直覺電腦 (INTU) 2018 Q3 法說會逐字稿

Good afternoon.

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

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

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

Thanks, Latif.

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

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

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

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

You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 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've reconciled the comparable GAAP and non-GAAP numbers in today's press release.

Unless otherwise noted, all growth rates refer to the current period versus the comparable prior year period, and the business metrics and associated growth rates refer to worldwide business metrics.

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 delivered very strong results in our third fiscal quarter, with overall revenue growth of 15% fueled by 15% growth in the Consumer Group and 16% growth in the Small Business & Self-Employed Group.

Because of the strength and the continued momentum across the company, we're raising our revenue, operating income and earnings per share guidance for fiscal year 2018.

With that headline, let me share some observations on our business overall and I'll start with tax in our consumer business.

Heading into tax season, we foreshadowed that this year's primary drivers of revenue would be do-it-yourself category growth and a higher average revenue per return.

That's indeed how the season played out, producing very strong results.

As we communicated over the years, there are 4 primary drivers in our consumer business: The first is the total number of returns filed with the IRS and the latest IRS data indicate total returns grew about 1%, in line with our expectations.

The second is the percentage of those returns that were filed using do-it-yourself software.

As a reminder, the DIY category growth is our largest lever of revenue growth.

To date, the DIY category share has grown just over 0.5 point, again outpacing the assisted tax prep category.

As the leader, we view it as our responsibility to help drive category awareness and growth.

So we're pleased with this result.

The third is our share within DIY.

We completed well and earned a modest increase in our share of the category this season.

When you look beyond DIY, the total returns would also gain 0.5 point of total market share.

The fourth is the average revenue per return, which increased quite nicely this season.

The growth was driven by a combination of attached, mix shift to the higher end of our product line, which include TurboTax Live and pricing for value.

Bottom line, it was a successful tax season.

As we shared at Investor Day last fall, in addition to extending our lead in DIY, we're increasingly focused on transforming assisted tax prep and expanding our business beyond tax.

We made encouraging progress behind each of these strategic priorities this season.

In support of transforming assisted tax prep, we're pleased with the results of our TurboTax Live offering in its first season.

We delivered an innovative experience that enable filers who were seeking more confidence in their personal tax situation to do so by accessing a tax pro with a touch of a screen.

Feedback from the nearly 2,000 pros and the many customers they serve reinforced our confidence that TurboTax Live has the potential to be transformative to our consumer business in the years to come.

It opens up a $20 billion assisted tax prep category and it provides us with an opportunity to grow our dollar share while increasing our average revenue per return.

Michelle will share some additional data around our progress in a moment.

This season was also the first for our Turbo offering, the consumer financial platform that expands our portfolio beyond tax.

Turbo provides customers with a full view of their overall financial health by combining their credit score, verified income data and a debt-to-income ratio to show customers where they truly stand.

This year, TurboTax customers had the option to transfer their tax data into a Turbo account when they completed their return.

Nearly 5 million TurboTax customers registered for Turbo in year 1, providing us with a strong foundation to extend our business beyond today's user paid model.

The real value with this offering will come as customers engaged with it on an ongoing basis.

Overall, we feel good about our results this tax season, and I want to congratulate all the employees throughout the company who played a role in delivering that performance.

We're just getting started with TurboTax Live and we are looking forward to what we can deliver next season.

Shifting to the Strategic Partner Group, our professional tax revenue was in line with our expectations for the quarter, with revenue up 4% year-to-date.

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

This enables us to drive our Accountant success while growing our Small Business ecosystem at the same time.

Turning to Small Business, we delivered another strong quarter in our Small Business & Self-Employed Group.

QuickBooks Online subscriber growth continued at a rapid pace and online ecosystem revenue grew 41%.

We exited the quarter with over 3.2 million QuickBooks Online subscribers, a 45% increase year-over-year.

Growth remained strong across multiple geographies, with U.S. subscribers growing 40% to approximately 2.5 million and international subscribers growing 66% to about 720,000.

Within QuickBooks Online, self-employed subscribers grew to over 680,000, up from 360,000 just 1 year ago.

Approximately 330,000 of those subscribers are from the TurboTax Self-Employed offering.

So putting a bow around the quarter, our strategy of a vibrant One Intuit Ecosystem continues to gain momentum.

We performed ahead of our expectations this tax season and delivered continued strong performance in our Small Business and our Self-Employed Group.

With that business overview, let me hand it over to Michelle to walk you through the financial details.

Thanks, Brad, and good afternoon, everyone.

For the third quarter of fiscal 2018, we delivered revenue of $2.9 billion, up 15% year-over-year; GAAP operating income of $1.6 billion versus $1.4 billion a year ago; non-GAAP operating income of $1.7 billion versus $1.5 billion last year; GAAP diluted earnings per share of $4.59, up 24% year-over-year; and non-GAAP diluted earnings per share of $4.82, up 24% year-over-year.

Our non-GAAP tax rate is 26.3%, which is lower than the 27% rate we anticipated earlier this year.

The reduction is the result of our continued analysis of the impacts from the new U.S. tax legislation.

This lower tax rate contributed $0.05 to non-GAAP earnings in the third quarter.

Turning to the business segments.

Consumer Group revenue grew 15% in the quarter and is up 14% year-to-date, exceeding the annual guidance of 7% to 9% we gave at the beginning of the fiscal year.

We now expect 14% revenue growth for the year.

TurboTax Online units grew 6% this season while total TurboTax units grew 4%.

This unit performance was driven by faster growth in both our paid and free offerings.

As Brad mentioned earlier, our share within the DIY category was up slightly while our share of the total tax preparation market grew 0.5 point.

We're pleased with the performance of TurboTax Live in its first season.

We scaled the offering from its in-market test during extension filing last fall to a meaningful contributor this season.

This is great progress for a new offering in its first year, and we're encouraged by the positive feedback we've received.

Customers who'd used our final review feature rated their care experience nearly 20 points higher than those who did not.

And TurboTax Live had the highest product recommendation score of any of our Consumer Tax paid offerings.

Additionally, feedback was positive from CPAs, enrolled agents and tax attorneys serving clients on our platform.

We look forward to applying what we learned to scale this offering further in the future.

Turning to the Strategic Partner Group.

We reported $131 million of Professional Tax revenue for the third quarter, up 4% year-to-date.

We now expect revenue to grow 2% to 3% in fiscal 2018, slightly better than the 0% to 2% growth we guided previously.

Total Small Business & Self-Employed revenue grew 16% in the quarter.

Online ecosystem revenue grew 41%, up from 39% in the second quarter.

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

QuickBooks Online subscribers grew 45%, ending the quarter with over 3.2 million subscribers.

TurboTax is a significant channel for QuickBooks Self-Employed, and a total of 330,000 subscribers have come through that channel.

We now expect to end the year with 3.35 million to 3.375 million subscribers, equating to approximately 41% to 42% growth.

Desktop ecosystem revenue grew 3% in the quarter and is up 7% year-to-date.

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

Turning to our financial principles, 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%.

We finished the quarter with $1.9 billion in cash and investments on our balance sheet.

Our first priority for that 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 $19 million of shares in the third quarter.

Approximately $1.2 billion remains on our authorization.

The board approved a quarterly dividend of $0.39 per share payable July 18, 2018.

Our fourth quarter fiscal 2018 guidance includes revenue growth of 12% to 14%, GAAP diluted earnings per share of $0.04 to $0.06 and non-GAAP diluted earnings per share of $0.22 to $0.24.

We now expect a GAAP tax rate of 24% and a non-GAAP tax rate of 26.3% for fiscal 2018.

You can find our Q4 and updated fiscal 2018 guidance details in our press release and on our fact sheet.

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

Thank you, Michelle.

Before closing, I'd like to set some context for the management changes in our Consumer Group that we shared in our earnings release today.

Effective at the end of the fiscal year, Dan Wernikoff, the General Manager of our Consumer Group, will step down as the leader of Intuit's consumer business but he will remain at Intuit working with me on strategic projects.

Craig Johnson, Senior Vice President of Marketing, will succeed Dan as the General Manager of the Consumer Group.

Dan's done a tremendous job leading the team and I couldn't be more proud of the foundation that he's built.

Under his leadership, we extended our lead in the do-it-yourself category, we advanced our efforts to disrupt the assisted tax prep category and we expanded our business beyond tax.

I want to thank him for an outstanding tax season and for repositioning the business for continued growth for years to come.

At the same time, I couldn't be more confident in Craig's ability to lead the Consumer Group into the next chapter.

Craig has spent the last 5 years as a key member of the Consumer Group's senior leadership team.

He's been leading our go-to-market initiatives, commercial innovation, analytics and marketing capabilities that have accelerated the growth of Intuit's tax business.

He's been a driving force in the reinvention of our consumer business model, spearheading the introduction of Absolute Zero, helping bring TurboTax Self-Employed and QuickBooks Self-Employed together and was a key member of the team that brought both TurboTax Live and Turbo to market this season.

For those of you who have followed Intuit for a while, you know that we pride ourselves on building a deep talent bench and this change is reflective of those efforts.

I am excited to watch our momentum continue as Craig takes the baton from Dan to lead the Consumer Group.

And to sum it up overall, we delivered a very strong quarter and we feel good about where we stand at this point in the year.

While we remain focused on closing out the fiscal year on a high note, we already have our sights set on next year and beyond as we pursue our mission of powering prosperity around the world.

But for now, we will continue to keep our heads down and focus on execution with the finish line in sight.

And with that, Latif, let's open it up and hear what's on everyone's mind.

(Operator Instructions) Our first question comes from the line of Brent Thill of Jefferies.

Brad, the consumer business, you started 7% to 9% guidance.

You're ending the loan to that almost double.

I was just curious if you could just bridge the outperformance and what you think the primary reasons were?

And if you could also highlight a little bit of TurboTax Live and if there's any more numbers or financial impact for that?

It will be helpful to get some color on that.

Sure, Brent, happy to do that.

Really, as I mentioned in my opening comments, the season played out the way we anticipated.

The 2 primary growth drivers this year was an acceleration of DIY category growth and our ability to pick up a little bit of share in that category.

And then the second was obviously average revenue per customer, which came as a result of increased attach services.

We saw a mix shift to the higher end of the product line, really brought on by TurboTax Live to a large extent.

And then we did have some pricing opportunities that we strategically took in key areas where we saw an opportunity to price for value.

Net-net, when you look at it overall, it was just a well-executed plan.

The team was able to go out and compete effectively in the free category while also introducing 2 new products, TurboTax Live and Turbo.

And then I'll flip down on TurboTax Live for a minute and say that if you remember the strategic context, it is tens of millions of people each year end up going to an assisted tax prep method because they have a nagging question.

They've lost confidence in their situation because something changed year-over-year.

And we lose about 3 million customers a year because of that in addition to the tens of millions who are in a tax store or a CPA.

And if they simply had that question answered, they would file taxes on their own using software.

What we saw this year was really encouraging with TurboTax Live.

Mitchell mentioned the fact that those that went through the final review, those consumers who actually went through a final review with the Pro, had a 20 point higher product recommendations score.

We also saw very high product recommendations scores from the pros on the other side of that network.

Another piece that obviously we were looking for is improved retention and we did see improved retention.

We'll talk more about that at Investor Day.

And then last but not least are the sources of new customers who are exactly the ones we wanted to see, first-time filers entering our category because there's also a Pro available and we also saw a 10 point higher conversion from assisted tax prep methods for those who signed up for live versus those who just did TTO.

So those are the kind of numbers that we're willing to share at this point.

We're not going to break down the actual number of customers or revenue.

But you should see hear in our tone a high degree of confidence and an excitement about next year.

And just a quick follow-up from Michelle.

Given the outperformance on the top line, we're really not seeing it flow through as meaningful when you look at the margin structure over the last couple of years.

I'm just curious if you could talk to when you think you can open up the bottom line margin a little more, relative to what you've seen in the last couple of years?

Thanks, Brent.

I go back to our financial principles.

When we think about how we want to use the additional money that we have, it really is, first and foremost, we want to invest in the business and continue to do that so we can drive customer and revenue growth.

And that's actually one of the things that we had pointed out earlier this year that we were doing.

Specifically, investing in our transition AWS and additional AI ML competencies.

We also were investing more in our engineering area, helping with software development and then in marketing efficiencies in our corporate brand.

And so we'll continue to look at opportunities to invest to grow the company.

And then, obviously, as we get closer at Investor Day, we'll update you as to what that might look like going forward.

Our next question comes from Jesse Hulsing of Goldman Sachs.

Just wanted to follow up on the last question around Live.

Brad, did you see enough out of the product that you feel like you're going to put your foot on the gas from a marketing perspective for next tax season?

And I guess, how does marketing Live change or differ versus marketing your lower-end SKUs?

Yes, Jesse, I want to be cautious not to give too much of next year's game plan away.

But what I will say is, we are confident enough we're going to put our foot on the gas with TurboTax Live.

In terms of the messaging, our team actually got a little bit of practice in this year.

We had dual campaigns going.

One was helping people understand that they can move into free with at least your taxes are free.

And the other side was there's nothing to be afraid of, which began to introduce the fact you can have an expert at the touch of the screen.

We learned a lot and we've been running tests in the back half of this season, so I feel very confident that we can go into market and have a message that basically says we're here for you regardless of your tax situation.

And if you have any reason to need someone to work with, we've got somebody right there waiting to connect with you.

So I feel pretty good that we figured out this year how to go out with a campaign that speaks to the entire spectrum of tax filers.

Got you.

And I guess, it's kind of an extension of that question and response.

How comfortable do you feel with, I guess, price and mix and higher-end products being the core driver of the consumer business going forward?

Yes, thank you for the question.

We have a principal inside the company that has been a great guiding principle across all our businesses for years, and that is to grow our customers and monetization will follow.

Many times that's translated into growing customers faster than revenue, and that is true when you're converting nonconsumptions.

You're getting a small business out of a spreadsheet or a shoebox or you're even getting someone off a paper and pencil from a tax filing situation and maybe get them into free.

Those often come with lower-priced products so many times, our customer growth outpaces revenue.

In the case of tax right now, you have very few people left on paper and pencil, about 5 million people in total.

So it means we're now converting people who've already adopted a method.

And with TurboTax Live, we're converting them from higher priced alternatives.

So when they come to our category, we're getting 3x the average revenue per customer for those customers that come in with TurboTax Live.

So we're in an interesting situation right now in Tax, and that is that we're able to grow customers and share and grow average revenue per customer, which is accelerating our revenue growth.

So we're not in a trade-off situation there.

I think we're actually in a pretty good situation in being able to do both: expand share and grow revenue faster.

So I feel good about the strategy and the way it's playing out.

Our next question comes from the line of Jennifer Lowe of UBS.

I wanted to drill in on the QuickBooks Self-Employed number, particularly those attached to TurboTax.

And it looks like that slightly more than doubled year-over-year.

I know there were some questions about what the renewal rate might look like given that, that was sort of the first experience renewing those types of customers.

Can you just give us a little more color on the strength there?

How much of that was maybe better renewals?

How much of that was better gross adds?

What are sort of the major pieces there?

Yes, thanks, Jennifer.

But first of all, we did see better renewal rates and retention than we had in our original forecast, so we're encouraged by that.

The second is we got better at executing converting customers at the end of their tax filing process for TurboTax into the product itself.

And the customer experience and the Net Promoter Scores continued to improve.

So it was really strength across the board.

It was stronger renewals and retention.

It was stronger top-of-funnel conversion, and it was also a better quality experience that has the customers actively engaged with the products.

So we're feeling good about this particular product combination and we're looking forward to next year as well.

Okay, great.

And one more for me.

So looking at the 5 million Turbo customers that you had registered post-tax season, I think in the past, you've talked about sort of longer-term monetization opportunities there around targeting financial offers to those customers and things like that.

At this point, how -- what sort of the monetization status of that business?

Is it really user acquisition mode at this point?

Or is there sort of near-term opportunity to drive revenue there as well?

We're actually executing both, but the priority is customer acquisition and then turning those customers into active daily users or monthly users, depending upon their particular financial situation.

So we were really encouraged to have 5 million people register in its first year.

That was a number beyond what we had expected and we had some pretty lofty goals ourselves.

The monetization strategy, as you know, was similar to Mint, which is this is one of the products in our portfolio and it's -- in addition to Mint, the only 2 products where the less money the customer spend, the more money we make.

So said another way, we introduced them to other financial products to give them better deals and lower fees.

And then those particular companies pay us to reach those customers.

And we are seeing a very nice monetization strategy with the half a dozen partners we have now and they're seeing very nice conversion rates on qualified leads, which gives us a reason to lean in as we look ahead to next year.

But I would say the priority right now was more active users and customers.

The monetization we proved out this year for us and for our partners is there and we'll start leaning into that as we head into next year.

Our next question comes from the line of Ross MacMillan of RBC.

Brad, just -- I know it's early.

But as we go into next tax season, I guess, the big change is that with the new tax legislation, it's very possible that we'll see a much higher percentage of the filing population do simple standard deduction and not an itemized deduction.

And I wondered if you had at any high-level thoughts at this point, as to how that might impact the DIY category growth.

And then I had one follow-up.

Sure.

Thanks, Ross.

We spent a lot of time studying the behaviors this year and then working with customers post the end of tax season to better understand their psychology heading into next year.

We do know there are some facts.

The facts are more people will qualify for standardized deductions, which means they have the opportunity to move to the lower priced products in the DIY category, but it also means the opportunity to move out of the assisted tax prep category and into DIY.

And when we put all that math together, we see this as a catalyst to grow the do-it-yourself category, especially when you introduce services like TurboTax Live, which doesn't force a binary choice between doing it yourself or having an expert ready to help you.

So we're really encouraged.

We think this is going to be a tailwind for the category and an opportunity for us as we head into next season.

Great.

And my follow-up was -- it was actually just a clarification on the 330,000 QBSE TurboTax units.

Is that a base number?

Or is that a net add number year-to-date?

Because I had read that as a total number, which implied that the net adds were about flat year-over-year.

But Jennifer's question suggests that it might be a net add number.

So could you just clarify that?

Yes, Ross.

You're correct, 330,000 is the base number out of the 683,000 active customers today.

So that includes both stronger renewal rate than we had originally anticipated as well as the net adds.

Our next question comes from the line of Walter Pritchard of Citi.

Two questions on

(technical difficulty)

It looks like that business decelerated quite a bit on the desktop side, it grew to sort of a couple of percent year-over-year.

I wondering, you're seeing some real good growth there on sort of similar unit performance earlier.

Can you talk about what drove the difference in growth?

And I just had a follow-up on subs.

Walter, you cut out on the first part of the question.

I heard the desktop question, but I wasn't sure of what product line.

Was it QuickBooks that you're asking about?

Yes, I was trying to ask you if the desktop -- the unit growth has been pretty similar, unit declines have been pretty similar.

You've seen stronger revenue performance, I think, on a year-over-year basis earlier in the year.

And this quarter sort of just slight growth.

I'm wondering what explained the discrepancy in -- that drove the revenue deceleration in QuickBooks Desktop?

Sure.

Got it, Walter.

Thank you.

Really, it's an anomaly of a discontinued product that last year in the third quarter, recognized some revenue that had been deferred for a period of time.

And let me tell you what that product was.

You may recall a couple of years ago, we introduced a version of QuickBooks Desktop that included an option.

We called it the Chooser SKU.

When you bought desktop at retail, you could go in and either choose QuickBooks Desktop or you can opt in to a subscription of QuickBooks Online.

And because of accounting rules, we had to defer the revenue and anyone who purchased that product and kept -- carry it out over the extent of the license.

So what happened was we found that not a lot of customers were taking that product, but the ones who did, that revenue got recognized last year in the third quarter.

So we had a little bit of a balloon payment, if you, will we had to grow over this quarter.

If you actually pulled that product out, QuickBooks Desktop revenue would have grown 9%, which is in line with the prior quarter.

So really was a onetime anomaly based upon a discontinued product from a couple of years ago.

Got it.

Okay, that's helpful.

And then just on subs for next quarter, the guide.

At the high end, I think even 3.375 implies fewer net adds than a year ago.

And all year, you've been seeing growth in the net adds over last year.

I'm wondering is that just conservatism?

Or is there something else there to explain why you might be a more significant decel in the net adds?

You know, Walter, conservatism is in the eye of the holder.

We're clearly leaning in and thinking about how do we continue to accelerate our QuickBooks Online subscriber growth both here and in the international markets?

And I do feel good with the momentum we have.

We are testing right now in this fourth quarter of our fiscal year different promotional approaches, different discounting rates.

And so we give ourselves a little bit of an opportunity to experiment.

So that when we head back into the peak season in the fall, we really have a game plan we feel confident in.

So you should probably consider that a little bit of hedge for us, as we're testing things as we wrap up this fiscal year and get ready for next year.

Our next question comes from Scott Schneeberger of Oppenheimer.

Brad, I have a 2-parter for you and then a follow-up for Michelle.

In -- when you list revenue per return, you mentioned in order attached then mixed shift then strategic price increase.

And I'm just curious, is that the rank order?

Were they all 3 equal or 1 a little bit more?

And then the follow-up is -- on that is, could you elaborate a little bit on attach, particularly if it is truly the #1?

Yes.

I appreciate it.

We'll unpack a little more of this in Investor Day.

But I would give you this.

I would put it in the order of mix shift, attach and then price.

And it's just by a small percentage points, so there isn't a significant variation across those.

And then in terms of attach, we have a different bundles.

We have a plus bundle you can come in and purchase.

We have some security features.

We have the ability to do audits, defense, if you decide that you want to have some protection against being audited by the IRS.

We had the refund transfer, which is the ability for you -- it's called refund -- what is it called now?

Refund-something service.

The ability to pay for the software out of your refund and it's a combination of those that basically add up to attach.

There wasn't really anything that we did this year that was a breakthrough new offering in attach.

It was just continuing to find better ways to expose customers to those products when they have a point of need.

And then, Michelle, I saw the guide on CapEx down $50 million for the full year.

Could you just remind us how we should think about that, not just this year, but kind of going forward?

Sure.

Thanks, Scott.

Well, CapEx for this year, if you look at where we are quarter for the year-to-date, actually, there's a couple of different things that are impacting that.

As we talked about transitioning to AWS, what that means then is we don't have to do all of the refreshing in our data centers.

And so that's having an impact there.

One of the other things is we do have some lower software capitalization.

And then last year, at this time, we were still doing some of the renovation and construction on our Mountain View campus.

And so that had inflated last year.

And so we'll continue to look at that.

We'll give you some more insights into that as we think about going forward at Investor Day, but those are the big drivers of the decrease that you're seeing right now.

Our next question comes from the line of Brad Reback of Stifel.

Michelle, if we go back to some of the margin commentary, if we think about it from a high level, is this situation where the gross profit dollars should continue to outpace OpEx dollar growth, so cash flow should be a net-net benefit going forward?

I'm sorry, Brad, could you repeat the question?

She wasn't clear what the question was.

Yes, sure, absolutely.

So should we think about gross profit dollars growing faster than OpEx dollars?

So while the margin may go down in the future, the cash flow benefit is still positive.

I'm not sure how we -- if that is actually -- I'm trying to think through that right now.

I don't know that I've thought about it that way.

So I can jump in.

I mean, if you assume that the cost of goods sold is going to be relatively stable at about 15%, then gross margin is going to be about the same rate of growth as revenue and our operating margin dollars usually grow just a little bit faster than revenue.

They're not this year but that's typically what they do.

And so, Brad, I think you'll back into an answer that's pretty much what you're expecting.

Can I?

Sure.

No, go ahead.

No, no, I was going to say thanks.

So go ahead, Brad.

Well, what I was going to do, I know this came up earlier and Michelle answered it and this question came up just now.

And I thought I'd unpack for you a couple of points that I thought Michelle did a really nice job of putting out there.

The first is our financial principles in the company remain enduring and we just reviewed them with the board a couple of weeks ago, which is double-digit organic growth on the top line to grow revenue faster than expense, which allows us to grow operating income dollars in the midteens.

As we enter this year, we saw 4 opportunities that we wanted to lean in to invest that we said would both accelerate our top line growth this year, but would set the foundation for a stronger multiyear growth opportunity ahead.

And those where the areas that Michelle walked through.

We saw accelerated top line growth this year.

And we also saw strong operating income growth of 13%.

We'll come back and talk about our financial principles again in August at Investor Day, but you should hear our anticipation that we're going to not continue to get good operating leverage out of this company in terms of growing our operating income dollars.

This was a strategic choice.

This is not a business model question.

We saw opportunities to invest in technology, data sciences, accelerating at AWS, which by the way, TurboTax ran 100% in second peak at AWS, and we saw real benefit from that.

And then, of course, the brand.

So I'm putting that out there just so if there's a question on anyone's mind about, is there an issue with the operating leverage of the company?

I can tell you with straight eyes and a clear heart, the answer is no.

Next question comes from the line of Keith Weiss of Morgan Stanley.

I'm going to try to sort of attack head on, I think, the questions that like everybody is trying to get at.

Consumer had a great quarter this quarter and a great year, year-to-date.

I even think 14% is the highest I've seen in my model.

Is there anything onetime in nature that we should be thinking about in this year versus prior years that makes this special, if you will, or nonrepeatable?

Or can we potentially see a higher durable rate of consumer growth on a going forward basis, given sort of how you expanded the product portfolio there?

Yes, thanks, Keith.

We'll talk about what we think the durable growth opportunity is in this business when we get into the fall, which historically sits at a 5% to 10% grower.

And we're fully aware that the last couple of years has been double digits this year versus even further up into the teens.

But what I do think is different as well I've touch on a few minutes ago.

Historically, when we try to grow the category and grow customers, they often came in with a free offering around the lower end of our product lineup.

Now as we're getting customers to come in with TurboTax Live and we're getting customers out of the assisted tax prep method, they're coming in at the higher average revenue per customer.

So as we expand the category and grow customers, we're also growing revenue.

And so I don't believe that you see a onetime event here.

I think you're starting to see a structural shift in the business economics that if we can continue to execute, should give us a really good sustainable growth rate as we look ahead.

But we'll talk much more about what that looks like when we get into the fall.

Our next question comes from the line of Kartik Mehta of Northcoast Research.

The TurboTax Live product this year, what was the primary objective for you for this year?

And what would you say the primary objective will be for that product next year?

Kartik, I think I picked up the majority of your question.

I heard TurboTax Live, what was the primary objective this year and what will be the primary objective next year?

Was that your question?

Yes.

Yes.

So what we did seek this year to do was to see is if we can impact the 3 million customers on average that we tend to lose when something changes in their tax situation, they either have a child, they get married, they move between states, they sell stock.

They have that nagging question.

And we wanted to see if by introducing a pro, we could actually improve our retention in our existing customer base as the primary objective.

And as I mentioned earlier, we'll talk more about what the results look like as we get into the fall, but we did achieve that.

The other thing we wanted to see is we could change the source of new customers coming into the category and if we could begin to bring people into the category as first-time filers who may have gone to an assisted method or actually get people out of tax stores and CPAs.

And so far the mix of new customers, as we finish this season, also looks like we've been successful in proving that hypothesis.

So as we lean into next year, the primary objective is going to be to transform the $20 billion assisted tax prep category and begin to bring more of them into the do-it-yourself category.

We think that will be the big opportunity for us over the long run.

And then, Brad, you talked about on the tax side maybe getting some pricing.

Do you think, has the market changed and do you believe there is an opportunity for you to maybe raise prices more than you have in the past, because maybe consumers are seeing the value a little bit more now than they have in the past?

Well, Kartik, as you know, you follow the space really closely, it's a hypercompetitive market when you get into the free category.

And as we mentioned a few minutes ago, tax legislation will give more people the opportunity to qualify for standardized deductions so they can move into lower-end products, lower-priced products or even free.

But we have also seen that consumers are willing to pay for value and the ability to have someone answer their question at the convenience of coming through the software and being there at the point of need and they can schedule when they want to talk to that person is something that customers are willing to pay for.

So we do feel like with the right strategic value proposition, that we can continue to grow revenue while also growing the category.

In terms of taking price, if there's not value-add relative to a competitor, that becomes difficult.

And so we have to be able to differentiate and deliver more than our competitors can for us to earn a higher price.

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

Brad, did you say clear eye and a straight heart?

Or a clear heart and a straight eye?

That was not a question.

That was not a question.

Both would apply, actually.

My question is, when you look at the profile, either demographic or whatever profile, however you wish to categorize people that came in on TurboTax Live, I'm curious how much of that is flow from competition that was bricks-and-mortar versus upgrade from your existing base or people that might have, to your point, tried it because the terms got complicated?

Or even perhaps, people that were going to a professional accountant that were using professional TurboTax?

So if you could just characterize the flow of business in TurboTax Live and where you see the different vectors?

But hoping that you can actually project these vectors in the future and help us understand the bigger picture of how it all plays out.

Let's say TurboTax is going to be as live as it's going to as big as potentially TurboTax -- the core business?

Where do see the inflow coming from?

And from a product standpoint, as we went through one realm of it this season, what changes do see making to TurboTax Live next year from a product standpoint that will [echo] the company even better, forget the go-to-market, but from a products perspective?

Yes, thank you, Kash, and thank you for helping me think through the quotes and the things that I use here.

Sometimes that West Virginia side of me comes out and I cannot even remember what I said.

So let me start first with we're going to break out a lot more detail in TurboTax Live when we get into the fall at Investor Day.

As we always do, we'll show sources of customers.

But we'll hit it at the high level.

What we're encouraged by is, as you know, 3 million to 5 million people enter the tax category for the first time each year when they file their first return.

There's a whole of host of reasons why people end up filing the first time.

They're filing jointly.

They're divorced.

They're entering the workforce for the first time out of college.

So you take any one of those scenarios.

We saw a disproportionate inflow into the category and into TurboTax.

So that was exciting.

So we do know that's an evergreen source of customers, and we'll talk more about that in the fall.

The other thing we saw is customers who have been with TurboTax a couple of years ago and had left, we saw them coming home.

And so that was a good opportunity for us as well.

They had gone to an assisted tax prep method or to some other alternative.

And then we did see those who had been with an assisted method, whether it's a tax source or CPA, we actually saw TurboTax Live draw about 10 points more from that category than regular TurboTax Online does.

So we do like the sources of customers.

They are first time filers.

They are people who used to be with us coming home or those people who tend to be going to an assisted tax prep method.

We will break out the granularity later.

In terms of the opportunity, we still have a lot to prove to ourselves and to prove to you.

But if you look at the tax category, it's about a $20 billion assisted tax prep category and we have a very small sliver today.

So this could be a very nice business for us, if we can continue to execute well and create more value than any of the other alternatives in the market, we'll just have to see how big that is.

The product perspective, thanks, if you have the time.

Otherwise, no big sweat.

Yes, Kash, I would rather, at this point in time, not to get to ahead of our headlights in terms of sharing what we're going to do on the product.

Obviously, there are a lot of people in the marketplace that are interested in what we felt we did this year with TurboTax Live and what we'll plan to do next year.

Not all of them are investors.

And so we just want to make sure that we keep some of those product plans close to the vest and we'll talk more about that when we're getting ready to launch the product.

Our next question comes from the line of Siti Panigrahi of Wells Fargo.

Going back to QBO Internet, 720,000, that's pretty good growth.

How much of that's driven by this QBO's Small Business versus Self-Employed?

And also, you talked about France, Brazil, India product marketplace, could you give us some update on that, when we should start seeing some kind of growth from those regions?

Yes.

Thanks, Siti.

So I would say, first of all, predominantly the growth in the international markets was driven by QBO core, as supposed to QuickBooks Self-Employed.

That product is ramping up and we're continuing to add functionality that is very country-specific and we're excited about this prospect.

But right now, the core growth, that 56% growth, was really driven primarily by QBO.

In terms of the other markets, and these are the markets where we're still in search of product/market fit, France is really looking healthier by the day, and we like what we're seeing in India in terms of prospects.

We're actively engaged over there right now in the process for the government.

It is opening up the technology stack and looking for a handful of providers that help them implement GST, which is their new tax situation that impacts small businesses.

Brazil right now, we're still working through.

We don't have clarity yet in terms of how best to capitalize on the acquisition we did with ZeroPaper as well as around our own QuickBooks Online offering.

So I would just say in terms of sequencing, I would do France and India is a little ahead of the pack and Brazil is a little bit further behind.

But we're on the trail of all of them and we've got a team actively working to make sure that we turn those dashboards green and we get the product/market fit.

Our next question comes from the line of Raimo Lenschow of Barclays.

Quick question on Turbo.

Brad, can you talk a little bit about the -- you'd talked earlier about how you like what you saw, the early monetization.

Can you talk a little bit about the activity levels of declines that you signed up, the $5 million?

How is that going in terms of what you see, what they're doing with the product, how often they're using it, et cetera?

Yes, thanks, Raimo.

This actually has been, as Scott Cook our founder would say, savor the surprise.

We know what the average Mint customer looks like.

We know what their credit score is.

We know what their decisions tend to be in terms their financial investment.

Turbo is bringing in a different customer.

Actually, a customer that's a little more paycheck-to-paycheck with a lower credit score and much more in need of the kinds of financial services that these partners that we're working with can bring them.

And so their active use is different than what we might see from a Mint customer or any other product we've had in the past, like Quicken.

And so we're in the process of learning as we speak.

What we are finding is things like alerts and notifications, making them aware of the changes in their financial situation, are very important to them.

And we also know that, that drives active engagement.

So we're at the process now of saying we have 5 million people who registered.

Now what can we do to actively engage with them and help them make the best decisions to improve their financial health?

And then, as we get closer to the fall, we'll be able to share with you some of those insights.

And we'll break apart for you the differences we're seeing in these customers, relative to other products.

But I will say this, we are very encouraged by how many people signed up.

We're encouraged by the fact that as they save more money, we make money.

And we're encouraged by the fact that the quality of the leads that we're getting to our partners, in some cases, it's 8 to 10x better in conversion than what they've gotten from other sources.

And so that for us is a real win-win-win and now if can just turn them into active users and then get more of them, we think we have a viable business over the long term.

Perfect.

And one follow-up question for me.

On the investment side, can you talk me through like where are you on the move towards AWS?

I think I heard earlier you said TurboTax around 100% on AWS.

That should have been a big benefit for you guys.

Just overall, like I refer to the investment initiatives, but where are you in the process of kind of doing some of the major ones?

Yes.

So Raimo, as you know, we've been working towards getting into AWS for several years now, a little over 4 years, and there was a combination of getting our products architected, working with AWS to ensure the level of security for the kinds of data that we have in our products and then migrating the products in.

TurboTax, as I mentioned, has been in the process of last year and this year moving into AWS.

And when we got to second peak, which was mid-April, we were able to run 100% of our volume through AWS.

And we were delighted with the performance, with the product, the quality, the experience, everything was really above expectations.

QuickBooks Online, in the major Small Business products, are in the process of moving in.

We hope to get those moved in, in the next 12 months.

And then we will have a long tail of other services we'll be moving out of our own data center and into AWS, and that'll probably have another 12 months or so after that.

But right now, what we're dealing with is we have a double bubble.

We've talked about that before where we have our own data center up and we also have AWS.

And so that's part of the investment that we foreshadowed as we went into this year.

We're going to be paying for volume in AWS while we continue to be pay to keep the lights on in our own data center, until we get everything moved out of our garage and into theirs.

And we feel good.

We actually like what we're seeing in terms of how our products perform when they're on AWS and we got another, call it, 24-plus months to get everything moved over.

Our next question comes from Jim MacDonald of First Analysis.

Believe it or not, I have another TurboTax Live question.

Did you have any capacity issues, either supplier demand or could you talk a little bit about that?

Did you have enough on either side of the equation there?

Thanks, Jim.

Never apologize for asking about any of the products and certainly about TurboTax Live.

We're very, very proud of this product offering this year.

And the short answer to your question is no, we did not.

We were delighted by the supply of professionals who wanted to work with us on the platform.

We were delighted by our team and the ability to match supply and demand in real time and maintain service levels where you could be connected within minutes, or you had to the ability to schedule at your own convenience when you wanted to have a professional to connect with you.

And we were also delighted to see that customers and pros were willing to flex.

And in some cases, at the end of the season, they said, hey, I'll go ahead and file an extension because I'm not ready to get my stuff to a pro.

So it really did, at the end of the day, work out much better than we had hoped.

And I think at the end of the day, it's also an opportunity to re-imagine this entire category because many times, you're constrained in an office when you have a line sitting at the front office waiting to get their turn to get their taxes done.

But in our case, we have pros working from home and they can come in at any point in time and help you get it done.

So I think this is really a game changer.

Very good.

And just on a different subject.

Your online -- QuickBooks Online services seemed to be particularly strong this quarter.

Was there anything going on there?

Jim, it was.

We're excited about the fact that our teams, and we've been talking about this for some time and acknowledged we needed to improve our execution.

But our teams have continued to improve our execution behind both payroll and payments.

That was helping drive our online services.

And then in addition to that, we did have a quarter of TSheets, the acquisition, the time and attendance acquisition that rolled into those services as well.

But it really is a continued improvement and our ability to execute those services beyond just core accounting, and that's what's driving that growth.

Our next question comes from the line of Sterling Auty of JPMorgan.

Brad, you mentioned that in the DIY category, that you gained a slight amount of market share.

Were you satisfied with the share gains that you saw?

Were you surprised that maybe there weren't more?

And what did you see in the marketplace that maybe limited some of the share gains that you saw this year?

Yes, thank you, Sterling.

We have really good competitors.

They continue to invent and reinvent their game every year as we do.

And I think that, in the end of the day, is good for us because we have to take our game to the next level and it's certainly good for the consumer.

And if you look at everyone who's reported publicly, ourselves and the second-place player in the market looks like we picked up share.

And so far the others who have reported seemed to have not.

And in terms of how we performed, of course, I would always like to remove the word slightly and simply say we gained share.

But if I keep things in perspective, given how hypercompetitive it was this year, I'm very proud of the fact that we were able to continue to build on our market share and at the same time, introduce products like Turbo and TurboTax Live.

So each year, we're going to come out and our game plan is going to be to try to increase market share in the category while we expand into these other services.

And I'm really pleased the team did that this year.

Our next question comes from the line of Kirk Materne of Evercore ISI.

Brad, thank you for again -- for sort of reiterating your financial principles and the way you're thinking about that going into next year.

I guess my question is, if we're in a situation where consumer growth is going to be higher for longer, that obviously gives you a lot more flexibility from an investment perspective.

Can you just talk about whether or not the success you had in the quarter has allowed you to accelerate some investments, whether it's in areas like AI or on certain products?

I guess, just -- I mean, can you offer maybe just some insights into how you're thinking about that from an investment perspective as we head into the next fiscal year?

Yes.

Thank you, Kirk.

I appreciate the kind words on the performance in the quarter that the team delivered.

Our financial principles give us the flexibility to continue to invest.

And as Michelle talked about, when we produce cash flow, our first priority is to invest in the business to accelerate customer and revenue growth.

And then we look for acquisitions and we return cash to shareholders, whether it's stock repurchase or dividends.

But you may recall this year, we also talked about an initiative we implemented called Reinvent-to-Reinvest, where we look across the company at the lower ROI investments and we basically redirect those resources, time, people and dollars to higher priority areas.

And this year, under the leadership of Michelle, we found over $190 million that we have been able to redirect to higher priority areas.

And we already have plans in place to even increase that number as we look at fiscal year '19 and beyond.

So I do believe that we have the opportunity within our financial principles and also within our ability to just take a hard look at ourselves and say, look, there are areas where you can spend this dollar more wisely that we're going to continue to redirect those dollars to think like artificial intelligence and machine learning, global expansion, TurboTax Live, Turbo, QuickBooks Capital and all those other things we've talked to you about.

And we have that capacity to do so without harming our financial principles.

Our next question comes from the line of Michael Millman of Millman Research.

Using IRS numbers, in the past several years, the growth in do-it-yourself has been about 5 points higher than it has been in assisted.

This past year, it dropped to 2.5.

I was wondering if you could talk about it because it seems at variance with what we'd think.

Second question is, I think this is your number that there's about 30 million taxpayers who don't itemize, but yet use assisted.

Why do you think if we increase that number with a higher standard deduction, they're going -- those people will change to do-it-yourself?

Yes.

Thank you, Michael.

It's good to hear from you.

First of all, we would say that relative to the prior years, the thing we keep in mind is the assisted category, is do-it-yourself outpacing assisted?

And obviously, it is.

This year was a little bit of a fear, uncertainty and doubt year.

There was a lot of confusion in the market as tax legislation came out.

Does it affect this year?

Does it affect next year?

Which is why TurboTax Live was so important.

So if you have a question, we wanted to let you know that we could help you with a tax professional.

So I can't really tell you why this year, we saw maybe a less accelerated growth.

We do know that the category picked up 0.5 point share, which is good.

And we believe that, that opportunity just continues to increase with 2 things: with tax legislation taking full effect next year and then us having TurboTax Live out there so that people know that if they do have a question, they can move into our category and still have the assistance of a tax pro.

And that really answers your second question.

The 30 million people today who are filing a 1040EZ or A or have what could be simple returns but still go to a tax pro, they're doing so because they don't realize that with just 1 or 2 quick answers in a 5-minute exchange, they could file their taxes for a much lower price.

We believe it's not just tax simplification but it's TurboTax Live that will allow us to shift the category into do-it-yourself and to get more of those filers using TurboTax.

So it's in the legislation in TurboTax Live that we think will help us fundamentally grow the category.

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

Would you close with any additional remarks?

Yes, thanks, Latif.

I want to thank everybody for your time and for your questions today.

I hope everyone has a great Memorial Day weekend.

We're looking forward to speaking with you soon.

And until then, take care.

Ladies and gentlemen, thank you for participating.

This concludes today's conference call.