a completely different experience.

Thank you very much.

I appreciate it.

Brent Thill, UBS.

This is John [Gunn] for Brent Thill.

I have two questions, you mentioned full service payroll was up more than 80%.

Realizing it's probably a small base, but why the strength there?

Go ahead.

Ask your second.

There were some questions in the past about filing of tax extensions, and wondering whether you had seen any impact from that in the October quarter?

Yes.

Okay.

Thanks, John.

Let me start with the first one.

As you may recall, we looked at extending our payroll offering on the high end to include something called full-service payroll, which not only enables you to input your hours and basically, your wage rates, but also will handle the filing for you and will handle any inquiries that may come from the IRS if you have any sort of an audit or potential penalty.

That's pretty much a direct competitive alternative to some of the outsource solutions in the market.

The difference is ours is driven from algorithms.

We're able to look at big data and able to look at prior user behavior to see where there may be a potential input error and we can tell you, did you mean to type 400 hours or did you mean to type 40 hours?

By correcting it at the point of input, we reduce the potential errors down the road, which lead to penalties and interest.

About 40% of small businesses, by the way, make a mistake every year on payroll.

By doing this, we're able to basically eliminate that risk of mistake.

The product is so simple to use, it's online and it is really accelerating in terms of its traction in the market, and so that's what's driving the 85% growth rate.

You're right, it is also the small base of about 13,000 customers, but that continues to accelerate and we're excited about its future potential.

The second is the filing of returns and tax.

Yes, we did see the continuation of people filing extensions up through October 15.

That's what drove some of our tax numbers that you heard Neil talk about earlier, both in ProTax, as well as consumer tax.

At the same time, though, it wasn't enough to offset what everyone had anticipated would have happened this past tax season in terms of the total returns being filed.

While it certainly was more than we had forecasted, it still didn't make up the delta of what we had fully expected for the year.

Thank you.

Scott Schneeberger, Oppenheimer.

Following up on the consumer tax questions and on your comment of pivot.

I want to clarify, it sounds like you're going to do more of a deep dive on the product itself and you alluded to a shift away from advertising.

Could you specify that a little bit more?

Is that a spend thing?

Is that a type of customer that you're going after?

Just a little bit of elaboration there.

Thanks.

Yes.

We used the word at Investor Day, too, so I don't want to lead anyone down a false sense that there's something fundamentally different than we talked about in September.

If I can take the word pivot and pull it out of the vocabulary and talk about what exactly we're doing differently this year.

We mentioned that, over the last couple of years, we hadn't made the advances in the product that we feel we needed to make, and as we looked ahead, we said there's the real opportunity now that we have the power of data, we have an ecosystem of offerings, like W-2s that we pay with employee payroll and small business, bank fees and a lot of other information that we can basically help you get your tax return done in a much shorter period of time if we take the burden on of getting all the data input for you.

That's what we call Taxes Are Done.

It's going to be a multi-year effort to get to our nirvana.

Our nirvana is to eliminate basically 7 billion hours of tax preparation for consumers and to reduce the tax prep drudgery for the professionals who actually do tax prep; so make it easier for the accountants and CPAs as well.

What you see shifting this year is much more of an emphasis on the product innovation.

In terms of advertising and marketing, the last few years, we have engaged in increased spending of marketing and advertising.

What you'll see differently this year is we're going to be much more targeted and much more specific about how we look for effectiveness in that advertising.

As opposed to a continuation of increased investment, we're going to look for how we get more bang for our buck out of our marketing.

Those are really the concepts that we're talking about when we talk about a pivot year, is leaning more into product innovation and then allowing the advertising to basically showcase the product.

Thanks for the clarification.

On the tax season, could you speak, and we just had the question about extensions, could you speak to what it looks like is trending for returns at the IRS this year?

Again, repeat, if it doesn't look like a possible delay this year is yet affecting your thinking on the upcoming year, what's your anticipation for returns at the IRS in the 2014 season, maybe?

Scott, I wish on this first one I had an answer for you.

We haven't gotten any update from the IRS as a result of everyone that's filed October 15 to know what the year's looking like.

Our data suggested it was still going to be shy of flat to the prior year, but we have to see what the rest of the industry shows up doing.

In terms of this coming year and what the delays are, we really don't have enough information to know what the implications will be.

Our expectations for return growth, though, is we're in that zero to 1% range and we're targeting in that zip code for year-over-year return growth.

That'll be more informed once we get a deeper analysis from the IRS on how the full year played out this year.

I could sneak one in, just to get Neil involved.

Neil, is the accelerated share repurchase complete yet?

Will we know when it is complete?

Will there be some type of announcement?

While it's ongoing, are you able to repurchase shares in the open market on your own?

Thanks.

Scott, we're about 70% done, 70%, 75% done through the end of the first quarter.

We anticipate it'll be completed in December.

We're not anticipating doing any type of release or announcement when it's finished, but those are the timings we're looking for at this point.

We're not precluded from acquiring additional shares while the ASR is in effect, so, we're free to do that if we choose.

Great.

Thanks for taking all of the questions.

Jennifer Lowe, Morgan Stanley.

I had two questions, but they are related, so I will ask them together.

First, I wanted to ask about the Affordable Care Act, and certainly, the launch hasn't been as smooth there as the government would have hoped.

But, one, given the disruption there in the initial set, has that changed your thinking at all about the Affordable Care Act opportunity for Intuit, either positively or negatively?

Related to that, I think the consumer opportunity with eHealth got some discussion at Analysts Day, but some of the demos I've seen at the Gallery also suggests that there's a small business opportunity for Intuit with the Affordable Care Act as well with some of the payroll solutions.

Can you talk a little bit about where you might be able to capture some opportunity as the Affordable Care Act goes into effect?

Sure, Jennifer.

Happy to do that.

First of all, we weren't really banking on much impact in this coming year from the Affordable Care Act.

We know that there's a lot of learning going on right now.

Obviously, there's a lot of issues being worked through at the government level.

However, we do have a solution out there.

We have the answer exchange, so if you have any question regarding the Affordable Care Act or any implications for your taxes, that's up and available today.

Our partnership with eHealth is out there as well, so if you want to go out and shop in an exchange for the best potential health plan to meet your needs, you have that ability to do it, as well.

Which takes me to the second part of your question, our partnership with eHealth, we're excited about.

We continue to work closely with them to make sure that process is seamless from getting a question answered to being able to shop for a health plan and to have that data flow into TurboTax.

But as you suggested, small businesses are also having to contend with answering questions from their employees -- what does this mean to me?

If they don't offer health plans, this gives them the ability to actually point their employees to an exchange.

We have an Intuit small business health exchange that we basically are working with.

It's currently in pilot in California.

The implications for small businesses are not as pressing as they are for consumers right now.

What we're doing is we're piloting the experience in California, and as we learn more, we may scale that out across the country as well.

Imagine that being the same thing as it is for TurboTax.

You can go in and get questions answered.

If you want to shop for a health plan, you can go out on an exchange and you can actually make a purchase as an employee.

That's complemented with the products we have in payroll right now, which is basically a prepaid card, or a pretax card, that a small business can make a contribution to an employee, in pretax dollars, that they can then use to make a purchase of a health plan.

We're putting together a nice little value proposition for small businesses and their employees, as well.

We don't expect a lot this year, for all of the reasons you decided, but we do think this is a real opportunity for us to get our learning in place and to make sure we do have the offerings in the market so when consumers and small businesses are ready, that we have the absolute best set of solutions for them.

Thank you.

Raimo Lenschow, Barclays.

Can I just go back to the new QuickBooks Online product, please?

Can you just talk me through how does it work for the 500,000 QuickBooks Online users that you have at the moment?

Are you just converting them over, and once you have converted them over, can you talk a little bit about the upsell of opportunity?

Is QuickBooks online -- how many versions is the new tool to get more customers, or do I get more for the installed base out as well?

Thank you.

Okay.

Raimo, I'm going to ask you to help me with the second part of your question, but let me answer the first part.

Today, what we've done is we've focused on new users who've never used QuickBooks online, because there is no relearning of navigation.

At the same time, we've been testing, with small slipstreams of existing customers, how much of a learning curve is there to move from the QuickBooks Online classic to the QuickBooks Online.

We've been pleasantly surprised that there is little to no transition time.

It's very intuitive and they're able to get up and running very quickly.

In fact, we have had our power users, the accountants, basically make sure they pressure-test that concept.

Now, what we're doing is we're starting to open it up to existing QuickBooks Online customers, as well as helping QuickBooks Desktop customers with a three-step, three-minute conversion that will pull their data out of the Desktop and put it into the new QuickBooks Online.

That's going to be happening over the next several months.

We started with new users first.

We tested with existing to make sure we understood the learning curve transitioning, and now we're opening up the flood gates for them to be able to move over, as well.

The second part of your question around the upsell, I'm just going to ask you to articulate what, specifically, you were looking for there and then we'll try to answer that.

You have connected service to go with it.

Do you think Harmony makes it easier to sell the connected services or is it going to be the same, but you have a nicer looking solution that makes it easier?

Thank you, Raimo.

Yes, it does make it easier.

We're looking at leading indicators in the product right now: the number of people who click through to payments, the number of people who actually fulfill a payment applications, the number of people who send a first invoice.

All of those indicators are up quite measurably for all the attached products and so we think that is a good precursor for what we think the attach rates will ultimately end up being for the new QuickBooks Online.

Perfect.

Thank you.

Brad Zelnick, Macquarie.

Brad, I know it's only been a couple of months since Investor Day, but is there anything incremental to share about your efforts to further leverage the base of accounting professionals to drive QuickBooks sales and serve as a channel to better compete with tax stores?

Brad, it's a continuing confirmation of what we talked about at Investor day.

A couple concepts: first of all, what has surprised us more than we had anticipated is the readiness and willingness of the accountants to adopt cloud solutions.

In our ProTax business, the shift to the ProTax cloud products, we call Intuit Tax Online, it's built on the Lacerte engine, even though it's early season, the early sales on that are ahead of our forecast.

When you look at the QuickBooks Online for accountants, so the accountant version of QuickBooks Online, we're seeing a very good adoption rate on that product, not only in the US, but outside the globe.

While it is early yet, we're getting very strong signals that Books To Tax, which is the ability to actually press a button in QuickBooks Online for accountants and have that go into the new cloud version of the tax system and basically, do the tax for the small business is going to be an app that is very important to accountants, as well.

That's why we're describing this for the accountant base as what we think is a once in a generation shift, and we have a good first mover advantage; not only just in a ProTax product, but also with QuickBooks Online and the ability to have both sides of that equation.

So far, there isn't anything that is new that we didn't talk about at Investor Day, other than the early indications from the sales pipeline and the feedback from accountants that it is very positive.

I appreciate that, Brad.

If I could sneak in just one more, looking to consumer ecosystems, slightly better than flat.

Again, we spoke a bit about this at Investor Day, as well.

Can you just paint for us, if we decompose that number, what's going on between Quicken and Mint?

As we look forward, what's your expectation?

What does it really take to get this business growing into its full potential?

First of all, Quicken 2014, we just released a few weeks ago.

We have some good news there with the new application, having the ability to take a picture of your receipt and embed it in.

We're getting some good early reviews.

We just released Mint in iOS 7 and it's got the new, very important feature that we always had on the web, but we never had on the phone, called Mint Trends, and that's really causing some very good positive buzz and very high user ratings on the app stores.

Right now, overall, it's really just been goodness in Quicken, because that's the bulk of the revenue in that consumer ecosystem and at the same time, we're seeing some good early indicators in Mint.

In terms of what's it going to take to be meaningful, a couple pieces here.

First of all, in the tax business, this is consumer tax and ProTax, the strategy are taxes are done and then, after that, we're looking for ways to help families do more with their money.

A lot of what we're doing right now is having the consumer ecosystem work with the tax team to say, okay, how do we take that 50% of families who didn't even expect to get a refund, now they have this found money.

How do we help them do smarter things with that?

Either find better deals or invest it in 401(k) plans.

Our consumer ecosystem is working with them.

The other thing the consumer ecosystem is doing is they've taken the Mint platform and they've given it to the small business team to go after those customers that aren't big enough for QuickBooks yet.

You'll see Mint's My Business coming out soon.

It's in beta now that will basically help those businesses that operate as a single entrepreneur out of their bedroom and help them separate their personal from their business expense, and then, what ultimately happens is once they do that, they can literally press a button and it goes into TurboTax and does their tax return.

Basically, the consumer ecosystem's going to become the glue that helps you do more with the refund you get from your taxes, and also helps you to be the platform and the low end of QuickBooks and basically pulls the entire company's ecosystem together.

It's early days, but we really like the progress happening across all those fronts.

Excellent.

Thank you so much for taking my questions.

Ross MacMillan, Jefferies.

Brad, when I look at your subscription adds, the net subscription adds in the quarter, QuickBooks Online looks really strong, but Enterprise and QuickBooks Desktop, in terms of the net new adds look less strong.

I was just curious as to whether you're seeing any shift, maybe with the advent of the Harmony release from traditional QuickBooks Desktop users that had been on subscription towards the online product or indeed, if that's happening on the Enterprise, side as well.

I'm just curious as to any dynamics in there that might add some color around that.

Ross, right now, it's still too early to say that it's going all to the new QuickBooks Online.

What we do know and what we actually hope for is that we'll get the customers to move to QuickBooks Online.

We think it's just an elegant solution, and it's going to have a robust set of third party developers out there and we think that is clearly the chapter for small businesses that they need to be moving to.

The desktop customers that want to upload their data in the cloud continues to grow strong for us, but we are trying aggressively to get them to convert over to QuickBooks online instead of simply uploading their data into the cloud.

While I can't tell you that is fully attributable to the first quarter results, I can tell from you, from an emphasis perspective, that's why we put together a three-step, three-minute conversion process to get them up into QuickBooks Online.

Enterprise continues to be strong.

I would tell you that, where we are right now is, we've learned certain promotions that we had used extensively last year started to get a little stale in the fourth quarter.

These are primarily promotions to our own base to get them to move up to QuickBooks Enterprise.

The team's been doing some pretty interesting innovation around different marketing messages to basically get them to move into the new enterprise product and we think that product will continue to grow.

Up 21% is good healthy growth.

It's up to 91,000 users now.

I don't think that is attributable to QuickBooks Online.

That's a more full-featured product with deep inventory.

What we are doing is we're starting to get new promotional offers that we're testing that we think will incentivize people to move up.

Net-net, it is our focus to get desktop to online.

I can say that in the first quarter, the fact that desktop subscribers were up 17% was directly attributable to the new online version, but it will be our focus going forward.

That's helpful, thanks.

A follow-up for Neil, two questions, if I could.

Your gross margin progression in the model has been very impressive and you continue to show year-to-year expansion in gross margin.

I'm just curious if you could just talk to some of the drivers and also your expectations around how that will progress this year?

One other quick follow-up on tax, just so I understand, given that you had guided the year before the IRS made the statement around the potential delays this tax season and today you haven't made any changes to the seasonality since your initial guide, does that suggest that you'd already factored some of that in, or are you just sort of saying, let's see how things progress?

Thanks.

First of all, in the gross margin category, we are delighted with the impact that the shift to SaaS products has on our gross margins.

A lot of it has to do with the engagement of the customers and how they attach other products and services and things like that.

As Brad mentioned earlier, we are being very thoughtful about how we allocate our resources among tier, among marketing, and among engineering and product development.

We're trying to test all those components and make sure that we have really good indicators of value from customers and it's really helpful in attracting new customers and improving conversion before we make long-term commitments to those.

I think some of the improvement you're seeing is a reflection of us getting a little better in terms of our allocation of how we spend and invest to build the products and deliver them to the market.

We still think there's opportunity to improve there.

Again, as Brad mentioned, we're making a lot of investments, particularly in tax, this year on the product side that maybe there's a little pent-up demand there to get the product where it needs to be.

That's where the improvement's coming from, really, is I think, a better resource allocation against the return it's delivering, and I think there's continued improvement there as we go forward.

On the tax side, what we're trying to say there is that we don't think the shift or whenever the IRS starts accepting returns has any impact on our tax guidance for the full year.

There is very likely to be an impact on the shift from second quarter to third quarter.

Each year, when we give our quarterly guidance, we make some assumptions around when the IRS will open and when they'll begin accepting returns, because as you know, that's a critical factor for us and when we can recognize the revenue.

We're going to wait when the IRS actually begins to open and start accepting returns and then we'll make a determination as to whether or not our guidance needs to shift between the second and third quarter.

But no impact for the full year and what you should read into that is that we're going to wait and see, specifically, when the service begins accepting returns to decide what the impact should be on our quarterly guidance.

Great.

Thanks for the clarification.

Thank you very much.

Walter Pritchard, Citigroup.

This is Ken Wong for Walter.

Just a quick question around QuickBooks, are you guys hearing anything in terms of how your QuickBooks ProAdvisor channel feels about the online roll out?

In the past, we had heard it wasn't really something that they felt was a product good enough to recommend.

Has that dynamic changed?

Yes, Ken, it has.

In addition to some studies that have been produced out there in your industry, where some of your peers have been polling the pro advisors, we also have our own net promoter results.

Our net promoter results with QuickBooks Online for accountants is up significantly with the new version of QuickBooks Online.

We're getting very good feedback.

I, personally, have been out to some of the major conferences and been interacting with the accountants and getting their feedback directly.

I have to say, for a group of people who, quite frankly, for years were not pleased with our version of QuickBooks Online, that sentiment has not only swung to the positive, but it swung much more positively, as I mentioned a few minutes ago, than we had expected.

We're getting good feedback from the pro advisors right now about the online version of QuickBooks; not only for their clients, but also for them.

Great.

Great.

You guys mentioned the partnership with Square.

Just wondering, when should we expect to see that go live?

Any concerns that this cannibalizes your existing payment offering?

I'm sorry.

Repeat that last part, again?

Sure.

I was just wondering, on your partnership with Square, when should we expect that to go live?

Any concerns that having that capability for your customers might cannibalize your own payment offerings?

Got it.

Thank you.

First of all, the rollout of Square, we have it live right now going out with QuickBooks Online, the new version.

It's in a beta format.

We will continue to roll that out more extensively as we're rolling out the new QuickBooks Online.

The teams have been working side by side to make that very seamless.

In terms of cannibalization, we actually think this is very complimentary.

Our GoPayments product in the market, we're trying to focus very squarely against service-based businesses; that's about two-third of the business in the US that operate on wheels, they paint houses, they mow lawns, they clean pools.

That business, by the way, GoPayment paying customers was up 19% in this past quarter.

That continues to be a nice complementary service to our payments offering.

Where Square is really helping us focus, is they're going to be focusing on restaurants and retailers, those physical point of presence sort of businesses.

We think between that offering and our own GoPayment offering and the fact that they all work with QuickBooks as an operating system, this is going to be a net add to the total payments opportunity that we can provide to small businesses and we think it will be incremental to our business, as well.

Got it.

Great.

Thanks a lot, Brad.

Wayne Johnson, Raymond James.

I realize that we're in the beginning stages of the QuickBooks Online rollout, the updated version, if you will, or the latest updated version.

You made comments about the three-step, three-minute opportunity to convert traditional desktop users to the online version.

Is there any kind of efficacy here, numbers that you could share with us, what are your expectations?

What do you think we're going to be talking about six months from now, nine months from now?

I'm just trying to get a sense of how it's tracking and what are you looking for?

Yes, Wayne, I can't tell you anything beyond what we've talked about at Investor Day, which is we have a multi-year forecast of what we think we can do in terms of doubling our small business base over the next five years, going from 5 million to 10 million.

We've tried to break that down in sort of a waterfall that shows how much of that will come from the new QuickBooks, QuickBooks Online, which will be several million users over the next five years, taking that QuickBooks Online version globally, which will also generate several million users and then, ultimately, going after some pre-accounting customers which will round out the rest.

The early indicators, I would say, to keep an eye on, will be to continue to look at the growth in subscribers quarter-over-quarter.

We continue to see good early adoption and plus the attach rates of payroll and payments.

But we haven't laid out any sort of detail that says, here's what you should expect in Q2, Q3, and Q4 at a product level.

We built that into our guidance, overall, but we haven't broken it down over the next few quarters.

Perfect, thank you.

Jim MacDonald, First Analysis.

You mentioned on the call that you had a new unified health platform for TurboTax.

Could you talk a little bit more about that?

Also, what does that mean for the live tax help this season?

Sure, Jim.

We can.

If you look at TurboTax historically, there were multiple places on the home screen where you could get help.

You could go into frequently asked questions, you could look up an answer through a community, we called it live community, you could actually click on a phone monitor and call a rep or chat with a rep, a live call center agent or you could go out to an expert through live tax advice and it was confusing.

Now, what we have is basically one search box that's very visible in the upper right-hand corner of every page.

You type in your question and there's a little drop-down shelf that comes down and it gives you the choice.

It'll give you the answers to the frequently asked questions right there.

It'll give you the ability to post that out to the community from right there.

Or it will give you the ability to talk to either one of our agents or an expert.

It's all in one simple place and it gives you a multiple choice set of options and you can look for whichever one answers your question the fastest and the most efficient.

Tax experts are embedded into that offering for certain SKUs and in other SKUs, it won't be.

It'll be a part of just having a live community or our own agents answer the question, but that's what the unified help is designed to do.

Think of it as a single search box in the upper right-hand corner of our products.

What implication does that have on the size of your investment in the live tax help area?

We haven't talked about the exact amount specifically, Jim, but you can take away from this it's going to be less than we spent the last two seasons.

We shifted more of that resource to product improvement and to build out the products.

Okay.

Great.

Thanks.

David Togut, Evercore Partners.

First, could you update us on your unit pricing strategy for FY 2014, both in the small business group and the consumer group?

Okay.

The unit pricing for us in the consumer group hasn't been published, yet, so we'll talk about that when we get the products into the marketplace.

We just don't want to be out ahead of our headlights here in terms of the pricing itself.

In the Small Business group, the product pricing for QuickBooks year-over-year is fairly consistent.

There's been a modest uptick in our QuickBooks enterprise pricing and we have a one-user, two-user, three-user, four-user, five-user sort of SKU lineup and then we go up to 10 and 30 users.

It's a very modest amount.

It's probably in the neighborhood of 7% to 10%, depending upon which one of those SKUs you're looking at.

Everything else is pretty much the same in terms of Desktop and Online pricing.

In Payroll and Payments, there's a lot of moving parts.

We have simplified the pricing in both of those businesses.

We've tried to make it much more transparent.

In Payroll, we've gone in and we basically have simplified it so you know what your price is on a per-employee basis and in Payments, we're doing the same thing.

There's a lot more moving parts to those two pieces, but I would tell you, it's much more around simplification and less around any sort of major changes in the pricing itself.

When do you expect the new version of TurboTax to be released, and what are the detailed new features you expect to have in it?

The Desktop version will be out around Thanksgiving and we've talked about some of the features around easy for returning users to retrieve their data and to have a much simpler experience.

TurboTax Online would be out around the end of the calendar year, first part of next year, and in TurboTax Online, of course, the product you see at the beginning of the season won't necessarily be the product you see at the end because we're continuing to make improvements and iterations throughout the season.

It'll focus on first time filers and having a simpler, easier to get started experience.

There'll be some enhancements in TurboTax Online for returning users as well, again, to take advantage of data that we know from other customers like you or we know from your prior-year returns that you filed with us.

That's the basic things you can expect in terms of TurboTax.

Understood.

Thank you very much.

Yun Kim, Janney Capital.

Brad, there has been a lot of focus on new customer acquisitions and those metrics showed strong growth numbers again this quarter across all small business segments.

Congratulations on that.

How effective was cross-selling in the quarter, especially around Demandforce product?

Thank you, Yun.

We actually are excited about the new customer acquisition.

Demandforce this past quarter, subscribers are up 36%, the fastest growing vertical they have and by vertical, they focus on dentists, then they focus on lifestyle and spas and salons.

We're calling the QuickBooks customer base a vertical because it's basically a pool of leads that they can go sell against.

They have continued refining, through big data, which of the customers in the small business base have the same characteristics of their existing customers in terms of size, business needs, and the revenue they generate, and there's 650,000.

They're going after about 225,000 now and that is the fastest growing vertical they have in their portfolio.

We haven't broken out the exact percentages of quarter-over-quarter, but I can tell you in the grand context of a business that's grown 36% and that being the fastest vertical, that it is growing at a very nice clip and we're very encouraged with the cross-sell opportunities of Demandforce into our base.

At the Investor Day, you talked about focusing more on the lower end of the small business market, trying to accelerate the new customer acquisition.

On that, has that focus started already?

Does the new customer add that you expect in the or in the small business group today, would that be different from your existing install base?

The question is, really, would that focus on the low end of the market change the monetization opportunity around cross selling and upselling, which has been your hallmark of your business model?

Yes, so I'm assuming this particular question is focused on the small business at large and not just on Demandforce?

Yes.

Yes, our efforts have continued to accelerate in the lower end of the market.

We have a small team of innovators that are working on a set of promising solutions that we think could be the first initial entrees into having a relationship with Intuit before you end up ultimately needing QuickBooks.

I mentioned one a few minutes ago, Mint My Business, which continues to accelerate through its beta phase, and we'll be looking to roll that out, and that's the ability to separate personal and business expenses at tax time, then ultimately file your taxes with TurboTax or a CPA.

Our teams also have several other products like Weave, which basically is a to-do list for small businesses that continues to pick up momentum.

We have Snap payroll, the ability to basically enter your hours and earnings from a phone and do your payroll for your small business while you're out on the road.

There's a whole host of other solutions the team's testing.

In terms of over the long term, there will be different monetization models for these products.

Each one of them will generate a different sort of revenue stream and then ultimately, over time, our goal is to make the small business successful enough that they grow.

Then, when they do grow, they'll move up into the ecosystem of other products where we can do things like payroll and maybe QuickBooks Accounting for them.

For any individual product, each monetization model will be slightly different.

If it's a to-do list, we may ultimately end up leading that into something like calendaring.

We may end up leading that into something like payments.

But we are making progress and I think over time, we'll have to see which one of these gets the best traction before we can answer the question specifically about what would be the best cross-sell opportunity for each product.

Okay, great.

Thank you so much, Brad.

Michael Millman, Millman Research.

For this current year, fiscal 2014, on tax, does your models include ACA questions, eHealth kind of questions, or anything to raise the visibility of this coming event?

Yes, Michael, it does.

Today, in fact, if you go to our website, all of our programs that support the Affordable Care Act have been up and running since the official opening in October.

You can go there today and you can get answers to your questions through the answer exchange.

You can also link to eHealth, our partner, and you can learn more about the offerings.

That is out there today for customers, and it will continue to be out there as we roll out the new versions of the product for fiscal year 2014.

Will it be in the product if someone just goes to the product and will there be something in there that will say heads-up?

Yes, yes, throughout the product, we'll make sure, first of all, TurboTax Online and the website are synonymous.

Once you get into the product, there are some things that perpetually move with you through the product.

The answer exchange is a key piece of that.

Also, we will make sure that we are reminding you at certain points in the tax prep itself implications as it results from the Affordable Care Act.

When we close up at the end, we'll also be giving you tips around how to think about next year, as well.

Yes, it is embedded into the product experience.

For the coming year, do you expect any change in your RT share?

We continue to see strong demand in RT.

It is a product that the consumers really like, the ability for them to pay for their tax software out of their refund.

That continues to grow, and we have that sort of trajectory built into this year's forecast.

Our goal is to continue to accelerate the growth of that.

Is there any assumption regarding over the next couple years, any switchers between do-it-yourself and assisted?

Switchers in terms of the total category growth?

Yes.

Yes, and what we've seen, including this year, is that the software category grew about 3%, the CPAs were roughly flat, tax stores seem to be down a little bit year-over-year.

When you model that out over the next few years, that continues to show the software category picking up a little bit of share out of the total number of filers that are filing and we think that trend continues.

Great.

Thanks, Brad.

Thank you.

That is all the time we have today for our Q&A session.

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

Thanks, Sayed.

Clearly, you can tell we're encouraged by the momentum that we've built coming out of this restructure and we went through back in August.

I'll tell you our teams are hitting on all cylinders and we are looking forward to the peak season, which we know is quickly upon us here.

I do want to thank you for your time.

I know there's a lot going on today in our space.

I just want to wish everyone a safe and happy holiday season and we'll speak with 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.