直覺電腦 (INTU) 2018 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to Intuit's First Quarter Fiscal Year 2018 Conference Call.

(Operator Instructions) With that, I'll now turn the call over to Jerry Natoli, Intuit's Vice President of Finance and Treasurer.

Mr. Natoli?

Thanks, James, and thanks to you all for joining us.

James, we couldn't quite hear you.

So hopefully, the line is open.

If it's not, please work the communications line, and let us know.

Good afternoon, and welcome to Intuit's First Quarter Fiscal 2018 Conference Call.

I'm here with Brad Smith, our Chairman and CEO; Neil Williams, our CFO; and Michelle Clatterbuck, our incoming CFO.

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

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

You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2017 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 these remarks 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'll turn the call over to Brad.

All right.

Thanks, Jerry.

And thanks to all of you for joining us.

We're off to a strong start in fiscal year 2018.

In the first quarter, we grew revenue 14% and exceeded our overall financial targets.

Small Business & Self-Employed Group revenue grew 17%, with QuickBooks Online subscribers growing 56% and the online ecosystem revenue growing 35%.

Both the consumer group and the Strategic Partner group revenues were also in line with our expectations.

With that backdrop, let me share some observations on our business overall, starting with the Small Business & Self-Employed Group.

QuickBooks Online subscriber growth continues at a rapid pace, with online ecosystem revenue accelerating.

We exited the quarter with over 2.5 million QuickBooks Online subscribers, surpassing the 2 million subscriber milestone during the quarter in the United States, while our non-U.

S. base grew 70% year-over-year to approximately 550,000 subscribers.

Within QuickBooks Online, self-employed subscribers grew to roughly 425,000, up from 390,000 last quarter and 110,000 just 1 year ago.

The strong growth in QBO customers and online ecosystem revenue reflects our focus on improving the customer experience and delivering what matters most in their lives when choosing our products.

That is more money, no work and complete confidence.

Our teams are laser-focused on delivering these customer benefits, and they've produced a steady flow of new features and capabilities, many of which were showcased at our QuickBooks Connect Conference last week.

Our QBO innovations are resonating with customers, with our most recent Net Promoter Scores once again improving, this time by more than 6 points on top of the 22 point improvement we drove last year.

These improvements are reflected in each geography around the globe, positioning us well versus local alternatives and giving us confidence in continuing our expected QBO subscriber growth north of 40% with online ecosystem revenue growth of more than 30%.

Turning to the consumer group.

First quarter revenue finished in line with our expectations, up 7% year-over-year.

We're gearing up for the upcoming tax season and remain laser-focused on delivering an outstanding end-to-end customer experience for do-it-yourself taxpayers.

We're also launching our new TurboTax Live offering, leveraging technology for those seeking access to a tax expert on demand.

Our experience with October tax extension filers gave us an opportunity to run some water through the pipes, and we are encouraged by the results as we head into the season.

As we discussed last quarter, our consumer group now includes Mint and personal financial management.

We unveiled our new Turbo platform at the Money 2020 conference in mid-October.

Turbo is the first step towards expanding beyond a tax offering to a consumer platform.

This platform will improve the overall financial health of the end user.

Turbo goes beyond a credit score and unleashes the power of verified IRS-filed income, the credit score and a debt-to-income ratio to show customers who give consent where they truly stand.

We announced an exciting slate of initial partners who will use the platform to provide offerings for participating customers starting early in calendar 2018.

Moving on to the Strategic Partners Group.

Our Professional Tax revenue was also in line with our expectations for the quarter.

We continue to focus on multiservice accounting firms that do both books and taxes.

This is in service to driving our accountants' success while growing our small business ecosystem.

Putting a bow around the quarter, we're off to a strong start to fiscal 2018, and we are excited about our prospects for the year.

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

Thanks, Brad, and good afternoon, everyone.

For the first quarter of fiscal 2018, we delivered revenue of $886 million, up 14% year-over-year; a GAAP operating loss of $57 million versus $61 million a year ago; non-GAAP operating income of $43 million versus $32 million last year; GAAP loss per share of $0.07 versus $0.12 last year; and non-GAAP diluted earnings per share of $0.11, up from $0.06 last year.

Turning to the business segments.

Total Small Business & Self-Employed revenue grew 17% in the quarter, up from 14% in fiscal 2017.

QuickBooks Online subscriber growth remained strong at 56%, ending the quarter with 2.552 million subscribers.

Small Business online ecosystem revenue accelerated to 35% in the first quarter from 30% in fiscal 2017.

Online accounting continues to drive this revenue growth.

We expect year-over-year QBO subscriber growth to slow in the second half of the year due to the introduction of the self-employed bundle last tax season.

We remain confident in our outlook for growth in QBO subs, as reflected in our fiscal 2018 guidance of 3.275 million to 3.375 million subscribers.

We also continue to expect online ecosystem revenue to grow better than 30%.

Desktop ecosystem revenue grew 8% in the quarter, driven by QuickBooks Enterprise strength.

QuickBooks Desktop units fell 35%.

Remember that operating system changes in the year ago period led customers to upgrade to the newest desktop version, which drove strong unit growth last year.

For fiscal 2018, we expect QuickBooks Desktop units to decline mid-teens and desktop ecosystem revenue to be in -- to be up mid-single-digits.

Total consumer revenue was up 7% for the quarter while Professional Tax revenue within the Strategic Partner Group grew 2%.

Looking ahead, I'm excited about the opportunity TurboTax Live provides to address the needs of more tax filers.

We typically see 3 million prior year TurboTax customers go to a pro each year.

TurboTax Live provides us the opportunity to keep more of those customers in our franchise.

Turning to our financial principles.

We continue to take a disciplined approach to capital management.

We finished the quarter with approximately $780 million in cash and investments on our balance sheet.

Our first priority for cash remains investing in the business to drive customer and revenue growth.

Next, we use acquisitions to accelerate our growth and fill out our product road map.

We return cash that we can't invest profitably in the business to shareholders via both share repurchases and dividends.

We repurchased $170 million of shares in the first quarter.

Approximately $1.4 billion remains on our authorization.

We expect to be in the market each quarter this year.

The board approved a quarterly dividend of $0.39 per share payable January 18, 2018, an increase of 15% over last year.

Our Q2 fiscal 2018 guidance provides revenue growth of 14% to 16%, GAAP diluted earnings per share of $0.08 to $0.11 and non-GAAP diluted earnings per share of $0.31 to $0.34.

You can find our Q2 and fiscal 2018 guidance details in our press release and on our fact sheet.

Finally, I'd just like to say that I'm thankful for the opportunity to work with you, Brad, for the last 10 years.

It has been the high point of my career to learn from you and to laugh with you during our time together.

And I'll miss you.

Thank you, Neil.

There are no words, although I'll share some at the end of the call, but I do say that these last 10 years have flown by like it was just a blink of an eye.

It's been an awesome ride.

So shifting back to the business, we are pleased with the strong start to the fiscal year, and we look forward to accelerating our momentum as we head into peak season.

We couldn't be more proud of the work that our employees are doing.

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

(Operator Instructions) Our first question comes from Brent Thill with Jefferies.

Brad, on QuickBooks capital, I was curious if you could just talk a little bit about your aspirations.

And as I understand it, in the past, you had a group of connected lenders that would loan to small businesses.

I think now you're putting your own capital out to these small businesses.

Can you just walk through the dynamics and how those changes in this initiative?

And I had a quick follow-up.

Sure, Brent.

Let me start by saying that our goal remains unchanged.

If you look at the number of Small Businesses & Self-Employed who are seeking access to credit, 70% of them still get turned down.

And yet, we have visibility into things that most lenders don't have.

Most only have a look backwards at history.

We also have a look forwards.

We have over 26 billion transactions in the QuickBooks ecosystem that we're able to look at.

That includes forward-looking things like inventory on hand, invoices outstanding, cash flow, projects and process.

And it's the combination of the past and the future and a proprietary algorithm that we think has led to a credit score or a credit rating system that is much more predictive of good businesses in which you can invest.

And case in point is, so far to date, 60% of the loans that we've been able to issue or facilitate have been to people that would have been considered unlendable by other institutions.

So we're really excited to get access to capital into the hands of these small businesses and self-employed.

To your second question, we think this could be a very promising opportunity over the long term, but our use of capital was really to fuel or prime the pump.

What we needed to do was get a rapid feedback loop on whether our algorithms were predicting the things that we needed so it would make it a better tool for other lenders.

And so we, at this point in time, don't have plans to become a bank.

And we don't have plans to lean into that aggressively as opposed to using it as a way for us to tune our algorithms and make it a really good platform for other lenders to be able to provide access to capital.

So that's sort of the summary of QuickBooks capital and hopefully answered your question.

Great.

And just a quick follow-up on the QuickBooks business and the growth rate in the back half of the year.

I know you cited a couple of factors, but I think one of the questions we've had from investors is, given how big the market is and how early it is, why the growth rate should be fading at this point?

Any perspective?

It doesn't sound like there's anything fundamentally off, but I'm just curious, kind of what the rationale is given how early this is and why you would see that type of fade.

Yes.

There is no fundamental weakness in the business itself.

As you've heard, the Net Promoter Scores are improving in every geography.

We're seeing strong funnel management.

We just released a whole new set of innovations at QuickBooks Connect last week that we think will only accelerate the conversion of the funnel.

It's just the reality that last year we opened up one of the biggest channels any company could hope for, which is 100 million people visiting TurboTax.com in a 100-day period.

And we got a nice pop of customers that were exposed to that for the first time.

And so we're going to have that grow-over.

Now we don't view that as a foundational or a systemic weakening.

We simply view that as a seasonality thing.

And we'll see how strong we can go through tax season.

But right now, we just want to manage expectations, but we did get a big tranche of customers in that period of time.

We want to make sure that we know the second half compares are a little more difficult than the first half.

Our next question comes from Kash Rangan with Bank of America Merrill Lynch.

Neil, we will definitely miss you, and congratulations on your 10 years at Intuit.

Brad, question for you.

Can you talk a little bit more about TurboTax Live, the specific segment of the market that you're trying to go after?

Is there any, on the flip side, potential cannibalization, albeit you may experience higher ASPs, even if that were to happen?

But what is it that you're looking to uncover here?

And how solid is the market research that you've conducted to validate the true potential for TurboTax Live?

Great.

Thank you, Kash.

Well, step back and look at the market, and we'll size the U.S. at a little over 150 million returns that go to the IRS.

And somewhere approaching 90 million of those turn to an expert, whether it's a tax store or a tax professional to answer questions or to complete their taxes for them.

And when we get underneath that, the series of questions sometimes will just go as far as, if I only had the answer to one nagging question, I would have been happy to do my taxes myself.

And that's really where TurboTax Live leans in.

Now we have 2 flavors of TurboTax Live.

We have the do it with me, where we offer advice and then there's do it for me where we can take over the return and complete the return for you and sign it.

And those are both going to be in the marketplace, but we think the big opportunity is going to be that advice-giving.

A lot of people out there have simpler taxes, and they simply have a nagging question based upon a life event change.

They had a child, they moved between states, they sold stock.

And being able to actually get a tax expert on demand to answer that question and then go on and finish your taxes, we think, is a big opportunity.

I don't see this as cannibalization.

We actually see this as an opportunity to extend our value further into the market that historically has not moved to the do-it-yourself category or may actually switch from DIY to a tax pro because they lost confidence.

We think it's a great retention tool as well as an opportunity to go into a part of the market that we have underserved.

That's fantastic.

Do you have enough capacity to handle the demand if it surges?

Because that sounds like a terrific value proposition.

That's it for me.

Yes, Kash.

I would tell you, as we went through the tax filing extension season in October, we not were only able to validate there's real demand in the market on the consumer side, there's real interest on the professional side, and they like the experience of the platform we've created.

But we were also able to run water through the pipes on our ability to scale.

Now obviously, as we get into season, we're going to continue to learn because there'll be more and more volume as we go closer to April 15.

But right now, we have confidence to say we feel like we've got a strong operational model that has both consumer and tax professional benefit.

And we're really excited for the season to come.

Our next question comes from Matt Pfau with William Blair.

Just wanted to follow up a bit on TurboTax Live.

So first of all, I think you mentioned that there were -- there's typically around 3 million TurboTax customers that go to a pro every year.

Just wondering, in terms of those customers that switch over, is it the case that they start the return and then run into a roadblock and switch to a pro?

Or does something happen prior to them even starting their tax return that motivates them to switch over to a pro?

And then I guess, parlaying on that, how do you go about communicating to these customers or getting the message out there to sort of stop them from moving over to a pro?

And then also, in terms of the live offering, just kind of wondering the initial feedback you've heard from accountants and how confident you are that you'll be able to build up that network big enough to handle any demand that you have on that offering to provide a good experience?

Great.

Thanks, Matt.

So you're right.

We did reference 3 million TurboTax customers who, year-over-year, end up losing confidence in themselves simply because of a life event change, and they opt to go to a professional.

Sometimes for that next year, sometimes it could be for a couple years, and we have to win them back.

Sometimes that decision is made before even logging into the product.

Many times, it's once they get into the product and they realize that they've now had a child that's crossed the magic age and they can no longer claim them as a deduction or they sold stock and they start to lose confidence.

So how are we reaching them?

Two ways.

You're going to see our go-to-market campaigns and our advertising talking about the ability now to have a tax expert on demand.

So if you don't log into the product, you'll now know you can because you have a tax expert that'll be included with the software.

For those that are in the product, we have in-product discovery.

So if we see you hovering too long in a particular area, and throughout the product, there's a perpetual link that says if you want to get access to an expert, simply press here.

So we have both outside-the-product advertising and inside-the-product advertising.

In terms of the experience, 2 things have happened.

We are way ahead of our expectations in our ability to recruit the number of professionals we think we'll need for season.

We had milestones for every month leading up to season, and we are ahead of those milestones in terms of people signing up for the service.

So we think we'll have very strong professional supply.

And the second is the Net Promoter Scores of those tax professionals during the October extension season was above our targeted goal.

So we're excited both in the volume of professionals we're able to recruit, but also the experience they're enjoying so far.

Now we'll have to see if we can sustain those levels as we get into the peak tax season.

Our next question comes from Keith Weiss with Morgan Stanley.

This is Sanjit Singh for Keith Weiss.

I have 2 questions for you guys.

One in terms of this year, in terms of international expansion plan, any new countries that are coming on board this year that's important to flag?

At this point, we haven't announced any additional countries.

As we often say, we have so much opportunity in the countries we're in.

We have real acceleration happening in Canada, the U.K. and Australia.

We're still working to get that last mile with compliance and product market fit in France, India and in Brazil.

We do have tests going on in other countries we've referenced in prior calls, but those tests have not yet validated that we're ready to go big into those markets.

And so at this point in time, I would say the countries we've announced are the ones we would stay focused on, and that is still a 224 million prospect opportunity.

And as we just celebrated 2.55 million subscribers, we have got a lot of headroom just in those countries.

That's super helpful.

And then maybe talking -- toggle back to the commentary on the TurboTax bundle.

Any early indications on what retention rates might be for those cohorts of customers that signed on last year?

Any sort of early readings on whether they're staying on board or whether they are trending higher than normal?

Yes, (inaudible).

I think the proof is going to be in the tax preparation season.

The customers that have that bundle now look good in terms of their retention and their active use.

But we all know that it's the tax preparation process itself that is the big value proposition for these customers.

And so I think we want to get through an entire filing season and have a full annual cycle with these customers before we get too definitive about what their retention characteristics are.

Our next question comes from Adam Holt with MoffettNathanson.

It's Adam Holt from MoffettNathanson.

So another good first quarter.

And I had 2 questions on the QuickBooks business.

First, it looked like outstanding year-on-year margin expansion in QuickBooks, looked like 3 full points on a year-on-year basis despite strong unit growth.

You've talked a lot about different factors that drive that.

But maybe as it relates specifically to this quarter, what did you see that enabled you to expand margins so much?

Adam, the seasonality, I think, is something that can play some tricks on you in terms of trying to do the margins analysis there.

We don't really look at it on too much on a quarter-by-quarter basis.

As I mentioned on the call, the accounting revenue is really what's driving the top line, the revenue growth, our retention rates for QuickBooks is doing nicely.

And so that's held up the revenue side really well.

But our expenses and our investments are not really not evenly distributed throughout the year.

So we're excited about where it is, but it's going to move around a bit through the year.

So we're excited about the customer growth and the top line growth, for sure.

Well, I'll apologize and I'm going to ask another quarter-oriented question.

But you beat numbers this quarter.

And as we've learned in the past, sometimes you roll that into the year.

And in this case, you did as well.

So the annual numbers don't change, which means we've got to take down our numbers a little bit in one of the forward quarters.

Given what you said about the tough comps in QuickBooks, which seemed to be tougher in Q3, should we: a, assume that the delta is in QuickBooks?

And b, assume that, that principally falls in the third quarter?

That's it for me.

Adam, I think that, definitely, the Small Business Group was the one driving the revenue growth in Q1.

We do think that we've got a tough grow-over in Q3, particularly in small business.

And so that's why the overall guidance we've given for the year for revenue and for subs takes that into account.

And that's why we've been cautioning people that we're going to have a tough compare when we get to those self-employed bundle units in Q3.

So I would look to the full year guidance both in terms of online ecosystem revenue and in terms of subs and think about how Q2 and Q3 play out for those.

But I would stick -- I wouldn't get far away from the full year guidance on either revenue or subs for the Small Business segment.

Our next question comes from Michael Nemeroff with Crédit Suisse.

Congrats on a good quarter.

Neil, been nice working with you.

Good luck going forward.

Brad, I wanted to ask about TurboTax Live.

And I know there's been a bunch of questions on it.

But can you give us a sense of what pricing has looked like during this trial period and how you expect that to be priced going into this tax season?

And then for -- that's it for the second.

All right, Michael.

So many of you have been going through the product, and we've spoken to you offline.

And you've been a part of our test cells.

We've been testing a lot of price points out there.

We have not yet announced our pricing.

It's still a little too far out for us to give competition or others that nod.

But I would say that what you're going to see is it's going to be a premium to the current price points we have in the TurboTax lineup, but we have not landed yet on what that price point will be or announced it.

So if you don't mind, I'd like to just hold that back and we'll get a little closer to season, and then you'll see the price points out there.

Our next question comes from Jesse Hulsing with Goldman Sachs.

Brad, I wanted to ask about Turbo, which it sounds like you're launching next year.

If you were to compare Turbo to some of the other consumer finance platforms out there, I guess like Mint and Credit Karma and others, what's the value proposition to consumers to get them to use the app?

And I guess, if you're a partner institution looking at Turbo versus the others, what's the value proposition for those partner institutions and lenders?

Great.

Thank you, Jesse.

Let me start with just the interaction model.

Our mission is to power prosperity.

And for the consumer group it is provide financial freedom for consumers.

And so financial freedom is a 365-day-a-year task.

Historically, with TurboTax, we enjoyed 2 interactions with customers a year, where Mint enjoyed 112 interactions with customers.

The challenge is both were incomplete on a stand-alone basis.

But when you bring them together as a platform and then you begin to look at the other customer and partner data that we have in our ecosystem, we believe we can provide a platform that can help individuals and families better manage their financial health.

The reason being is not unlike what I shared with QuickBooks Capital, because we have access to more data.

And it's not only backward-looking, but forward-looking.

Today, with a credit score, what you can basically get with that is access to more credit cards.

But if you had debt-to-income ratio, if you have IRS-filed income that's been verified by the government, so it's a real source of income, and you also have a credit score, you can put the combination of those 3 things together, and you can start to do some pretty wonderful things for consumers.

You can help them find better financing for student loans.

You can help them get lower credit card fees.

You can help them get access to mortgages, to get better loans for car loans and a whole host of other things.

So we fundamentally believe that the data we have, the algorithm that we've written and the partners, the 40 that came with Mint, the more than half a dozen that have already signed up for Turbo, and you put them together with others, we think we're going to be able to start to solve some important financial problems for consumers that others in the market just quite frankly can't match today.

And that's the excitement.

We still have much to prove, so we haven't baked a lot of that into any financials for this year.

But we sure have a team focused on it, and we think we're on something that could be really meaningful to consumers if we get it right.

That's helpful, Brad.

And a question about QuickBooks Online.

If I -- it looks like ARPU was flat year-over-year, and which is great to see, given the increasing self-employed mix and international mix.

It was also flat year-over-year in the first quarter of last year and then declined year-over-year in the second through fourth quarters.

I'm wondering, do you expect that same pattern to play out through the remainder of this year?

Yes, Jesse, you're welcome.

Appreciate the question.

If you go to our Investor Day deck, Neil did a wonderful job of laying out a page on ARPU and what we expected the trends to be going forward.

And basically, if I had to summarize that for you, because it has individual QBO U.S., QBO non-U.

S, QuickBooks Self-Employed, you just lay them all out.

What you're going to see is the health of the ARPU on a cohort basis is getting stronger across all those cohorts.

But when you put it together as a mix, you're going to have downward pressure on ARPU.

So as you said, I would echo what you said, flat given the growth we're seeing outside the U.S. and the self-employed is a good thing.

But you should know, underneath, the ARPU is getting healthier in each of those cohorts.

And it's only a good news story over time.

So I think Neil's page in the Investor Day deck kind of lays out what our expectations are for ARPU.

And I think if you refer back to that, it pretty much says what you just assumed.

Our next question comes from Kirk Materne with Evercore ISI.

Brad, now that we're through the extended filing season, I was wondering if you had any sort of thoughts when you look back and you got the sort of last pieces of data from last year.

Did that inform your view on the upcoming season at all just in terms of the baseline units to start with?

I mean it sounds like everything is pretty much in line with what you thought, but I just want to double check on that.

Yes.

Last year's still one of those years that's going to play out as an anomaly, not unlike 2013.

I think when you throw everything in including extensions, it's still going to be hovering around flat as a tax season with total IRS returns.

And we had anticipated between 0% and 1% growth.

I know we were a little more muted in our expectations than many in the industry.

However, as we look ahead, we still have that same sort of an outlook for the coming year.

We think it's a 0% to 1% growth year in total returns.

No one's really been able to diagnose, I was just meeting with the IRS commissioner and my peers in the industry 3 weeks ago in Washington.

No one had a better hypothesis for what happened in tax season other than, who knows and we'll just have to gear up and get ready for this season.

So it hasn't changed our expectations for this year.

I think we're looking at a fairly modest total returns growth happening at the government level.

Okay.

And just with the legislation pushing through Congress right now.

Does that change any thoughts in terms of just the shape of the season from a seasonal perspective in your view?

Or is it still more of a, you'll just have to wait and see what happens?

Yes, at this point, it doesn't.

You're right.

There's still a lot that we're going to have to wait and see.

If there is positive news, it's both coming out of the House and Senate.

Most of the recommendations are proactive versus retroactive.

Retroactive becomes an operational challenge for the IRS.

And then that cascades down to industry, and sometimes, that leads to a late tax filing season.

If Congress can actually get this through either sometime before the end of the calendar year or early January, as long it's proactive, we still believe the shape of the season looks pretty much the same.

There's just one caveat there, and the one caveat I'll toss in for those who look at the calendar closely.

This year's Q2 will have 1 extra filing day in it.

It's just the way the calendar works for us.

And 1 day in a 100-day season can move things around just a little bit.

The total season, we don't really see anything that we think's going to fundamentally reshape the curve.

Great.

That's it for me.

Neil, best of luck going forward.

Thanks, Kirk.

Our next question is from Michael Millman with Millman Research.

And also looking at the IRS kind of information.

So really, 2 areas of questions.

First, on standard deduction increase, assuming increase.

How do you see this impacting both taxpayers now who are using assisted because they have all these deductions, computations and now they may not?

And sort of similarly, how do you see those who are now using do-it-yourself and say, "Boy, it's gotten so simple.

I can do this myself." Maybe you can sort of put some numbers to those things.

And then I have another question.

Yes.

Thank you, Michael.

I think your overall thesis is similar to ours, and that is the more success we have in getting the tax code simplified, the more success that will drive category growth for the do-it-yourself category.

Many people turn to an expert today because they have a nagging question or they think it's too complicated.

So we think the simpler Congress gets the tax code, that's better news for the do-it-yourself category.

And as you know, that's the #1 lever of growth for us.

1 point of category growth is worth several points of revenue for us if it plays out.

The second is, the do-it-yourself category, I think software is the answer.

I mean, if you look at the IRS, they will tell you they don't have the bodies to process paper returns like they did even 5 years ago.

So if someone says, "This is so simple.

I can do it myself." They're going to use software to do it.

And so we just have to make sure we have the best, most effective software for them to get that done.

I think, by and large, a simplification is a good news story for the do-it-yourself category.

And so related, it's -- in simplification is the postcard return.

And I know you fought against this in California.

So I've got to assume there's things about it you don't like.

And maybe you can talk about what you see coming forward, if indeed we have tax on a postcard.

Yes.

Thanks, Michael.

Let me try to clarify what we were standing for and standing against in California.

We were for simplification.

We have been for more than a decade, and we were for getting it so simple you could get it done on a postcard.

Where we draw the line is we are believers and supporters in voluntary compliance, which is the citizen has the right to determine what they believe they owe the government.

And it's the burden of the government to prove that they're wrong and not the other way around.

It shouldn't be the government actually sending out this form and saying, "Here's what you owe us." And then people who may have English as their second language or people who may be intimidated by the government paying a number that may be overpaid because they're just nervous.

So what we've done, just to be candid with you, it's why I was up in Washington a few weeks ago, we've even built prototypes that we've shown Congress and the administration on how private industry can help them build this postcard for them so that they can execute the plan they want to deliver.

We think that would be a wonderful thing.

We just believe, at the end of the day, it's the individual's right to determine what their tax obligation is, and it is not the government's role to come in and say, "I'm going to tell you what you owe me and pay me the money."

So assuming the government takes your advice, what kind of impact would you see on the do-it-yourself business?

Well, I'm not sure the government will take my advice.

I think the good news is industry, overall, as well as Congress, many members of Congress have been on the record saying that this is the way the country was founded so many years ago is we felt that we should have the ability to determine what we owe based upon a set of rules and laws and not have somebody dictate to us what they're going to make us pay.

So with that sentiment, and we happen to be in that camp, we believe at the end of the day the simpler this thing gets, the more people are going to move into do-it-yourself.

And I think it's going to be a real accelerant, not only for the economy, but for the category.

And then ultimately, for us, if we do our job.

Okay.

And Neil, best of luck in the future.

Thanks, Michael.

Our next question comes from Ross MacMillan with RBC Capital Markets.

Brad, we did a survey recently looking at TurboTax Live, and there was I guess, 2 things that I was interested to ask.

I know you're not talking about pricing specifically, but I believe the assisted category has, call it revenue or dollars per return that are something like 4x what TurboTax currently has.

And as you think about the pricing model for this new offering, I'm just curious if you could frame it in that context, and I guess just trying to think about that envelope and how far you think you may be able to go.

And then secondarily, we also found that other services like audit insurance and fraud protection could also sway customer decisions.

And I would think those would be important for folks that are maybe -- have more complex filings.

So I was just curious for your thoughts around sort of bundling some additional services with the TurboTax Live offering to try to increase participation.

Yes.

Thank you, Ross.

And always appreciate the work that you and your team do with the surveys and the in-market discoveries.

Your analysis is correct.

If you take a look at the average revenue per return we get in TurboTax, it's a little north of $50.

If you look at what an average tax store charges, it's in that $180 to $220 range.

And you can go to a pro, and it's $300 or $400.

So that's multiples of the current price point of TurboTax.

We're not here today to tell you or anybody else on the call that we're announcing a 4x price point on TurboTax Live.

In fact, what you should hear is we think we have a disruptive business model that will allow us to provide better value for the customer.

And at the same time, be able to have them be a part of TurboTax franchise.

So just know that somewhere north of where we are and south of where they are is probably going to be in the ZIP Code of where the pricing will be.

And then you're on a really important point.

With everything happening in the market today, whether it's cyber threats or other things, whether it's audit insurance or it's fraud protection, those are absolutely the kinds of services we continue to not only market ourselves, but look at creatively bundling with other products.

As we get closer to season, you'll hear us talk a little bit more about those things, but that is the right theme.

People are looking for peace of mind and some assurance that if anything happens to them that we've got their back.

And that's what we want to continue to be there for.

Congrats as well, Neil, and good luck in the future.

Our next question comes from Scott Schneeberger with Oppenheimer.

Just curious, there's been a lot of talk about timing fiscal second, third quarter.

And thanks for the extra filing day.

That's interesting.

I realize other things can move around relative to the guidance, like maybe what comes out of the tax bill or other items.

But I'm just curious, the PATH Act was disruptive last year on the consumer tax side.

So Brad or Neil, what's the consideration in the guidance for the start of the tax season?

How strong or weak are you -- are you expecting there?

And how does that play into the guidance?

Yes, Scott, we think that last year was an opportunity not only for the market, but for all of us in the industry to adjust to the PATH Act.

There was definitely a little bit of shock and awe last year, no matter how hard we tried to educate the end user.

Once they finally fell into the muscle memory of filing their taxes, a lot of them were still surprised they weren't going to be able to get their money until -- in February.

I think that experience that they went through, plus the experience we all had in conjunction with the IRS is we anticipate it's going to be a new normal now in terms of what the PATH Act impact will be.

So we don't really see any meaningful or material shift year-over-year.

That's all subject to no surprises coming out of Congress between now and tax filing season.

Great.

Appreciate that.

And then, Neil, if we can bring you on, since it's probably our last chance.

Kind of a similar question along the line of obviously there are a lot of investments going on this year.

And I'm just curious how that might affect seasonality in second quarter and third quarter this year and maybe things we might want to consider on the marketing front.

Yes, Scott.

I think the seasonality for Q2 and Q3 on the -- our investment side both in R&D and in marketing ought to follow a similar path as last year.

It may be invested a little differently in some different ways but we may have reallocated a bit within the categories, but I wouldn't expect to see any more shifts between quarters than you saw the last few years.

Obviously, Q1 and Q4 are the lightest quarters for us, but Q2 and Q3 are the critical periods for us.

And the investment levels in those quarters are pretty well baked.

Appreciate it and best wishes.

Thanks.

Our next question comes from Jennifer Lowe with UBS.

I wanted to -- actually, sort of following up on the last question, but looking at the OpEx.

It looks like, in Q1, there was a pretty material step up quarter-over-quarter and year-over-year.

And I know, Neil, you commented earlier that there's always some shifting.

But I know this year's also going to be an investment focus year for you as well.

So as we look at the spending in Q1 and the step up year-over-year and quarter-over-quarter in that metric, how much of that should we think of as maybe spending that got -- normally would have happened later in the year that just happened a little earlier versus how much is attached to things like hiring that might persist throughout the course of the year?

Jennifer, I think the level you saw in Q1 is really reflective of the investments we're making throughout fiscal year 2018.

So again, I wouldn't assume that it was necessarily front-end-loaded.

But we outlined 4 areas at Investor Day that we really wanted to lean into in 2018 and make significant progress; areas like machine learning and artificial intelligence, our transition to AWS, improving market productivity and things like that.

So you should expect and assume that, in Q1, it reflects the higher level baked in throughout the year.

Our next question comes from Matthew Wells with Citi.

I'm on for Walter Pritchard.

And we were at your QBO Connect in San Jose last week.

We thought you guys all did a really good job.

And we get the sense that you're positioning QuickBooks Desktop to move upstream, essentially targeting SMEs.

Can you add anything here?

And just maybe comment on how higher ARPU QBE customers are contributing to growth in desktop?

Yes, thank you, Matthew.

And first of all, thank you for coming to QuickBooks Connect.

For those who weren't able to make it, it was, I think of the 4 years, perhaps the very best.

We had over 5,000 attendees there, over 70,000 streaming live.

Energy level amongst the participants was amazing and the speakers were incredible.

And also the number of innovations we unveiled was unprecedented for us in any given event.

It was a really upbeat year.

In terms of QuickBooks Enterprise, you're correct.

In fact, when Neil walked through total QuickBooks Desktop units down 35%, yet QuickBooks Desktop revenue up 8%, that's really being powered by QuickBooks Enterprise.

QuickBooks Enterprise Solutions is a disruptor to the mid-market.

It is a fast-growing product in our product lineup.

It's priced about 35% cheaper than any of the competitors in that marketplace.

And we're going to continue to invest in that product.

So I fundamentally see, as we said going forward, desktop units overall will be down in the mid-teens, but you're going to see mid-single-digit growth.

And that's going to be powered by QuickBooks Enterprise Solutions, which is our upper-end product for the mid-market.

Our next question comes from Siti Panigrahi of Wells Fargo.

This is (inaudible) for Siti.

I just wanted to see if you could comment on the Quickbooks Online (inaudible) services revenue, how the payroll and the payments part of this is trending?

I'm sorry, I think -- you dropped in and out a little bit.

Did you ask about how payroll and payments are doing in QuickBooks Online?

Yes.

Well, we continue to be encouraged by the performance of our payroll and payments business overall.

Those that are attached to the QuickBooks Online platform are accelerating at fast growth rates.

Payroll is in the 20%-plus range, and the payroll and the payments is in the plus 30% range.

We continue to get stronger performance in getting the payments and payroll stand-alone products over onto the QBO platform.

In fact, we introduced some innovations with GoPayments.

As you may remember, it was our stand-alone mobile offering but it was off on a different technology stack.

We've now had that ported over so the technology now works with QuickBooks Online.

But you should hear confidence and enthusiasm coming out of our payroll and payments ecosystem.

We still have more work to do, but a lot of the innovation we talked about, both internally and then externally, QuickBooks Connect was focused in these areas.

Our next question comes from Jim MacDonald with First Analysis.

Yes.

Just following up on that last question.

What are the other prospects or possibly other services or other revenue streams in the other category for QuickBooks Online in addition to payroll and payments?

Jim, are you referring to something on the fact sheet or are you asking theoretically, are there other things we have in the pipeline beyond payroll and payments?

Right, that could be significant going forward.

Yes.

Well, I think there's a combination.

Payroll and payments have a lot of headroom.

We've needed to get our execution things straightened out, and I feel we've got some run rate there.

QuickBooks Capital is one that we've talked about, we're excited about.

As we start to really double down on things like electronic invoicing or e-invoicing, we're seeing real benefit to customers.

With the innovation we introduced last week at QuickBooks Connect, it used to take 33 clicks and a 48-hour approval period to get your invoice electronic-enabled, pay-enabled.

Now it's 3 clicks and 1 minute.

And so if you just look at payroll payments, QuickBooks Connect and then the third-party services with all the different apps being built on the ecosystem, we will start to see what the next opportunities might be.

But right now, I would say payroll and payments and probably QuickBooks Connect would be the place that I'd put my attention.

(inaudible).

Great.

And in terms of the third quarter number of days for TurboTax, is that going to show a similar decline versus the increase in the second quarter?

Yes.

Yes.

It's a day shift between the 2 quarters.

Great.

Best wishes, Neil.

Thank you.

Our next question comes from Sterling Auty with JPMorgan.

This is Jackson Ader on for Sterling tonight.

One question from our side.

If -- how should we be thinking about TurboTax Live versus make -- versus the investments that you've made in SmartLook?

How do those compare and contrast?

Yes.

Thanks, Jack.

I'm glad you asked this question because I think I've contributed to some confusion out there, and we probably haven't been clear.

Think of SmartLook as the technology that enables TurboTax Live to happen.

TurboTax Live is end-to-end value proposition.

It's not only the TurboTax core product, it's an expert on the other end and it's the ability to connect through a video, a one-way video and have that sort of interchange between the customer and the expert.

That interchange happens over a piece of technology we call SmartLook.

So SmartLook was the codename before we got this end-to-end value proposition launched.

It's really the technology that enables one-way video, but the overall bundle is called TurboTax Live.

Our next question comes from Nandan Amladi with Deutsche Bank.

So back on the comment, Brad, about QuickBooks Enterprise.

As you build out the road map, you have a new version of the API coming on QuickBooks Online, how do you balance the future road map with QuickBooks Enterprise relative to QuickBooks Online and that online ecosystem?

Yes, Nandan, thank you for the question.

I would tell you we're going down a parallel path.

We're continuing to build out the feature functionality in QuickBooks Online.

And as we do that, we hope to ultimately have a replacement, or an alternative rather, for QuickBooks Enterprise in the online version.

That's going to take us some time.

In the meantime, there's real customer problems in the market that aren't getting solved well by current mid-market solutions.

And we're not abandoning the desktop.

So we're continuing to make the appropriate investments in the enterprise product to make sure it's got the highest Net Promoter Score while we're making the investment Neil talked about to strengthen QBO, QuickBooks Online.

And an acquisition we recently did was an acquisition of a company that provides sales and use tax.

And that's one of the key features that you need in an enterprise-level product.

And so that's just an example of what we're doing to build out that functionality in QuickBooks Online.

Ladies and gentlemen, I'm not showing any further questions.

Would you like to close with any additional remarks?

James, I would.

First of all, I want to thank everyone for the questions.

I know this is one of those weeks where we've got a lot of things coming up, for those of you in the United States, with the holiday.

I did want to just go back and thank the Lone Ranger here, Neil Williams.

I've often joked that, over the years together, it's been like Batman and Robin, and he's the one that drives the Batmobile.

It's just been a real pleasure and a joy to sit by him and to help navigate through this business model transition together and to learn from him.

And his sense of humor and his wit, as you all know, is unparalleled.

And I'm also delighted to see that not only has he left us better than he found us, but he really produced a strong leadership bench.

And in that bench came Michelle and Michelle is just an outstanding individual.

She is a great human being.

She's an excellent financial expert.

She's a great thought partner.

And I believe that come February, with the knowledge transfer that they've executed since August, we're really going to hit the ground running.

And I will also tell you all, you should rest easy, because he's taken the Batmobile keys and he's handed them to Michelle.

So once again, I'm not in the driver's seat.

I get the chance to sit in the cockpit, but there's no place I'd rather be, whether it's Neil or Michelle.

So we tip our hat to you one more time, my friend.

You're just a good human being and a great friend, and we love you.

And you'll be forever in our Hall of Fame here.

And Michelle, we can't wait for you to step into his shoes and show what they can do with the next set of dancing legs.

So we're going to be ready to rock and roll.

Neil's dancing legs were like mine; he tended to step on my toes.

But I understand that you're going to bring a whole new level of professionalism.

So that's it.

And for everybody else, we want to wish you a happy and safe holiday season.

And we look forward to speaking with you soon.

Ladies and gentlemen, thank you for participating.

This concludes today's conference call.

You may all disconnect.