直覺電腦 (INTU) 2014 Q4 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to Intuit's fourth quarter full year FY14 conference call.

(Operator Instructions)

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

Thank you, sir.

Good afternoon, everyone.

Welcome to Intuit's fourth quarter FY14 conference call.

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

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

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

You can learn more about these risks in the press release we issued earlier this afternoon, our form 10K for FY13 and our other SEC filings.

All of those documents are available on the Investor Relations page of Intuit's website at www.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 reconcile 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, and the business metrics and associated growth rates refer to worldwide business metrics.

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

Our fact sheet and press release include new disclosures and other material to help you understand and model the financial impact of the strategic decisions that we will discuss today.

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

Thank you, Matt.

Thanks to all of you for joining us.

I've been looking forward to today's earnings call for two reasons.

First, because we have some positive results to discuss and second, because we want to share some exciting strategic decisions that position us for accelerated performance as we look ahead.

Let me begin with the positive results.

We closed out our fiscal year 2014 on a strong note with excellent momentum in each of our businesses.

For the full fiscal year, total revenue grew 8%, and earnings per share increased 9%.

These strong results were in the context of an acceleration to cloud based subscriptions that shifted revenue into future reporting periods.

The results also reflect a significant restructuring effort that we executed in our fiscal fourth quarter to reallocate resources to our online services and to drive a step rate improvement in our products and customer growth.

Adjusting for the impact of the related restructuring charges, our revenue, our operating income, and our earnings per share would have been at the high end of our guidance ranges.

Stepping beyond the current period results, I'm even more excited about the choices that we're making for the future.

To sum it up, we are fully committed to winning on the cloud.

Over three decades we've navigated several platform shifts from DOS, to Windows, to the Web, and in every instance, we seize the opportunity to reimagine our offerings and extend our market leadership position.

And we're doing it again.

We've been delivering cloud based services for over a decade with more than 30 million Intuit customers using offerings across a variety of desktop and mobile devices.

The benefits are clear.

Online experiences are simply better for customers.

They expand our total addressable market, and they generate more predictable, recurring revenue streams.

Today we will discuss several decisions to further accelerate our shift to cloud based services which will include changes that we're making to our desktop products that will lead us to recognize desktop revenue over time.

The combination of these choices will create a transition year for our FY15 financial reporting.

As we will explain, this is a short-term impact, and we fully expect our FY16 results to return to double digit top and bottom line growth in alignment with our financial principles.

Our outlook for FY17 is a company approaching $6 billion and predictable recurring revenue and generating roughly $5 in non-GAAP earnings per share.

Now, with that context, let me click down and share my reflections on the Company's current period performance, as well as the strategic choices that we're making, starting with our Small Business group.

I'm quite encouraged by the increasing momentum in our QuickBooks Online ecosystem.

This past quarter, we reached a strategic inflection point with more new to the franchise customers choosing QuickBooks Online over QuickBooks Desktop for the first time ever.

The achievement of this milestone was driven by two factors.

First, the secular shift to the cloud is now in full swing for Small Businesses, just as it was several years ago for our consumer businesses.

This tail wind is in the early stages of development, and it will continue for many years.

And second, we've been accelerating this Small Business adoption of cloud services.

Our catalyst is the success of our QuickBooks Online offering as an open platform.

This enables Intuit and third party products to work together seamlessly in the cloud.

The new QuickBooks Online is one of the biggest breakthrough products that we have launched, and it is living up to its billing.

QuickBooks Online subscribers grew 40%, up from 36% in the previous quarter.

We added approximately 60,000 net customers in a seasonally slower quarter.

We closed FY14 with nearly 700,000 QuickBooks Online customers and more than 1 million total QuickBooks subscribers.

The new online experience enables the seamless purchase of additional services as evidenced by our payroll attach rate improving to 19% in the fourth quarter, up from 16% a year ago.

The attach rate for active payments customers is currently 5%, also up from 3% in the prior year.

These improved attach rates are contributing to an increase in the annualized recurring revenue per subscriber.

And finally, the new QuickBooks Online is a global platform which has significantly increased our total addressable market.

Outside the US, QuickBooks Online subscribers were up more than 150% in the fourth quarter, further accelerating from the 130% growth last quarter.

Now shifting to our Consumer Tax business, the team delivered an exceptional year.

As the category champion, we helped drive digital category growth of more than 6% compared with assisted tax prep methods, such as, tax scores declining 1%.

The secular shift to do-it-yourself software is the continuation of a decade long transition to digital solutions, and our efforts simply added fuel to the trend.

Within the software category, TurboTax gained over 2 points of share, growing TurboTax online units 14% and total TurboTax units 10%.

Our investment in product improvement paid off with website traffic, conversion, retention, and overall net promoter scores improved in every single dimension.

Hitting the total key, Consumer Tax revenue grew 7% for the fiscal year, better than our original guidance of 4% to 5%.

But as we shared, this was just the first year of a multi-year journey towards our ultimate product vision.

The team has some exciting things in the pipeline as we look forward to the next tax season.

We also had strong results in our ProTax and our consumer ecosystem businesses.

Both businesses exceeded their internal plans, their external guidance, they have a strong pipeline of innovative offerings in the works, and they are definitely looking forward to another strong year in FY15.

When you sum up the results across the Company, customer growth and more specifically, subscriber growth is accelerating.

Active use is improving, attach rates are increasing, and global adoption has hit its stride.

Which takes me to my second reason for looking forward to today's call.

The explanation of several strategic choices that we have made that will enable us to further accelerate the growth of our Online Ecosystem.

First as I mentioned earlier, we restructured our Small Business organization in the fourth quarter to increase the focus and investment on the QuickBooks Online ecosystem.

The actions that we've taken improve our speed of decision-making, they prioritize key functionality and compliance services that are necessary to win in each of the global geographies.

And they include some soon to be announced initiatives that will make it even more attractive for accountants and their clients to sign up for QuickBooks Online.

We've increased our investments in R&D, Sales and Marketing and infrastructure to capitalize on a huge addressable market with our global ready QuickBooks Online offering.

Our demonstrated success in FY14 convinced us that now is the time to make this investment.

Second, in support of our goal to win every cloud decision, we're making important product changes to continue to delight our QuickBooks Desktop customers, many of whom will be cloud customers in the future.

As you know, roughly 4 million small businesses use QuickBooks Desktop.

Our goal is to attract them with compelling online experiences and incentives to move to the cloud.

To that end, we are strengthening our desktop products beginning in 2015 by delivering ongoing experience releases.

These will continuously improve the product experience, support Operating System updates, and provide access to connected services.

These actions are designed to ensure our desktop customers and their accountants remain our most vocal advocates today and become our cloud customers of tomorrow.

As a result of these changes to our desktop products, we will begin recognizing desktop revenue over time, as opposed to up front at the time of purchase.

This change will apply to our future QuickBooks, ProTax, and Quicken desktop products.

This is a strategic decision in favor of the customer that will push about $400 million of revenue from our FY15 into deferred revenue that will be recognized in future periods.

We will provide all of the relevant disclosures for you to see and model the financial impact.

For our Small Business group, the combination of these decisions positions us to more rapidly penetrate an enormous global market with a proven online ecosystem powered by the new QuickBooks Online.

And as I said, the time to make these changes is now because the proof points are clear.

More specifically, QuickBooks Online is opening new doors with 75% of the new QuickBooks Online customers being first time customers to the Intuit franchise.

The QuickBooks Online platform is increasing our ability to generate higher annualized recurring revenue through selling additional services seamlessly.

To put the improved payroll and payments attach results into perspective, the annualized recurring revenue for our Small Business online ecosystem was up 34% this quarter.

Add in the global opportunity, and our total addressable market expands from 29 million small businesses in the US to over 100 million worldwide, if you only focus on the currently prioritized markets of Canada, the UK, Australia and India.

The number of our weekly gross new subscribers that we're adding in non-US markets is currently averaging 2000 per week.

This is up from 600 per week just one year ago.

Finally, for the existing QuickBooks Desktop customers and their accountants, we have the best online solution, and we will be introducing new initiatives to further incent them to move to the cloud.

As a result, we do anticipate the number of desktop migrators will continue to increase meaningfully in the coming year.

On that note, I will turn it over to Neil to walk you through the financial detail and our guidance.

Thanks, Brad.

Let's start with overall Company results.

For FY14, we delivered revenue of $4.5 billion, up 8%; non-GAAP operating income of $1.6 billion, up 6%; GAAP operating income of $1.3 billion, up 5%; non-GAAP earnings per share of $3.49, up 9%; and GAAP earnings per share of $3.09, up 9%.

For the fourth quarter of FY14, we delivered revenue of $714 million, up 13%, non-GAAP operating income of $2 million, a GAAP operating loss of $73 million, non-GAAP loss per share of $0.01 and a GAAP loss per share of $0.14.

We incurred a charge of approximately $40 million in the fourth quarter, primarily as a result of the Small Business restructuring effort that Brad explained earlier.

This impacted our non-GAAP and GAAP operating income and earnings per share.

We also sold our 11% stake in Reckon, which generated a gain of $21 million in GAAP results.

We've included a bridge in the fact sheet to illustrate this impact.

Turning to the business segments, total Small Business revenue grew 12% for the quarter and 10% for the year.

Customer acquisition in our connected services businesses continues to be our primary goal and is driving growth in the QuickBooks Online ecosystem.

QuickBooks Online subscribers grew 40%, accelerating from the third quarter.

Small Business Online Ecosystem annualized recurring revenue grew 34%, driven by retention and improved attach rates.

Annualized recurring revenue is a new metric that we'll provide on our fact sheet each quarter.

We've defined annualize recurring revenue as 4 times the most recent quarterly revenue for our online offerings serving Small Business customers.

This includes QuickBooks Online subscriptions, online payroll, online payments, Demandforce, and QuickBase.

Within this context, our online active payments customers grew 4%, and online payments charge volume grew 24% driven by an increase in charge volume per user.

Online payroll customers grew 25%, and global adoption of QuickBooks Online continued to accelerate as we finish the year with 84,000 paying QuickBooks Online customers outside the US, up from 32,000 a year ago.

As the adoption of the cloud becomes more prevalent and we focus our energy and resources in this area, our recurring revenue will increase, and QuickBooks Desktop units will continue to decline.

In the fourth quarter, desktop units declined 10%, and for the full year they declined 10%.

The decline in desktop units in FY14 was more than offset by growth in subscribers as total QuickBooks customer growth accelerated to 6%.

We expect total QuickBooks customers to continue to grow next year as we emphasize the QuickBooks Online ecosystem even though desktop units and revenue will decline.

We've described how the cloud is a better experience for customers.

It's also a better business model for our shareholders, since a lifetime revenue of QuickBooks Online customers is greater than that of desktop customers, and it increases the predictability of revenues.

We provided details on our fact sheet to help you understand the unit economics on our online and desktop ecosystems as they stand today, and we will talk about the levers for growth as we execute against our top priority, expanding the category while growing customers and share globally.

Here is one way to compare online and desktop using FY14 as an example.

As you can see on the fact sheet, Online Ecosystem revenue was $592 million.

Using ending QuickBooks Online subscribers of 683,000, we generated more than $800 in annual revenue per customer.

On the desktop side, dividing $1.6 billion in FY14 revenue by 4 million customers, we generated less than $500 per customer.

We've learned in our Consumer Tax business that we can use price and changes to our product lineup to effectively grow customers.

We've also proven that we can build lifetime value through improved retention and attach services.

To drive customer growth in the QuickBooks online ecosystem, we will continue to experiment with pricing, promotions, and bundles that deliver value for more end-users.

We will also continue to improve attach and retention to enhance lifetime value.

This is our strategy to accelerate growth in customers and revenue over the next few years.

Now let's look more closely at the financial impact of the strategic decision to provide ongoing support and services to our desktop customers that Brad described.

This decision will affect future sales of QuickBooks and desktop products for revenue we recognized ratably over approximately three years and our professional tax solutions, where more revenue will be recognized over the entire tax year.

For customers, this enables seamless product enhancements, as well as better care and online services, insuring we keep our desktop customers happy and retain them in the Intuit franchise.

They are our future online customers.

For our employees, the strategic decision means clarity of work priorities, bringing up their time to build better online products.

And for shareholders, this means more customers and faster growth longer term.

Desktop revenue will now be recognized over time similar to how monthly subscription revenue is recognized.

Now when we sell a desktop unit, the cash comes in and our deferred revenue balance increases, so you'll be able to easily track our progress on our Balance Sheet and cash flow statement.

We're committed to transparency and clarity around the strategic decision, and it will make modeling our business easier over time as the predictability of our revenue increases.

We expect these changes to lower FY15 revenue by approximately $400 million, increasing deferred revenue by the same amount.

We've included a bridge in our press release and fact sheet that will help you understand the impact of this change, in revenue recognition and accelerated QuickBooks Online growth, on our revenue guidance for FY15.

The best way to gauge the success and health of our Small Business ecosystem going forward will be through subscriber counts and annualized recurring revenue.

We'll help you bridge reported results over the next few quarters to our historically reported results.

Moving over to tax, Consumer Tax revenue grew 22% for the fourth quarter and 7% for the year.

We'll continue to invest in the product experience and to prioritize growth in share and customers above margin expansion.

ProTax revenue grew 16% for the fourth quarter and 4% for the year.

Our ProTax business also had a great season which much of our customer growth coming in higher value solutions.

One thing that has not changed is our disciplined approach to Capital Management.

With approximately $1.9 billion in cash on our Balance Sheet, our first priority is investing for customer growth.

We also look for M&A opportunities, and in FY14, we made 10 acquisitions totaling approximately $550 million.

We will return cash to shareholders via share repurchases, and we repurchased $152 million of shares in the fourth quarter.

About $1.9 billion remains on our current share repurchase authorization.

We reduced our share count by 4% net in FY14, and we expect to be in the market consistently in FY15.

Our capital plans include a cash dividend of up to $1 per share for FY15 with the first quarter dividend of $0.25 per share payable on October 20.

This represents a 32% increase versus last year and reflects our confidence in our business strategy and our large and growing cash position, as well as, more recurring and predictable revenue streams.

Now let's move on to guidance.

Taking into account the impact of the strategic decisions Brad described, our outlook for FY15 is revenue of $4.275 billion to $4.375 billion.

Adjusted for the financial impact of the strategic decisions, FY15 revenue guidance would have been growth of 5% to 8%.

GAAP operating income of $800 million to $830 million, non-GAAP operating income of $1.11 billion to $1.14 billion, GAAP diluted EPS of $1.70 to $1.75, non-GAAP diluted EPS of $2.45 to $2.50.

Moving to our segment guidance for FY15, we expect QuickBooks Online subscribers of 925,000 to 950,000 for growth of 35% to 39%.

Small Business group revenue to decline 3% to 6%, but adjusting for the changes we discussed, revenue will grow roughly 10%.

Consumer group revenue growth of 3% to 4% with Consumer Tax revenue growth of 5% to 7%.

And professional tax revenue decline of 34% to 37%.

When adjusting for the change in our product, our pro tax revenue will grow approximately 5%.

Guidance for our first quarter revenue, operating income, EPS, and QuickBooks Online subscribers is available in our press release and on our fact sheet.

Looking beyond FY15, we provided a longer term outlook in our fact sheet and press release.

Beginning in FY16, we expect to grow revenue double digits as we recognize the revenue we've deferred this year and continue to experience strong growth in our QuickBooks Online subscriber base and ecosystem.

We expect to grow revenue faster than expenses generating operating leverage.

For FY17, we expect QuickBooks Online subscribers of approximately 2 million, an increase from 683,000 today, providing compounded annual growth of more than 40%.

Intuit revenue of roughly $5.8 billion or 9% growth on average over the next three years and non-GAAP earnings per share of approximately $5, reflecting low teens growth on average over the next three years.

We've shared many new disclosures with you on our fact sheet, breaking our Small Business customer metrics and revenue disclosures clearly into online and desktop ecosystems.

And with that, I will turn it back to Brad to close.

Okay, Neil.

You had to cover a lot of turf there, buddy.

That's right.

Let me try to summarize it.

We reached the inflection point, and we are seizing the opportunity.

Our Company is focused on two strategic outcomes that we've spoken to you about in the past.

Number one, to be the Operating System behind Small Business success, and number two, to do the nation's taxes.

Our Small Business momentum continues to build, and our QuickBooks Online ecosystem growth is accelerating, driving value for customers and for Intuit.

We've reorganized our Small Business group and prioritized investments that will further accelerate our Online Ecosystem globally, while ensuring the best product experience for existing desktop customers speeding up their move to the cloud.

We have a proven formula at Intuit.

If we innovate and delight customers with the absolute best solution in the market, we will expand our categories, we will grow our share, and we will increase lifetime value over time.

So we're stepping on the gas to drive share gains and longer term growth opportunities in all of our businesses.

We have lots of runway in front of us, and we remain deeply committed to accelerating customer and revenue growth.

And we're going to talk more about these things and our strategy to execute against them at our Investor Day, which we will hold at our Mountainview campus on September 30, and we look forward to seeing you there.

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

And with that, let's open it up to you to hear what's on your mind.

Thank you.

(Operator Instructions)

Our first question comes from Brent Thill from UBS.

Your line is open, please go ahead.

Hi good afternoon, Brad and Neil.

Thanks for taking the question.

Maybe Brad for you and then one for Neil.

When you look at the adjusted revenue guidance of 5% to 8%, it seems like on an apples-to-apples comparison from past years, that is a little lower than where you've initially guided.

It sounds like if I'm reading this correctly that the delta might be your willingness to be a little more aggressive on price.

I'm just curious if you could address that.

And maybe for Neil, certainly we've with all seen this with Adobe and Autodesk, the transition, but when you think about the very long term and you think about the operating margin structure, there's a lot of questions; is this more profitable or less profitable?

I'm just curious, I know you are going to give anything past the $5 in earnings, but from your perspective has this opened up an opportunity to effectively become a lot more profitable longer term?

Thank you.

Okay, Brent thank you.

This is Brad.

I will take that first one.

First of all, as you identified, the guidance next year of 5% to 8% on an adjusted basis does reflect the fact that we've hit this inflection point.

And we realize the way to grow this Company long term is to acquire new customers to license so that they stay and then earn the opportunity to sell additional services.

We also recognized that in addition to focusing on customer growth, which is the first of that formula, that we need to also have a good price value relationship.

And we've talked about pulling back a little bet on some of the dependency we've had on price over the years in some of our businesses, and we've been making those decisions along the way like the simplified payments pricing we've talked to you about this year.

When you put it all together though, I think it's important to look at the FY16 and FY17 guidance we've provided where we clearly articulated that we can see a return to double digit top line and bottom line growth.

So this is a one-year transition next year and a reflection of us about being very aggressive about expanding categories, growing customer growth and then earning the opportunity to sell additional services over time.

And so Brent I would just say as it relates to the margin, the outlook we've talked about for FY16 and FY17 clearly indicate we get back to where we were last year in terms of margin percentage.

But as you know, we talked act this a lot, we would rather have operating income growth over margin expansion.

If we can see more customer growth and more top line growth, we will invest more.

And we're really focused more on the operating income growth and the dollars over the long haul than we are the margin percentages.

And so we will see how that plays out, and we will see what's available to us and how much growth we can get on the top line.

And that will determine how much we invest and spend.

But as you see now, we're expecting to get back in the same neighborhood a little better than we are today by the out years.

Thanks.

Thank you.

Our next question comes from Walter Pritchard from Citigroup.

Great.

Thanks, just Neil, a question for you.

You did very clearly outline on the revenue side the $475 million impact.

I'm wondering as we think about impact on EPS, should we just think about that $475 million as dropping straight down to the bottom line in terms of headwind EPS in FY15?

And then I just had one follow-up as it relates to the implications of that.

The simple answer, Walter, is yes.

That's the way we think about it, the $475 million drops all the way through.

And as you know, this is just a deferral of revenue out to prior periods for most of us.

And there's really no impact on marketing or product build expense, so it's all margin compression.

And then it does look like if I just adjust that out and it's worth about $1.25 in FY15, if I add that back to your guidance, you're slightly shy of where maybe we would expect you to guide and what the margin progression that you generally had over the years.

Is that just incremental spend above and beyond the transition behind trying to push online and other initiatives you have going there for transition?

Yeah, I'd say it's two things Walter.

First of all, if it does reflect some additional investment and expansion outside the US and moving more of our engineering resources to online products and services.

It also reflects that we didn't buy as many shares back in 2014 as we would have liked or as we had hoped.

We were out of the market for a significant period of time during the tax season.

And as you probably noticed late in the fourth quarter, our trading volume was unusually low for our shares.

And so our original aspirations were probably to get more shares bought in this year than we were able to accomplish and that's the other piece of the EPS count.

Okay, great, thank you very much.

Our next question comes from Kash Rangan from Bank of America.

Hello.

Bold transformation, congratulations on this initiative.

Can you talk about the implied acceleration -- it looks like FY15 is going to be transition year, but as we look into FY16 and FY17, there is an implied acceleration in your top line.

How comfortable are you with that, and what are your assumptions behind the acceleration?

Maybe it's a pick up in customer growth or ARR growth or attach or payroll and payments.

If you can just walk through the quantitative considerations?

And also how should we think about your margin profile?

I know your focus is on growing operating income, but as we look at your $5 in non-GAAP earnings target in FY17, what is the embedded operating margin assumption behind it?

Thank you very much.

Okay, Kash.

Let us tag team.

This is Brad.

Let me start with the first piece, the implied acceleration.

So first and foremost, you're going to have a benefit from the cash we will be collecting for desktop purchases in FY15 that will show up as recognized revenue in FY16 and FY17.

But the bigger driver is customer growth and subscriber growth, and it's recurring as predictable revenue.

And as you can see, we continue to accelerate our subscriber growth in QuickBooks Online, and that is the primary driver both in the US and outside the US and new Global Markets.

The second and third big drivers here is our ability to continue to deliver a more delightful experience.

And so our attrition is being reduce, and so customers are staying active using the product.

And last but not least as evidenced by the payroll and the payments attach rate that I talked about earlier is the much easier experience to sign up for additional services and QuickBooks Online.

And so as we continue to drive additional tax services, we're going to drive up annualized recurring revenue.

So A, there's a bankable set of revenue coming in from the ratable revenue shift and FY16 and FY17.

And B, we see continued acceleration of our subscriber growth, which is job one.

And in addition to that, we will continue to improve retention, and then we will have the ability to sell additional services which were already proving we can do in the new QuickBooks online.

And that drives the acceleration in top line revenue.

And I will shift it over to Neil to talk about the margin aspect.

Kash, to get to the $5 a share we talked about for 2017 with that revenue level, would indicate an operating margin in the mid to high 30%s.

That's probably one where we feel the most confidence and where we have the most ability to manage.

Just going back to the comment I made earlier, I'd be totally fine if we got more revenue, $5 a share with a lower margin percentage than the way we're getting there now.

But our assumption we have today is that the margins back in mid to high 30%s by 2017.

That's truly tremendous.

I don't cover many companies that have $5 in earnings per share coming up pretty soon, so congratulations on that.

Thank you, Kash.

Our next question comes from Sterling Auty from JPMorgan.

Hello.

I wanted to start with I think the comment that you made that the transition would be complete after one year.

A lot of times the subscription transitions take a couple of years to get to a point where you're seeing normalized growth and normalized revenue contribution.

Can you just walk me through how you get from here to completion and in what time frame?

Yeah, let us tag team on this one again, too, Sterling.

First of all, I think it's important to recognize that we've been on this journey for some time.

We have a large number of customers already signed up on connected services and hosted products.

Across the Company, we serve about 45 million customers, and a little over 30 million are already using hosted products and through Mobile Devices.

And so we've just reached this point in Small Business and then as a result we see it happening in the remaining businesses like ProTax that we said let's just move this entire model now to a ratable revenue model and let's hit the gas on this cloud-based adoption.

So what you see right now is a relatively short transition period for us, because we're already so far down the journey, and it gives us the ability to bounce back quickly to the double digit top line and bottom line growth that we typically generate.

Anything you'd add to that Neil?

Sterling, just a couple other comments just to remind you of.

The QuickBooks Desktop and Quicken would probably be over close to a three-year life as we mentioned in the script.

So those are a little longer, but the thing to remember is that all of our online customers or most of them for the large part pay monthly.

So a pretty short transition period for those that are converting voluntarily from desktop to online services.

As Brad mentioned, probably as much as a third of the impact of the ratable change is in our ProTax solutions, and those products are amortized over the tax year.

So it will be a little longer than a fiscal year period for us but not much longer, maybe 15 to16 months.

So the QuickBooks Desktop, the traditional QuickBooks desktop and Quicken customers who might be over a longer period of time are a relatively small part of the transition.

So that's why it's a little faster -- the recovery is a little sooner than you might see with someone else.

And when you get done, will you have any products where you're recognizing the revenue ratably, but the use of the software can still be used perpetually, or will everything be finally on a term use?

Everything we have, Sterling, will be on a ratable accounting process.

We will -- it is possible to use a desktop product if you aren't using any connected services and if you aren't using any of the other products we sell that require connectivity, it's possible to continue to use it longer term.

We don't support it after a three year period of time, and all of your connectivity would be terminated, but you would still use it if you don't use any of that.

Great, thank you.

Our next question comes from Gil Luria from Wedbush Securities.

Could you provide a little bit of Free Cash Flow guidance just as a sanity check?

It looks like your CapEx is going to be up, but the changes you're going through as you said, you're still going to collect the cash up front.

So does that mean approximately flat Free Cash Flow given the higher CapEx?

We are spending a little more in CapEx next year, Gil, than we have.

The last few years have been usually low for us, at about $150 million to $175 million.

We're constructing a new buildings in Mountainview beginning in 2015 and have some other costs pushing us a little above $300 million.

So Free Cash Flow will be roughly flat.

Total cash flow up about 8% versus last year.

Got it, and then in terms of the international success of QuickBooks Online, is there one of those particular countries that's doing particularly well?

And can you give us a sense ahead of Analyst day what are some of your early takeaways about what's driven that success?

Yeah, Gil, it's Brad.

Actually each of the four countries are outperforming the expectations we had set for ourselves, and we've raised those expectations twice in the year.

What it really has come down to is we're treating each market individually in terms of making sure that we understand the local compliance needs.

We are winning the hearts and minds of the accountants which are the secret sauce to every country that we're serving.

We have great country leadership in each of the four prioritized countries that I mentioned earlier.

And we are seeing the ability for us to get the same adoption and then the word of mouth through high net promoter scores we've seen in the US, so we now have a formula.

Our team refers to it as a country in a box, which allows us to move from country to country.

But that doesn't oversee or doesn't overlook the fact that we have to make sure that we have the best product that is more local than the local competition.

And then from there we have to win the hearts and minds of the accountants and customers who use the products that they will recommend it to everyone else.

And that's really the formula, and we will dive a little deeper and show you things at Investor Day, but you aren't going to hear a lot different at Investor Day than that.

That is the secret sauce.

Got it.

Thank you very much.

Our next question comes from Raimo Lenschow from Barclays.

Your line is open.

Please go ahead.

Thanks for taking my questions.

Two for me.

First to stay on cash flow, if I think about the 2017, Neil, should you have better cash flow than net income at that point of time?

And is there any idea for you to maybe start guiding on cash flow, because given the more subscription focus or the business, that will be a bigger focus.

And then just a quick one for Brad on the desktop side and the new program as you're rolling out there, so how do I have to think about that?

Is that basically just trying to get them closer to online so that they convert them over time, or do you expect them to be still desktop customers?

And do you want to protect them from going to someone else?

Thank you.

Hi, Raimo, this is Neil.

I will start off with your first question.

I do think we can provide more clarity around cash flow, and we will do that at Investor Day, as far as where we are today and what our expectations are.

I wouldn't necessarily expect cash flow to outpace revenue by time you get out to 2017 and beyond.

As I mentioned earlier, our model is for most customers to pay us monthly.

That indicates they have high engagement with the product, and it's a way that really encourages and accelerates customer growth.

I will think about that more between now and then, but my first reaction is I wouldn't expect cash flow to be significantly faster growth than customers or revenue, by the time we get fully implemented into ratable.

Raimo, it's Matt.

Cash flow growth should be steadier, because we're still getting cash when those customers buy the products on the desktop side, and you're going to see revenue growth and earnings growth pick up as we recognize the revenue in later years.

But the cash will keep coming in, so the growth is a little steadier there.

You will see more acceleration on revenue growth and Op income and EPS growth.

And Raimo, I will take the second question.

I'm really glad that you asked it, because it gives me a chance to explain it for everybody on the call.

So you asked about the desktop announcement we made today and why we're going to provide ongoing releases and what does that mean in terms of the outcome for customers?

Well let me start by saying what it does not mean is adding new features to QuickBooks Desktop.

We describe these as experience releases because we have the opportunity to build more self help, eliminate some of those things that we know have been getting in the way of desktop users today, and also connect some important services like EM voicing or what we've talked to you in the past is Intuit commerce network, the ability to send an electronic invoice and get paid back electronically and move that money in a frictionless way.

Those kinds of services we know were delighters and are really important to keep those customers happy and in the Intuit franchise, so that's what we wanted to do.

Why we're doing that is because not only are small businesses getting increasingly comfortable with the cloud, but as you know the accountant relationship is critical.

And we have accountants out there today who have some of their customers in the cloud with QuickBooks Online and some of their customer in the desktop.

And what we want to be able to do is make sure we support both of those customers and keep them as Intuit advocates.

And as they get increasingly more comfortable, their accountants along with our own incentives and our opportunity to earn their trust, we will move them to the cloud.

Ultimately our goal is to get them very comfortable with the cloud and help them move to the future because we absolutely know that is a better experience for them, it's a better experience for their accountants, and it's a win overall.

So what we're doing right now is we aren't leaving any of our QuickBooks Desktop customers behind, but we are putting all of our new energy, all of our new features and all of our opportunities into the cloud and we are going to help those customers make it to the cloud on their time frame, not ours.

Perfect, that was very clear, thank you.

Thank you.

Our next question comes from Jennifer Lowe from Morgan Stanley.

My first question, maybe just to follow-up on that thought there, Brad.

You've talked in the past about the ability to charge a premium for QuickBooks Online because it's in a premium experience.

To the extent that you are rolling in some of these new experience features for the desktop product, does that give you more flexibility on desktop pricing?

Well, one of the things I'd like to not do today is talk a lot about pricing because we haven't announced anything and we will do that a little closer to when we release products and we meet you at Investor Day.

What I would say though is that we're clearly looking for the opportunity to incentivize customers to move to the cloud.

And as you mentioned or Neil described, we get about $800 in annualized recurring revenue with QuickBooks Online today and it's a little less than $500 on the desktop.

We have opportunities in both areas to look at different pricing strategies and different bundling strategies to help customers move to the cloud.

And we will talk more about that as we go down the road, but ultimately our ultimate goal was to make sure we're delivering a good value for the price so the customer stays with us and does not choose another alternative.

And you will see that show up in some of the decisions we will make in the coming months.

Great, and my other question, hopefully a quick one.

Everyone is asking about Small Business, but that's only one of the major franchises you have.

As you think about the FY17 guidance and overlaying that with some of the commentary around last year being a rebuilding year in the tax business and expectation that the growth there should improve over a multi-year horizon, is there any expectation in that FY17 guide that there will be an improvement in the growth rate and tax?

Thank you, Jen.

We do have a lot of other good businesses here, and I have to say our Consumer Tax team is probably startled the tax hasn't come up yet until this point in the call, so that's very exciting for a lot of reasons.

We have provided a multi-year guidance on the tax business of 5% to10%.

Obviously this year we're we delivered a 7%, and we said this is the first year of a multi-year journey and encouraged about some of the things the team's working on for next year.

We aren't at this point prepared to adjust anything.

You can assume that as we look at our long term model, that's the guidance giving us the confidence we can put out there at 2017 outlook like we did today and feel pretty confident in it.

Great, thank you.

Our next question comes from David Togut from Evercore.

Thank you.

Neil, could you comment on what you see as the biggest risk factors in the FY17 earnings guidance that you've given out today?

Well David, that's a good question.

I think the key components if you think about the online subscriber growth we've talked about for QuickBooks, it's a big number.

It's an aggressive growth rate, but we feel pretty confident about that.

We talked about the margin percentage, and I mentioned that's one of the areas where I feel like we have the most control.

Clearly we put this outlook out with concerns and with situations pretty much steady state in the global economy and other external factors.

Probably the biggest risk that I would think of is something external to Intuit that would happen in the markets or would happen to some of our customers or things like that.

I think the things embedded in the guidance we provided for 2015 and our outlook for FY16 and FY17 have taken into account things that are in our control.

We feel pretty confident about those.

Just as a quick follow-up on that, Neil, in the QuickBooks Online subscriber target for 2017, how much of that number is from new subscribers versus transition off the desktop franchise?

We definitely think the migration is going to continue to accelerate, and there's some things we're going to be doing to do that.

Probably a fourth roughly of that number would come from our existing base moving over.

Brad, is that what you would expect?

Yeah, it is.

We do believe that that's pretty much the range that we've got in our sub growth right now for 2017.

Obviously, we will view it more successful if we can get more of those customers off a desktop into the cloud, but we're trying to be realistic and pragmatic about what we think those customers will be ready to do in the next couple years.

Just on that point, Brad, what made your functionality still not in QBO -- that's in QB desktop that you need to add the QBO over the next 12 to18 months?

Yeah, David obviously we have some work still to do in a few key areas, self-form customization, job costing and inventory are the ones we hear the most from our Small Business customers as well as from the accountants.

The good news is those are all on the road map.

We did the acquisition of a small inventory company called Let Us a couple months ago, and our teams are diligently working to integrate that deeply into the customer experience.

So we believe by the end of this fiscal year we will have the majority of the key functionality we need for the largest portion of our customers up and running in QuickBooks Online.

In each of the different geographies, there's typically a small compliance piece that we have to have done in each of those countries, and we believe we will have that fully in place by the end of this first fiscal quarter.

So we're well on our way and I don't want that to be the reason the migration isn't happening quickly because today we have enough functionality for 70% of our QuickBooks customers on the desktop to move over.

It's simply our opportunity to earn the right to get them to move to the cloud, and that's where we're putting our energy.

Thanks, just a quick final question.

Neil, do you have a view on possible FY16 adjusted EPS?

That's the one number that's not quite in the guidance.

David we aren't going to talk about that at this point.

We may -- will give you more direction at Investor Day possibly, but we aren't going to pin something down at this point.

We want to have as much flexibility to get as many customers as we can over the next couple years, so we're not going to get more specific than just tell you that we expect double digit revenue growth and margin expansion next year.

Understood.

Thanks so much.

Thank you.

Our next question comes from Scott Schneeberger from Oppenheimer.

Thanks, good afternoon.

I have three separate thematic questions, and I think I was going to ask them in a different order, but I will play off that last question, Neil.

Last year you provided share count guidance, and I haven't seen it in the releases today, maybe I missed it, for FY15 and then ideally if you had a thought on FY17.

And if not, just to give us a feel for how aggressive you think you will be with buybacks after lighter than expected in FY13 and 14, thanks.

Yeah, Scott, the four we usually think about is at least offsetting any dilution from stock-based compensation.

So we look at the shares we issue every year, and that's providing a minimum level we would like to acquire.

And beyond that it just goes to what's our availability, what other opportunities we have to invest our cash during the year and other things that we may be considering or have in the pipeline.

So we don't typically set a maximum level.

We've got I mentioned almost $2 billion remaining on our authorization, but we never have trouble getting more authorization if we had the opportunity based on funding and things like that.

But you might think of at least enough to keep the share count flat as a minimum level.

Thanks, and just a follow on to that.

10 acquisitions this year, $550 million and if I have those numbers right.

As a group obviously small in size, so is that the M&A strategy going forward or might we see large ones?

Yeah, Scott.

We have a strategic game plan in each of our businesses, and as you just pointed out our track record tends to be looking at talent or technology tuck ins that accelerate our time to market to execute those strategies.

So if there is an opportunity that comes along that may be larger in size and it made strategic sense, we wouldn't say no.

But that's not the acquisitions we do, so I think you can continue to anticipate these acquisitions and they really are adding acceleration to each of the business units.

Swinging over to operational guidance.

Brad, for tax for FY15, I think at 5% to 7% is the revenue guidance.

Could you give as you have in years past the break down of individual federal returns, software category share, TurboTax share, revenue per return?

Thanks.

Yeah, Scott, we're going to dive a little deeper on that at Investor Day.

It's still the same four levers, and we will show you what we anticipate in an outlook for FY15 at that time.

So I'd like to just hold off on that if you don't mind until we get to the end of September here, September 30, and that will be a reason for you to show up and we will get a chance to see you and talk to you then.

Sounds good, and last one might get the same answer.

But with regard to QuickBooks Online, last year at Investor Day you said I think it was bridging for five-year, which would be out to FY18, 2 billion incremental QuickBooks US, 1 billion incremental QuickBooks global.

And now for FY17, it's a growth to -- I said billion not million -- is there any change to that, or is that consistent, just might be measuring apples and oranges but wanted to get a little clarity.

Yeah, actually Scott I will give you one on this one.

I won't make you wait until Investor Day.

So headline number one as your numbers are correct.

We have an aspirational goal of adding 3 million more QuickBooks customers by 2018.

We've articulated today we can see our line of sight to 2 million with a high enough degree of confidence we are actually going to tell you today for 2017.

I would also tell you that we are pretty prudent and sometimes conservative in trying to make sure that we feel we can put something out there we can achieve.

And so, just anticipate that our teams have a different goal than what we're talking to you about, and our full commitment to get to that 3 million number by 2018.

Great, thanks guys, good luck.

Our final question for today comes from Jim MacDonald, First Analysis.

Good morning.

Could you give a little more about the organizational changes that go along with your new components of online and desktop and how that works globally, as well?

Yeah, Jim it's Brad.

Happy to do that.

What we ended up doing in Small Business is we took what had been standalone business units, Small Business financial solutions, Small Business Management solutions, which as you know broke down into QuickBooks, payroll, payments, and then Demandforce and QuickBase.

And we said we now need to move to one Small Business ecosystem with the top priority being online global subscriber growth.

So we brought all those businesses together.

We reallocated our engineering to focus on the online platforms, and then we basically put our energy into making sure that we got rid of the redundancy where you end up in a Noah's Ark model.

Every one of those businesses had one of everything, and when you put them together we ended up with three or four.

So we had some inefficiencies there, and that allowed us to reallocate resources against things that would help accelerate our global expansion.

So that was really the crux of the work structure is uniting these four individual businesses into one Online Ecosystem and putting all the energy and resources into getting to the cloud globally.

There was with one other aspect of it, Jim, which is customer care.

As you move to a new customer care model in a mobile world, customers expect quality to be built in.

If you're using a mobile App they don't expect to have to call someone, and if they do, there's all kinds of new analogs like the mayday button from Amazon.

So we've put more energy into our customer care model for the future, and we made some decisions to move out of pieces of customer care that we don't think are core, and we found good partners who will handle that piece of it for us.

And that impacted some of our organizational restructure as well, but all that is under the context of more energy and more resources to online and global with Mobile Devices.

Great, and going back to some of the other questions, as you add these features to the desktop, you mentioned increasing attach on payments.

But what are your thoughts on attach broader than that for the desktop people as you ease them to the cloud?

Yeah, Jim, you just touched on an important piece.

We don't think we're tapped out in terms of attach rates for QuickBooks Desktop.

We do think, however, we have allowed things to get in the way of the customers being able to have a more seamless experience.

And quite honestly our engineers have been hamstrung.

They haven't been able to work on those things, because if they did it would impact how we had to account for the revenue.

So we've eliminated those barriers, and we will have the teams focused on making it a more seamless experience, which allows us to get even improved attach rates and desktop while we build the new stuff in QuickBooks Online.

Your assumption is correct.

We should have the ability to continue to get attach rates in payroll and payments and the desktop, while we put all of our energy into the cloud.

Great, thanks very much.

Thank you.

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

Would you like to close with any additional remarks?

Yes, I would.

I just want to thank everybody.

We know we hit you with a lot of we think very important and different information today, and if I could just summarize it for you we're coming out of FY14 with accelerating momentum.

We really like our trajectory, and we're making the decisions today to build an even stronger future.

And I'm hoping that we're going to get a chance to see all of you on September 30 in Mountainview for Investor Day, where we will share more information and break this down and be able to walk through it and talk to you about any questions you may have.

But in the meantime, everybody have a great weekend and we will 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.