直覺電腦 (INTU) 2015 Q3 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to Intuit's third-quarter FY15 conference call.

(Operator Instructions)

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

Mr. Rhodes, you may begin.

Thank you, sir.

Good afternoon, everyone, and welcome to Intuit's third-quarter FY15 conference call.

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

Before we start I would 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 a press release issued earlier this afternoon, our Form 10-K for FY14, and our other SEC filings.

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

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

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

We have 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.

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

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

All right, thank you, Matt.

Thanks to all of you for joining us.

First, the headlines.

Today we reported third-quarter revenue of $2.2 billion.

This was above our guidance range and, as a result, we increased our full-year revenue guidance.

Non-GAAP operating income and earnings per share were also above guidance.

QuickBooks Online subscribers once again exceeded expectations, so we have raised our outlook there for the fiscal year as well.

Our GAAP results include the impact of a strategic refocus in our consumer ecosystem group, which Neil will discuss in a moment.

Now, I know the tax season is on everyone's mind so let me start there.

I feel very good about our performance at our tax businesses.

In the US season to date, TurboTax Online units grew 13%, and total TurboTax units grew 9% excluding the Free File Alliance.

As a result, we now expect consumer tax revenue to grow about 9% for the fiscal year, above our previous guidance range of 5% to 7%.

We're in the second year of a multi-year journey to deliver our strategic goal of Taxes Are Done.

Our objectives this year were to drive growth in the do-it-yourself software category, to increase our customer base, and to expand our market share.

We succeeded on all fronts.

As we have shared in previous discussions, there are four main growth drivers for TurboTax.

Let me walk through each of these and highlight how we performed versus our expectations.

The first driver is the total number of returns filed with the IRS each year.

Total returns received by the IRS were up about 1%, in line with our expectations.

The second driver is the growth of the do-it-yourself software category and the category share of the total IRS returns filed.

This season, the do-it-yourself software category gained more than 1 point of share from alternative methods, which was a little better than we had forecasted.

As the category champion, it is our responsibility to help fuel the secular shift towards software that's been occurring for the past decade, and we succeeded.

IRS data shows that the do-it-yourself E-files were up 6%, contrasted with assisted E-files, which were roughly flat.

Over the past two years the do-it-yourself software category has gained 3 points of share from the assisted tax prep method.

The third driver is expanding our share within the do-it-yourself software category.

This season, driven by the improvements in our TurboTax product and more efficient and effective marketing, we estimate that TurboTax Online gained about 1.5 points of share, which translates into 4 points of share gains over the past two seasons.

While our absolute zero program helped drive share gains early in the season, the payoff on our multi-year product innovation had the greatest impact, as demonstrated by big improvements in Net Promoter Score, conversion, and retention.

And, finally, the fourth driver is the monetization of those returns.

Our share gains were not simply the result of aggressive promotion.

The reality is that we delivered revenue above our guidance range even as we achieved our goal of growing our customer base faster than revenue.

This was driven by stronger product mix, improved attach rates and a new bundle.

Our efforts to reinvent the tax prep category are clearly paying off.

TurboTax's mobile innovation enabled customers to start and finish their return on any device for the first time.

Total mobile app downloads were up almost 70% year over year.

And the ability to finish on any device more than doubled conversion for those that started out on a mobile device.

Our investment in the offering also led to a 30% decrease in overall customer support contacts throughout the season.

During the heaviest call days at the very end of season, we decreased our support abandonment rate by 80%.

These durable innovations, which have been developed over several years, are not easily matched by competition.

And they have improved TurboTax Online's conversion by nearly 300 basis points this year, and improved TurboTax Online's Net Promoter Score by 5 points, as well.

We learned a lot this tax season and we demonstrated an ability to adapt quickly to the constantly evolving fraud threats.

We have emerged a wiser organization with a game plan to win next season and beyond.

We're committed to leading the industry's fraud protection efforts and to earning the trust of our customers every single day.

On the pro tax side of the business, total customers also grew, while the overall pro category was roughly flat.

This segment is on track to come in at the high end of its guidance range as well.

With that overview on tax, let me now shift to small business.

The QuickBooks Online ecosystem continues to build momentum.

We grew total QuickBooks Online subscribers by 55% in the third quarter, up from 50% in the previous quarter.

This represents the eighth consecutive quarter of accelerating paid subscriber growth.

We added more than 120,000 QuickBooks Online subscribers in the quarter and we now have 965,000 paying subscribers worldwide.

In the US, QuickBooks online subscriber growth accelerated, growing 45% in the quarter, up from 39% in the previous quarter.

Our new customer payroll attach rate in the US improved versus last quarter to 23%.

And our QuickBooks Online payments attach rate of 9% is up from 8% a year ago.

Roughly 15,000 of our QuickBooks online subscribers are using the QuickBooks self-employed solution.

That's up from 5,000 subscribers just 90 days ago.

And about one-third of those customers chose the bundle that includes TurboTax Home and Business.

Finally, outside the US, QuickBooks Online subscribers were up about 140% to just over 150,000 paid subs.

So to put a bubble around the year, in tax we successfully navigated a challenging season, growing the category, gaining market share, and improving monetization efforts, all resulting from a multi-year effort in pursuit of our strategic goal that Taxes Are Done.

And our small business online ecosystem continues to build momentum, with QuickBooks Online subscriber growth accelerating.

With that overview, let me turn it over to Neil to walk you through the financial details.

Thank you, Brad.

We'll start with overall Company results.

For the third quarter of FY15 we delivered revenue of $2.2 billion, non-GAAP operating income of $1.2 billion, GAAP operating income of $906 million, non-GAAP earnings per share of $2.85, and GAAP earnings per share of $1.78.

These results factor in our strategic decision to deliver ongoing services and releases for future desktop offerings to encourage migration to online solutions.

As a result, revenue for future desktop software licenses will be recognized as services are delivered rather than up front.

Our GAAP results include a goodwill impairment charge for our consumer ecosystem group.

Our revenue and operating income for this group have trailed our expectations for the year.

As a result, we initiated a strategic shift in the third quarter to increase our focus on integrating our bill pay solution into Mint and Quicken.

Accelerating this capability was the primary reason for the Check acquisition last year.

With this strategic shift, we are reducing our focus on Check's biller and direct pay channels and, as a result, we are writing off approximately $263 million in goodwill primarily associated with these channels.

This charge reduced third-quarter GAAP earnings per share by $0.93.

Turning to the business segments, total small business group revenue declined 5% for the third quarter, primarily due to the impact of changes to the QuickBooks desktop product, resulting in ratable revenue recognition.

QuickBooks' total paying customers grew 20% in the third quarter and are up about 8% year to date.

Small business online ecosystem revenue grew 20% and customer acquisition in our online ecosystem continues to drive growth.

QuickBooks online subscribers grew 55%, accelerating from last quarter.

Online active payments customers grew 6%, and online payments charge volume grew 19%, driven by an increase in charge volume per customer.

Online payroll customers grew 20%.

Switching to desktop, total desktop ecosystem revenue declined 15%, as expected.

QuickBooks desktop units declined 23% in the third quarter as we continue to emphasize QuickBooks Online.

The strong acquisition of new customers in QuickBooks Online has more than offset the decline in desktop units.

Desktop active payments customers declined 11% and desktop payments charge volume declined 1%.

In the third quarter, we sold non-core payments assets, which had generated roughly $20 million in annual revenue.

The goal of this transaction was to further focus on our core opportunities in the payment space, attached to QuickBooks Online and E-invoicing across our ecosystem of more than 4 million small businesses.

We recorded a gain on the sale of these assets of $30 million in the third quarter.

Within the consumer group, consumer tax revenue was up 4% versus the third quarter last year and up 9% year to date, as we benefited from a higher than expected mix of paid units and revenue from attached services.

Free upgrades, rebates, and higher attrition for customers affected by our desktop product changes reduced revenue by approximately $20 million.

We also incurred an additional $15 million in expenses related to servicing customers impacted by the TurboTax desktop lineup change and to increase investment in data and security features.

We will continue to invest in this area to ensure our customers' privacy and security.

Pro tax revenue was $130 million, down 61%.

As we previously discussed, we expect a revenue shift of $150 million from FY15 to FY16 due to changes in our desktop offerings.

The fundamentals of this business remain strong, and we expect full-year revenue to be near the high end of our guidance range.

We continue to take a disciplined approach to capital management, investing the cash we generate in opportunities that yield a return on investment greater than 15%.

With approximately $2.1 billion in cash and investments on our balance sheet, our first priority is investing for customer growth.

We also look for inorganic opportunities, and in the third quarter we made two acquisitions totaling approximately $30 million.

When it's the best use of cash we'll return cash to shareholders via share repurchases.

Year to date we have repurchased $1.25 billion of shares at an average price of about $90 including $568 million of shares in the third quarter.

The Board approved an additional $2 billion in share buyback authorization.

We now have about $2.6 billion remaining on our authorization and we intend to be in the market each quarter.

Our Board also approved a $0.25 dividend per share for our fiscal fourth quarter, payable on July 20.

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

We raised our revenue guidance for the full year and we maintained our operating income guidance despite increased investment primarily in consumer tax.

We also raised our QuickBooks Online subscriber growth for the full year.

You can find our guidance details in our press release and on the fact sheet.

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

All right, thank you, Neil.

We're pleased with our strong finish to the tax season.

We grew the digital category, increased share, and plan to come in above the high end of our revenue guidance range in consumer tax.

As we continue to reimagine tax preparation experience we are already working on the product for next season.

And we will remain at the forefront in the ongoing fight against fraud, working with our peers and government agencies to help protect taxpayers.

On the small business momentum side, it continues to build and ramp up, and as a result our transition to the cloud is accelerating, driving value for customers and for Intuit.

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

Said?

(Operator Instructions)

Your first question comes from Walter Pritchard from Citi.

Your line is open.

Please go ahead.

Hi.

Thanks.

Two small business related questions.

First, I saw you bumped up the guide for the year.

You didn't comment on the 2 million number for FY17 ending.

I am wondering, just given the outperformance here, the pace at which you're adding subs, how should we be thinking about that 2 million number that you are thinking out in 2017?

Hi Walter.

It's Brad.

First of all, we have raised the guidance a couple times this year, so clearly the question is on target.

We continue to outpace our forecast.

At the same time, what we want to do is we want to close out this fiscal year and then pull up the nose of the plane, and we'll take a look at our guidance for FY16 in August as well as our outlook for 2017.

But at this point in time we're not changing the outlook but we clearly have a pattern here of continuing to perform well, so we'll talk to you more about that when we set guidance for 2016, and then talk to you at investor day in the fall.

And then, Brad, just related to that, I think this fall you are going to release your QuickBooks desktop product again, like you do every year, except this year my understanding is there is really not going to be any new features in the product, or substantially all of your feature development is on the online product.

Now that you are getting closer to that and maybe playing with how customers may behave around that, how should we think that impacts the growth rate of online given they'll go to the store and they'll see a new product but there is really not a whole lot new in that desktop product, where all the new features are in the online?

First of all, the statement is absolutely on target.

We are leaning our new R&D and features into QuickBooks Online.

At the same time, we remain committed to having a delightful product experience for desktop customers.

We still have 3.7 million customers using that product.

While we do see some that are willing to migrate to the cloud we want to keep those customers who stay on desktop delighted.

We haven't talked about what features we'll put in there.

The one thing we are continuing to do is improve the product experience so they can do things more efficiently and effectively.

So, there will be changes in the product that will continue to come out in the fall, but we will be leaning more heavily into the new features in QuickBooks Online.

What that turns into in terms of an outlook is we anticipate, as you can tell from our subscriber forecast, is you're going to see more new customers coming into QuickBooks Online.

In fact, right now over 60% of all the new customers are now selecting the cloud version versus desktop.

It was just a few quarters ago we hit 50/50.

We see that continuing.

We expect desktop units will probably continue to climb at 20% to 25%.

So, those are the outlooks we've provided so far.

Great.

Thanks, Brad.

Thank you.

Our next question comes from Brent Thill from UBS.

Good afternoon.

Brad, just on the international buildout of the small business, I am just curious if you can bring us up to speed in terms of what you are seeing there and the traction.

And if you could also comment -- I think you have obviously a very big install base on the desktop side.

I think you have been pretty clear that a lot of the net new user to QuickBooks have come from new users rather than the install base.

Are you starting to see that install base move over?

When you look at that 2 million number, how much is predicated on those install base customers moving over?

Thank you.

You're welcome, Brent.

Let me start with the global view.

We continue to be encouraged by our global progress.

We just announced that it was up again 140%.

We have about 150,000 paid subs.

On a country by country basis the story is slightly different.

There is real strength and momentum in Canada.

There is a continuing acceleration in Australia as well as the United Kingdom.

We have had some challenges with monetization efforts in India but it's a very small portion of our base, and we treat that as an experimentation market because we truly are the only cloud-based player there.

So, we are learning more in the India market.

We are getting good subs, we are just trying to find different ways to make sure that we're bundling that with the right products for accountants.

Of course, we just recently announced an acquisition in Brazil, as well as opening up in France.

So, as we head into the fall we'll have a better read on how those two countries are performing.

But so far we like how the product is shaping up and we like the reception in the market.

So, the global story is strong.

When you think about the desktop and then the new users and the migration that you were asking about for QBO, right now about 8 out of 10 of the QuickBooks Online customers are new to the franchise.

That's pretty consistent over the last several quarters.

The migration is not as much as we had originally forecasted but it is still up over 60%, so it's a good healthy migration number.

But our goal right now is to make sure we have the right feature functionality in the online version.

So, for those who want to migrate we have that.

And we think we'll have most of that gap closed in this late summer time frame.

The second thing we want to make sure we do is that we have data conversion and the assistance they may need up and running, and we have that in place now.

Then the third thing is just make sure that they feel like it's a good price value.

And we feel today that we're getting good feedback on that.

After that, it's up to them being comfortable.

And if their accountant helps them make that jump then I think we'll make the move.

If not, we're going to keep them happy on the desktop, because if they don't want to leave the desktop product to go to our own cloud solution we don't see them leaving to a competitor either, and we want to keep them in the franchise.

So, that's how we're looking at migrations right now.

8 out of 10 of the users in QBO are new to the franchise, the other 20% are actually migrating from desktop.

That's a pretty consistent ratio.

But we are seeing the migration numbers going up about 60%, but it's still not as big as we had originally forecast and we are fine with that.

Great.

Thank you.

Thank you.

Our next question comes from Ross MacMillan from RBC.

Your line is open.

Please go ahead.

Thanks.

Brad or Neil, I was just curious, you commented that total QuickBooks users were up, I think, 20%, but if I look on a unit basis and I think about what percentage you are actually capturing from conversion, it still looks like the overall desktop units are falling a little bit faster than I would have expected.

And I notice you did some promotions I think in April to try to, I presume, convert some of the traditional QuickBooks desktop customer to buy afresh.

I was just curious to what your thoughts are there with respect to, if you will, capturing those desktop customers that are clearly tracking a little bit lower than we typically see in terms of purchasing on that three-year cadence?

Yes, Ross, this is Neil.

You are exactly right.

We have been watching the desktop sales quite aggressively.

And, as Brad mentioned, the migration story hasn't been quite as robust as we might have planned and included in our expectations.

On the other hand, we don't see those desktop customers going anywhere else either.

As you know, for those of you who have used our products, they can choose when they want to upgrade, and when they choose to do that.

We have tested different price points throughout this year to determine if we can influence what we call eager upgraders, those people who upgrade our desktop solution more frequently than every three years and 36 months.

We have seen some encouraging signs more recently, but to the broader point, as we have said all along, we expect the desktop units to decline around 20%, 25% per year.

What we have seen so far has been pretty well within our expectations and guidance.

We just haven't seen as many convert over to QBO yet as we would have expected.

We are testing some different price points.

As Brad said, we want to be sure that customers who are using QuickBooks, whether they're using desktop or online, are using the absolute best product, the best solution, and that we make it easy for them to make that choice and to get in the product.

Ross, this is Brad.

If I could just add a quick point, and it's built on the answer I gave to Brent a couple minutes ago, as well.

This is really a good news story for us.

For many years we sat in front of you and talked about 4 million installed users on QuickBooks, and every time we had a quarter we would say why aren't we growing that base?

We are growing the base now because QuickBooks Online is expanding the total addressable market.

So we've raised guidance on QuickBooks Online units twice this year, and that's even with the migration from the desktop not happening at the pace we thought.

That's because 8 out of 10 of these people have never used software before and they're coming into the category.

That is good news.

The second piece of good news for us is the lifetime value is a wash.

The lifetime value on desktop is $1,400 and for QBO right now it's $1,400.

So, as long as we keep the customers happy on desktop, and they get features built out in QuickBooks Online and help them make that migration on their time frame, it's a win-win for us.

We aren't sitting awake at night worried about the desktop customers not moving.

We are committed to getting them to the cloud, but we want to do it on their time frame so we don't send them off to a competitor.

And we are feeling pretty good about how it's playing out so far.

Thanks.

And maybe just a follow up.

Neil you said -- or both of you probably are seeing this -- that you know that those customers are not going elsewhere.

How do you know that?

Is there some way you can see usage on desktop product users?

I am just curious as to how you actually -- or is it survey work?

How do you know they're not going anywhere else?

The main thing that I rely on, Ross, is just our own communication with those customers, survey data, input we get through our call center and through our care support agents, is what leads me to feel comfortable about that.

That's great.

Thanks a lot.

Thank you.

Our next question comes from Kash Rangan from Merrill Lynch.

Your line is open.

Please go ahead.

Hi.

Nice quarter guys.

First on the TurboTax retention which improved by 2 percentage points, what helped you and how sustainable is the space of improvement?

And on the small business side, Brad, I think you mentioned the lifetime value of $1,400, [$1,400].

What are the attach rate assumptions you are using to generate lifetime value as far as payments and payroll are concerned?

And if those attach rates were to move higher in the future I would assume you would have more aggressive targets, how much would the lifetime value expand?

Thank you.

All right, Kash, thank you.

Let me start with retention first.

I had mentioned that this is the second year of a multi-year effort where our team has been going in behind this vision of Taxes Are Done.

So, finding access to data so customers could actually import their W2 electronically.

You may remember last quarter we talked about one-third of the customers last year could do that.

This year over three-fourths of them could, over 75% could.

And we've seen that if they have any data already input in their tax return, it increases conversion.

And then if they have a great experience this year that increases retention next year.

The best leading indicator on retention is an improvement in Net Promoter Score.

And it went up 5 points this year.

So, we feel very good that because of the product being more customized to your particular tax situation, and we're having you do less work because we're able to import data electronically, that we're able to basically continue to improve conversion and retention and that's really what's driving TurboTax.

We'll break more of that down when we get to investor day in the fall.

The second is on the lifetime value.

I will go back to investor day again.

We put a slide into this past September and it really has all the assumptions laid out in there for the lifetime value of desktop versus online.

I think at the summary level what we have put in there as a forecast is to date desktop is less reliance on the accounting price and more on the payroll and the payments because it's got a heavier penetration of those attach services.

QBO today is less mature that way.

It is actually heavier on the accounting subscription every month and a little lower on payroll and payments.

But as you just suggested, every new customer we bring in is attaching at a higher rate and so we see that improving over time on an absolute basis.

The only thing that will work against that is that we are starting to move into new countries where we don't have payroll and payments yet available, so that will bring the mix down a little bit on the average.

And then we're also introducing QuickBooks self-employed, which are small sole proprietors who don't have employees so they won't have payroll.

So, on an absolute apples-to-apples basis we see the lifetime value of QuickBooks Online, with the payments and payroll attach rates getting stronger, improving.

But when you put it in the mix of those global units as well as QuickBooks self-employed, that will be a headwind we'll work against, but ultimately that will pay off over time, as well.

There is a lot more detail in that particular presentation in September if you want to pull it down, but I hope that hits the high level for you.

Absolutely it does.

Just as a follow up, how is the transition from the opt-out to opt-in coming along?

Are the attrition characteristics shaping up the way you expected after you made this change?

Thank you.

Yes.

I believe you are referring to our payroll change.

Yes.

Yes, absolutely, Kash, it is paying off.

What's happened now is the retention rates and the cohorts of the customers that are with us 30, 60, 90 days are improving.

What had happened is when we had people default into payroll, people found out after a couple of bills that they were getting charged for payroll and they didn't want it.

They were frustrated and it caused our attrition to spike.

Since we switched to an opt out, the right customers are now selecting payroll and we are seeing an improvement in our retention, which is one of the biggest levers you have in a recurring revenue service.

It's paying off the way we want and that's reflected in the growth rate we had in payroll this quarter.

Wonderful.

Thank you.

Thank you.

Our next question comes from Sterling Auty from JPMorgan.

Your line is open.

Please go ahead.

Thanks.

Hi guys.

On QuickBooks Online I caught the data migration comment but did you update in terms of where you are on the advanced inventory modules that you thought would help with conversions from desktop to online?

Hi, Sterling.

I didn't call it out specifically.

I referenced other features.

But just to be specific about the advanced features, we did an acquisition of a small company called Lettuce, and that brings advanced inventory capabilities that pretty much gets us to parity with QuickBooks Pro on the desktop.

Our current time line is to have those fully implemented in the late summer time frame and then begin to have more of a conversion focus for the desktop customers in the first quarter of FY16, so in the fall.

Okay.

Great.

And on the consumer tax side, looking back at the customers that you brought on -- so, the new customers -- especially at the low end, is there any sense of how we should think about those migrating up to being higher ARPU-paying customers next year and the year after that?

Yes, I'll give you a two-part answer on that one, Sterling.

If you go back to when we first went to free in 2004 we have gotten wiser about how to help customers realize the value of moving to a paid SKU.

That comes through a whole host of things -- the ability to import year-over-year information, the ability to get access to services like a refund bonus on an Amazon gift card.

So, every year that we've had free we've actually been able to hold or improve our revenue per return over many of those years.

This year, I would say, was the biggest step forward.

If you look at the fact that we had the absolute zero program, free federal and free state, for a period of time in the early part of season, yet we exceeded our revenue guidance range, that was really the result of a couple of important things.

In addition to just growing customers, which grows revenue, we had a better mix and that was because of last year's line up change we made to TurboTax online where we got customers into the right product so they weren't trading down mid season.

But the other one was this new bundle we put out there.

It was basically the absolute zero -- it was called Free Plus.

What was the brand?

Free Plus Bundle.

Yes, the Free Plus Bundle.

What it basically was, was you could move up to $29.99 bundle and you would get access to storage and vault capabilities, you would have the ability to do a refund transfer, you would have the ability to get an Amazon gift card.

And we saw a really strong take rate there.

So, if you think about that going forward next year, I think our track record is we can bring people in on free, we can monetize many of them in the same season, but we also tend to monetize more of them the following season.

And that just continues to be a formula that pays off.

Great.

Thank you, guys.

Thank you.

Our next question comes from Raimo Lenschow from Barclays.

Your line is open.

Please go ahead.

Thank you.

Two quick questions.

Brad, just to wrap up the tax season questions, remember on the analyst day you talked about the four drivers, and if they all come together then you can see a better growth rate than we saw in the last few years.

Now you delivered the 9% growth.

How comfortable are you about the sustainability of these results?

Raimo, right now we've put out there an outlook that we think that this business can grow 5% to 10%.

Last year we were in the upper end of that range and this year we are in the upper end of that range.

As Neil said we had a self inflicted wound.

We made a change to our desktop product line up, it cost us about $20 million.

If we hadn't done that and we had been able do what we normally do and execute, it could have been a double-digit growth year for us in revenue.

I think the question is fair.

Right now we haven't changed the outlook on 5% to 10% but we are clearly hugging the upper end of that range.

Our Company's financial principles are we believe we have businesses that can grow double digits organically.

I have increased confidence at two strong years in a row but we are not changing the outlook yet beyond 5% to 10%.

But I think it's a fair question and a conversation we can have when we head into the new fiscal year, as well.

Perfect.

And a quick question for Neil, or maybe Brad for you, as well -- you obviously have a very strong cash position.

As you go towards more subscription focus your results will be even more predictable.

How do you think about dividends?

I saw the increase now but your yield is still relatively low.

Is that something that's on the top of your mind when you talk with the Board?

It's certainly one of the tools in the tool box when we think about capital allocation and how to invest and spend going forward.

We're still pretty early as a dividend payer, and we brought the dividend amount up aggressively over the last couple years.

We will review our plan overall with the Board in July and talk about a number of things around capital allocation and see where it goes and see where it goes from there.

But, you are right, the predictability and visibility into our cash flows and cash position is pretty strong.

Free cash flow of the Company is doing great.

So, we'll see how that allocates between internal investment, opportunities to grow inorganically and share repurchase and dividend.

They're all, I like to think of them as levers we can use to return cash to shareholders and grow the business.

Okay.

Thank you.

Thank you.

Our next question comes from Brad Zelnick from Jefferies.

Your line is open.

Please go ahead.

Thanks very much.

After a great tax season I know the whole team doesn't just go off to Disneyland to celebrate.

I am sure you are already contemplating lessons learned and how you are going to apply those going forward.

I just wanted to touch on two issues that were very topical this season.

First, fraud.

I know, and you remarked on it a few times in the prepared remarks, it's always been very important to protect the taxpayer from fraud.

The other one is the Affordable Care Act.

Is there anything that was learned this season that changes the way you approach these topics next season?

Yes, Brad, thanks.

First of all, you're right, we didn't head off to Disneyland or Disneyworld.

The team is already working hard for season and I am excited to see that sort of enthusiasm.

The tax season lesson, starting with fraud, it is clearly a situation.

It is a massive attack on the US tax system.

It's not a company-specific challenge.

And there is nothing we take more seriously than the privacy and security of our customers' information, and the privacy and security of anyone's information in the tax industry.

So, while we continue to make advances in our own product offerings -- things like multi-factor authentication, the acquisition of a company called Porticor in Israel which is a leading security data encryption firm, we are working with outside third parties like Mandiant, Palantir, FireEye, all those players and all those pieces are coming together -- we are also at the table.

We are sitting with the IRS Commissioner, with the state agencies, with our peers in the industry.

And we have working groups going on as we speak, to try to develop a set of standards and best practices to advance the collective safety of the entire US tax system.

We have another meeting coming up in June.

It will be information that the IRS Commissioner and others may choose to release after that meeting.

But net-net we are committed to this.

There are lots of lessons learned as an industry.

We are going to continue to raise our game and hopefully help the entire industry raise their game.

The second is on ACA, the Affordable Care Act.

I think the lesson learned here is that if we continue to do what we have done for three decades -- make things that could be complicated simple -- they do not become an event for change, they actually become a catalyst for growth.

A great example is we have studied really hard what happened in Massachusetts when at the time Governor Romney introduced a version of this.

We learned from those situations and those behaviors and we took actions.

And, so, while many thought that this would drive behavior shift from do it yourself to assisted, we thought it would be a catalyst, so our teams worked really hard to make it simple.

And a proof point was this year one of the highest converting sections of TurboTax.com from traffic into an actual customer was the Affordable Care Act section.

Our team nailed it.

So, that's why the digital category grew 6% and I think the assisted category, again, was roughly flat.

We know next year there is going to be another big step forward.

The penalties go up 2X.

Everyone has to have proof of insurance and we're already working on that, as well.

We refuse to make that a reason for customers to lose confidence.

We're going to bring our A game and try to continue to push it forward.

The lessons are that courage isn't the absence of fear, it's a willingness to stand up and face it.

The Affordable Care Act was a boogie man and it remains a boogie man, and we are standing up and facing it and I think we're helping customers through it pretty well.

Those are really important issues and I really appreciate your perspective.

If I can just follow up with a quick one for Neil.

Neil, the consumer segment margin down a few hundred basis points versus a year ago.

Can you just dive into that for us and specifically talk about acquisition costs for TurboTax?

Thanks again.

Yes.

I think what you are seeing there is $35 million divot we had this year, part of that on the revenue side for the desktop line up and part of it for a care cost around security and privacy.

Those things hit us after we had our plan basically for this year and already made some other commitments.

As we think about next year and going forward we include that in our resource allocation expectations going forward.

So that's how we think about that.

It's clearly outstanding for us to perform as well as we did with the headwinds we had.

Agreed.

Thanks again.

Thank you.

Our next question comes from Scott Schneeberger from Oppenheimer.

Your line is open.

Thanks.

Good afternoon guys.

Congratulations.

I am going to follow on that last question and, Neil, ask you just, I think you made a comment about some increased investment in consumer tax that will affect the fourth quarter.

Could you just bridge a little bit the EPS outperformance in the third quarter, yet the full-year guidance not going up as much, and the fourth-year guidance down a little bit?

I know you also had that noncore sale in payments and I assume that's part of the answer.

But just a little bridge there.

Thanks.

Sure, Scott.

I think most of the issue around the fourth quarter is just difficulty in modeling it out, and hard for people to understand how the ratable impacts are going to flow through the full year.

We're not anticipating any substantial investments in consumer tax in Q4 beyond what we have baked into our normal regular plan, or things like that.

Fourth quarter is light for us but I think the biggest difference there between what a lot of people had in their models and what we are guiding to today has really just been a difficulty of understanding the ratable impacts through the full year.

The comment I made about investments in consumer tax is just primarily an explanation for why we are able to raise our revenue guidance for the full year with operating income remaining in the same range.

That $35 million I just mentioned certainly has an impact on that and flows through at a pretty significant rate to operating income.

So, that's a big change in that area.

And was the payments asset sale meaningful to the bottom line?

No.

It was $30 million gross so it wasn't that impactful overall.

It wasn't material to us in terms of operating income or EPS.

And GAAP only, Scott.

Okay.

Appreciate it.

Swinging over to consumer tax on the Absolute Free, obviously I think that's been very helpful.

You mentioned on an earlier question that the last two years have been very impressive volume and with regard to revenue per return.

I'm not sure where to go incrementally from Absolute Free.

You may be formulating this in the off season and we hear about it at investor day but, Brad, could you give comments on what the next step is, and what you're seeing with these bundle attaches and how strong revenue per return is that makes you, as you answered an earlier question, confident about the higher end of the long-term guidance range for consumer tax?

Thanks.

Scott, first of all, I don't want to raise anybody's expectations that we are changing the 5% to 10% outlook.

I think the question was fair, when you are at 9% and you had a couple things this year that could have made it double digits, to ask.

But that being said, as operators we are very bullish on the do-it-yourself tax business.

First of all, there has been a question for a few years, is there any opportunity to expand the TAM, the total addressable market.

And we've said there are 148 million people who file tax returns, about 50 million do software.

We think there is.

And if you look at the fact that you have new filers coming into the category every year, 3 million to 5 million, this year we actually outperformed versus our forecast on getting our fair share of those new filers.

The second is, we were able to take share from the assisted category, which has been a question, and we have taken several points of share over the last two years, and that's from the data recorded by the IRS when you look at all the data that's out there.

So, this category has opportunity.

The neat thing about Absolute Zero is, it's pretty much impossible for anyone to price lower than free federal and free state.

But what is hard is to figure out how do that and turn that into a paying customer.

We've got a lot of work and a lot of experience that helps us do that.

So, we're getting much wiser at using that kind of a tool to expand the TAM, and then really good or much better at getting monetization programs, whether it's attach services or new bundles, to turn those into paying customers.

And that's the bullishness that you hear us talking about.

That, plus the product innovations.

We'll talk more in the fall about what does that mean to the long-term outlook, but right now I like these last two years, and I like momentum the team has built.

And I really have confidence that our tax business has a lot of upside as we look ahead.

Great.

Thanks very much.

Thank you.

Our next question comes from Greg Dunham from Goldman Sachs.

Your line is open.

Please go ahead.

Thanks, guys.

Just one for me, and I switch gears back to the small business group.

If you look at QuickBooks online in the US you've doubled that subscriber base over the past two years.

What are you seeing in terms of retention of those QBO subscribers specifically in the US?

Yes, Greg, what we are seeing right now is the retention rates are in the mid to high 70%s.

We're improving the retention rates on a cohort basis.

As you get payroll and payments attach rates, the more services you sign up for, the stickier you become.

Obviously the product continues to get stronger.

The new version, which we call Harmony, which continues to get more feature functionality in it, adds more reasons for customers to stay.

But right now when you put it together in the US, it's in that mid to high 70%, is the retention rate for QBO.

Perfect.

Thanks.

Thank you.

Our next question comes from Jim Macdonald from First Analysis.

Your line is open.

Please go ahead.

Thanks, guys.

What are your take-aways with trying to up-shift people on desktop?

Do you think you will be able do that in the future or are you not going to pursue that anymore?

Jim, are you talking about QuickBooks desktop?

No, the TurboTax product, trying to get them right sized to the product.

Oh, I see, so, referring to the mistake we made this year where we tried to move feature functionality to match what we had online, and we had obviously some upset customers.

No, we learned our lesson on that one, Jim.

What we learned is that TurboTax Online customers have a very different expectation and a set of experiences they want.

Our TurboTax desktop customers, many of them begin with letters that say -- I have been using this product for 20 years.

They want a great product that does exactly what they want it to do, and they don't want a whole lot of changes to it unless it's going to make it easier for them.

So, we're not going to be trying to mirror image TurboTax Online and TurboTax desktop.

We're going to make sure we deliver the best experience for the customer on whichever platform they want.

Great.

And then it sounds like you really improved your sales and marketing efficiency for TurboTax this year.

Maybe you could talk us through some of the things you were successful with.

Yes, I would just, at a high level, without giving out too many of the secrets that I know our marketing team would tell me please don't talk too much about this stuff, I would say, first of all, this was a very competitive tax season -- very good competition that we are always up against.

And they brought their A game.

They improved their products.

There was aggressive spend in advertising and marketing.

There was aggressive pricing promotions out there.

Even when we had the issue that we created for our self with the desktop product, our team stood in there and really had a good season.

One of the things I would say is, despite the fact that we did not spend to the level that we believe some of the competitors did, we actually held share in traffic and improved market share in terms of conversion into pay customers.

And so we have a more efficient program because our message speaks to the end user -- don't be afraid of taxes, don't be afraid of the Affordable Care Act, it's amazing what you are capable of.

It's simply yes and no answers to questions and then you will be able to get your taxes done and keep more money in your pocket.

That resonated last year.

That resonated this year.

And we think we are going to continue to help empower the end user so they believe in themselves next year, as well.

Great.

Thanks.

Thank you.

Our next question comes from David Togut from Evercore.

Your line is open.

Please go ahead.

Thank you.

Good afternoon.

Brad, could you comment on unit pricing strategy both for TurboTax Online and QuickBooks Online over the next 12 to 24 months?

David, I'll talk about it as an overall philosophy.

We don't want to at this point start talking about our pricing line-up for the next year.

It's a very competitive market out there.

I would say overall we have learned some important lessons about pricing and it really comes down to price value.

We tend to have the entry level price for all of our products is free, either free TurboTax or an extended period or a trial period in QuickBooks Online.

But we also have learned that we can introduce additional services that we refer to as attach services, and those attach services customers resonate with the value proposition and they go ahead they add those on and it gets an increased revenue per customer.

On the upper end of our product line-up we start to run into much higher price competitors and that's where we can tend to take some price.

QuickBooks Enterprise, for example, it's about one-third the price of the mid-market ERPs so we are able to take a little more price there.

When you get up to the upper end of TurboTax, the next alternative is going to a tax store and paying a couple hundred dollars.

So, we're able to take a price there.

We really have surgical pricing.

We never get under cut on the low end.

We are getting smarter to monetize with attach services in the middle, and we take price where we have earned the right to do that against higher-priced competitors in the high end.

And that's tended to be the philosophy that's worked for us.

Understood.

Thank you very much.

Thank you.

Your next question comes from Michael Millman from Millman Research Associates.

Thank you.

Looking at the IRS numbers you see that do-it-yourself, or self-prepared, as they call it, increased about twice as much as the total, whereas assisted was, call it, flattish, actually up a little.

So, the question is, or comment is with a question, to what extent is do-it-yourself still taking market from paper, and how much of that is really left to move?

Yes, Michael, I would tell you, first of all, you know these numbers well, and you and I have talked about this stuff when we do our one on ones.

We are down to 5 million, 6 million, I am thinking, total that the IRS says are out there in paper.

When you look at the source of new customers we have -- because we are able to tell what you did, we're able to see if you used another software package, you went to a store, you went to a CPA or you are on paper -- this growth in do-it-yourself is not coming just from paper.

It is a secular trend towards digital.

In fact, we have taken 3 points of the category in do-it-yourself or, as you said, the self-prepared categories, taken 3 points of share away from the assisted category over the last two years.

I think that's a fundamental belief that ultimately plays out because new tax filers come in and they're much more comfortable with technology these days.

We have value propositions like Absolute Zero, as well as easier-to-use products that can import your data for you so you don't have to do any work.

It's actually telling people -- wow, I could get this done at a much lower price than if I go to a tax store.

Those are the realities.

I think, by the way, they play out even in our competitors' numbers.

If you look at their own mix, whether they own stores and they also have software, look at which of their businesses are growing faster in terms of returns, and you can see that digital businesses are growing faster than the assisted prepared, and I think that's just a secular trend that's going to continue.

Understood, but wondering the sources.

Have you talked about what your share with Absolute Zero or what share of your tax returns were Absolute Zero, and what the growth has been in the Zero range from absolute to semi-absolute?

I like the term, Mike.

No, we haven't broken that level of detail out.

As we get into the September analyst day we'll tend to share a little more information around some of those pieces.

But at this point, no, we didn't share any of that data.

Thanks, Brad.

Thank you.

I am showing no further questions at this time.

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

All right.

I want to thank everybody for your questions and your comments.

We're heading into the home stretch of this fiscal year and we really like our position.

We feel our financial results are strong and we're coming off one of the best quarters in our history.

And while this momentum really feels good we are certainly not resting on our laurels.

As someone said earlier, we haven't let the teams go off to Disneyland or Disneyworld.

They're so fired up they're already ready for next season.

And as we look to our fourth quarter and beyond, Neil and I are really encouraged by the steps we are taking to further strengthen the position in all of our businesses and functions.

So, with that, I really want to thank you for your time today.

And we want to wish everybody a good and restful Memorial Day weekend.

Thanks a lot.

Ladies and gentlemen, thank you for participating.

This concludes today's conference call.