Intuit Inc. (INTU) Q1 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Saeed and I will be your conference facilitator. At this time, I would like to welcome everyone to Intuit’s First Quarter Fiscal 2015 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] With that, I will now turn the call over to Matt Rhodes, Intuit’s Vice President of Investor Relations. Mr. Rhodes, you may begin.

Thank you, sir. Good afternoon, everyone and welcome to Intuit’s first quarter fiscal 2015 conference call. I am here with Brad Smith, our President and CEO and Neil Williams, our CFO. Before we start, I’d like to remind everyone that our remarks will include forward-looking statements. There are a number of factors that could cause Intuit’s results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2013 and our other SEC filings. All of those documents are available on the Investor Relations page of Intuit’s website at intuit.com. We assume no obligation to update any forward-looking statement. Some of the numbers in this report are presented on a non-GAAP basis. We have reconciled the comparable GAAP and non-GAAP numbers in today’s press release. Unless otherwise noted, all growth rates refer to the current period versus the comparable prior year period and the business metrics and associated growth rates refer to worldwide business metrics. A copy of our prepared remarks and supplemental financial information will be available on our website after this call ends. And with that, I will turn the call over to Brad Smith.

Alright, thanks, Matt and thanks to all of you for joining us. We are out of the gates strong in fiscal 2015. We grew revenue 8% in the first quarter and exceeded our QuickBooks Online subscriber and our company financial targets. It’s a great start, but it’s still early in the year and there is a lot of game left to be played. Let me provide a brief overview of what’s driving these results, beginning with our Small Business performance. We are continuing to accelerate growth in our online ecosystem. QuickBooks Online is generating new customer acquisition, with over 75% of QuickBooks Intuit franchise. We are also actively marketing QuickBooks Online to desktop customers who are cloud-ready. The QuickBooks Online ecosystem is building momentum. We grew total QuickBooks Online subscribers by 43% in the first quarter, up from 40% growth in the previous quarter. We closed Q1 with 739,000 paying subscribers worldwide. Outside the U.S., QuickBooks Online subscribers were up more than 170% to 103,000 further accelerating from last quarter. And the improvements we are seeing in the leading indicators are quite promising with new user attach rates of 12% for payments and 31% for payroll, up from 6% and 20% respectively, a year ago. We remain squarely focused on driving customer growth and increasing market penetration. QuickBooks Online has a very low penetration when you reflect our total addressable market of more than 160 million small businesses globally. Although we are still in terms of taking QuickBooks Online global, we are excited about the huge market opportunity. Adding just one additional point of penetration would more than double our QuickBooks Online subscriber base. The capstone to the quarter for our small business team was our first-of-its-kind QuickBooks Connect event that was held in October. We hosted more than 3,500 attendees, including accounting professionals, small business owners, entrepreneurs and developers. The attendees found inspiration from the main stage, while learning practical advice on how to start and grow their businesses from renowned experts in breakout sessions. At the event, we introduced more than 100 product enhancements and featured a lineup of dynamic speakers that wowed the audience. I am glad some of you on the call were able to attend, and I encourage everyone to consider checking out QuickBooks Connect next fall. With that context around our small business performance, let me now shift to tax. Fiscal 2015 is the second year of a multi-year journey to achieve our product vision of taxes, are done. We are excited about the progress we are making in preparation for the upcoming tax season, but there is still much to do over the next several years. We will continue our focus on improving conversion with a more simple and responsive experience that leverages data to get customers through their tax return with ease and confidence. We will also focus on delivering a unified help and answer experience, driving TurboTax customers to clear explanations on everything tax related, including the Affordable Care Act. We are looking forward to getting our new lineup of solutions out to market in the next few weeks. In the professional tax business, we are seeing strong new customer growth early in the season and our shift to the cloud continues to pick up steam. We intend to build on our leadership position and capitalize on this once-in-a-generation shift to the cloud for accountants. So, in a nutshell, we are off to a great start in fiscal 2015. I am energized by our results as we continue to accelerate customer growth in our online ecosystems. These results reinforce our confidence in the near and long-term financial outlooks that we have provided. And on that note, I will turn it over to Neil to walk you through the financial details.

Thanks Brad. Let’s start with overall company results. For the first quarter of fiscal 2015, we reported revenue of $672 million, up 8%, non-GAAP operating loss of $36 million, GAAP operating loss of $114 million, non-GAAP loss per share of $0.10 and a GAAP loss per share of $0.29. As Brad just said, we are off to a strong start, a little ahead of our expectations for the first quarter. Turning to the business segments, total small business group revenue grew 5% for the first quarter. Small business online ecosystem revenue grew 30% and customer acquisition in our online ecosystem continues to drive growth. QuickBooks Online subscribers grew 43%, accelerating from the previous quarter. Total online active payments customers grew 3%. Online payments charge volume grew 22%, driven by strong growth in payments customers connected to QuickBooks Online. Online payroll customers grew 24% and full-service payroll customers nearly doubled. Rounding out the online ecosystem, Demandforce customers grew 27% for the quarter. Switching to the desktop side, total desktop ecosystem revenue declined 2% and QuickBooks Desktop units declined 23%. This is in line with our expectations as we continue to emphasize QuickBooks Online. QuickBooks total paying customers grew 22% in the first quarter. As we move through the year, we will continue to experiment with our QuickBooks product lineup and our pricing to maximize long-term customer and revenue growth across Small Business. Within the Consumer Group, Consumer Tax revenue was up 36% versus the first quarter last year. As you know, our consumer tax business is highly seasonal and our first quarter is a light one. We will continue to invest in the product experience and to prioritize growth in share and customers above margin expansion. The quarter is also seasonally light for our ProTax group, with revenue growth of 46%. We continue to take a disciplined approach to capital management, investing the cash we generate in opportunities that yield a return on investment greater than 15%. With approximately $1.6 billion in cash and investments on our balance sheet, our first priority is investing for customer growth. We also look for inorganic opportunities, and in the first quarter we made two acquisitions totaling $10 million. When it’s the best use of cash, we will return cash to shareholders via share repurchases. We repurchased $114 million of shares in the first quarter and we have about $1.8 billion remaining on our authorization. We intend to be in the market consistently during the year. Our Board approved a $0.25 dividend per share for our fiscal second quarter, payable on January 20. This represents a 32% increase versus last year and reflects our large and growing cash position, as well as more recurring and predictable revenue streams. We provided our guidance for the second quarter and reiterated our guidance for full fiscal 2015 in our press release. As a reminder, we will provide tax unit updates in February, concurrent with our second quarter earnings release and in late April after the tax season. Back to you, Brad.

Alright. Thank you, Neil. It’s obviously early in our fiscal year, but we are off to a strong start. QuickBooks Online is accelerating our transition to the cloud, which is driving value for our customers, as well as for Intuit and our shareholders. As I mentioned, I am really pleased with the strong turnout at our inaugural QuickBooks Connect event last month, which helped build awareness of our growing online ecosystem. We now have 425 third-party applications on our partner platform, which is up over 4X from where it was last year. 375 accountants became QuickBooks Online certified at the event itself and collectively, the conference attendees touch more than 1 million small businesses. We are planning to build on the power of these connections throughout the year. We are also gearing up for tax season and we are looking forward to getting our new offerings in the market in the coming weeks. So, we are heading into our busiest time of the year and we are excited about the momentum that we are continuing to build. As always, I want to thank our employees for their hard work and their ongoing focus. And with that, Saeed, let’s open it up to hear what’s on everyone’s minds.

Thank you. [Operator Instructions] Your first question comes from Walter Pritchard from Citi. Your line is open. Please go ahead.

Hi, thanks. Just one question on small business and one question on tax. Could you help us understand on the tax side, we have had a variety of sort of seasonal anomalies over the last several years in terms of more of a front-end loaded or back-end loaded tax season? Could you help us understand kind of how you are thinking about the shape of the tax season as it compares to some of the prior years we have seen here?

Okay, Walter. So, right off the bat, one of the things that’s happened in the last several years has been a delayed tax season, because Congress has acted late to pass certain laws and then the IRS hasn’t been able to open up season on time. While that still remains a potential reality and there have been letters written by the IRS Commissioner to Congress, we are still banking on the fact that the season is going to open up around January 20, but of course we have contingencies in place in the event it does get pushed out for any reason. Beyond that, I think the natural seasonality is what it has been and that’s an increasing procrastination with more people waiting until later in the season to file. We have tried to reflect that in our forecast that ultimately we will have to wait and see how the customer behaves in terms of their tax filing behavior.

And then I guess Neil for you on small business expenses, we just back into that based on your operating income in small business and it looked like you grew your expenses in small business about 8% year-over-year, which is actually less than you grew it in the second half of last year. And it felt like at the Analyst Meeting, you were talking about accelerating some of your investments in small business and you noted you had Connect during the quarter. I guess it seems like you are spending less than we expected in that area. Could you give us some color on that and do you expect that, that spending ramps as we move through the year?

Yes, Walter. I guess, I would say two things about that. First and foremost, our small business team has gone through an extensive resource reallocation during the summer and some of our plans around are recommitting to the online products around our bold initiative that really drove a more extensive resource reallocation. Secondly, I would caution you that the first quarter is just the first one out of the gate and if some of the expenses may show up later in the year, particularly as we rollout additional products offerings and have marketing and things around those events. So, I wouldn’t read too much in the first quarter run-rate or necessarily assume that’s indicative of the full year.

And then just last one for you, Neil, I calculate your billings were up sort of high-teens and I am wondering I know most of your business is billed on a monthly basis and I am wondering if we should be looking at sort of revs plus change in deferred as any sort of metric for your business. What are your thoughts there?

Yes. It’s a good question, Walter. And if you look at the first quarter, you don’t see a huge buildup right there, because our desktop product really didn’t go on sale until the first part of October. And so what you see in the first two months of our first quarter is really the desktop sales still under the upfront revenue recognition before the switch to ratable. So, it’s probably worth maybe a point or two maybe in the first quarter would probably be in the total company, probably be in the low-teens without the effects of ratable. It will be much more prominent in second and third quarter.

One other thing I would point out quickly, Walter, this is Matt, the desktop payroll business generates some deferred revenue as well and we saw some pretty good growth there this quarter. So that’s showing up in the deferred balance overall for the company too.

Great, thank you.

Thank you. Our next question comes from Brent Thill from UBS. Your line is open. Please go ahead.

Thanks. Good afternoon. Brad you mentioned outside the U.S. you saw accelerating momentum and I know it’s early days, but maybe if you could just walk through what you are seeing there and help us understand the prioritization of what is a pretty big opportunity for you when you look outside the U.S.?

Yes, Brent, happy to do that. So as we discussed we have four priority markets outside the U.S. Those are Canada and the UK, Australia and India. And we have now put a tiger team on the ground in France. And we are in the early days of discovering there and getting the product more localized and making sure the compliance that the local market needs. In terms of prioritization we are treating each country as a market of one, so we don’t have one prioritized over other, plus we are testing different concepts. And right now we are seeing acceleration in all four of those markets. And we are seeing increasing gross new subs on a weekly basis. We are learning and getting more accountants aware of the products and signed up for our ProAdvisor program. We are becoming much more effective at direct selling through the websites. And we are also getting very good reviews from the customers and the accountants on how the products stacks up versus competition. We had mentioned in the last call we had a done a study, an independent study in Australia where we actually outperformed the leading online competitor there 2 to 1 terms of ease-of-use. We just replicated that study in the UK and got the same results. So, across the board we are continuing to see strong performance in these countries and now we are in the process of looking at that fifth country being France. And beyond that I would just say that the teams continue to learn every week. They are running rapid experiments and things are looking good.

Okay. Neil I realized you still have a long way to go on the authorization on the buyback, at the beginning of the year you took an accelerating approach to this, is this something we should continue to factor in the model, just steady ongoing accelerate – adoption of that buyback or just we would love get your thoughts on that? Thank you.

We had a little over $0.5 billion in buybacks embedded in the guidance we gave you on the share count back in August. And so we will see how that plays out. We executed in Q1 against that plan. But we will see how it plays out. It depends on what other uses we have for our cash and other opportunities we have in the marketplace. So I feel comfortable with the reduction in share count we have guided for 2015. We will see if there are opportunities to go beyond that.

Great. Thanks.

Thanks Brent.

Thank you. Our next question comes from Sterling Auty from JPMorgan. Your line is open. Please go ahead.

Yes. Thanks. Hi, guys. Two questions here on in QuickBooks Online, you mentioned in the prepared remarks that you are already marketing the solution to the desktop users that are ready, can you just talk us through a little bit more color of how you are reaching out and marketing to them. And remind us I think you talked about 70% of them are probably able to make the switch. So how should we think about you increasing that marketing as you can reach out to you when 100% are ready to make the switch?

Hi, Sterling, it’s Brad. First of all we are continuing to reach out to our desktop customers through both their accountant who is the most trusted advisor because we find that one out of two decisions are actually directed by the accountants. So we have been working with them, with the new QuickBooks Online for accountants. We have a very compelling ProAdvisor program that gives them incentives to help them get their clients over to the cloud. Of course, the other thing we have been doing is we have been directly marketing to our own customer base and we do that through but direct response as well as in the product. And we are getting really good receptivity. In terms of the actual number of customers you can migrate now, our goal is to have as many as 70% by the end of this fiscal year. Right now it’s more in the neighborhood of about third – a third of the customers could move over. And what we are doing to close that gap is basically closing out the feature functionality things that they are used to having in desktop like advanced inventory, job costing, sales form customization. And then the other thing we are doing is we are just making the migration process seamless for them, not only for accounting but also for payroll and payments. So when you put it together we are working with the accountants to get them comfortable and encourage them to recommend. We are directly marketing to the customer base through director response and in the product and then we are also closing out those remaining feature gaps so that more of those customers can make that move.

And then the follow-up is, when we look at the subscriber additions throughout the fiscal year, how should we think about seasonality meaning which are the quarters are naturally going to see probably stronger subscriber growth versus others?

Yes. So what we are seeing still is there is a natural timeframe in the first of the calendar year where many small businesses will consider making a switch or many accountants figure that’s a good time to get their client to start something new. But when you start thinking about small businesses overall, a lot of that behavior was shaped from the fact that we were desktop software and we used to send a new version out on Black Friday and then ultimately people would start to make the switch in the new calendar year. So, there isn’t as much seasonality in the cloud as there was in desktop, but there is still the sort of first of the year phenomenon. So, you will see more customers start to consider that switch in that January timeframe, but you are going to start to see a little more evening out over four quarters versus what we used to experience in the desktop.

Great, thank you.

You are welcome. Thank you.

Thank you. Our next question comes from Kash Rangan from Merrill Lynch. Your line is open. Please go ahead.

Hi. My goal is to ensure that I am not asking a Splunk question on the Intuit call, so…

Hey, Kash, we will take any question you want to ask.

I will ask a question on Autodesk on your call, I am kidding. With respect to QBO, obviously nice start in the quarter, can you give us a sense, Brad and Neil, of the new QBO subscribers that you brought on board? What attach rate did you experience for payments and payroll and how do you compare the trend in recent quarters? And I am also curious to get your perspective on as a result of getting this first quarter out of the way, how much more incrementally confident are you in the 2 million sub goal and the associated attach metrics for payroll and payments? Thank you.

Alright, Kash. Happy to do that. This is Brad. So, first and foremost, we are really excited with the momentum in QuickBooks Online in terms of subscriber growth. We had anticipated the neighborhood of 715,000 for the quarter. As you now, we provided that guidance. We closed the quarter in the neighborhood of 739,000. So, we are ahead on subscriber growth, perhaps what’s equally if not more exciting is the attach rates for new users. In terms of the actual payments attach rate, it was 12% for new users, that’s up from 6% a year ago and for payroll attach rates it adds up from 20% a year ago. So, not only are the subscriber base growing faster than we had forecasted, but the attach rates are much healthier than they were 12 months ago. In terms of confidence, you might imagine that gives us continuing and increasing confidence and the guidance that we provided both for this year as well as over the next 3 years. We also readily admit we are one quarter into this journey. So, there is still a lot of game and a lot of time left on the clock, but if we keep this momentum up, we are feeling very good.

Great. And if I could, you don’t have to answer it if there is no answer, but what are the things that you are watching and we should be watching that will give you confidence to alter your longer term outlook? I think you have a goalpost of about 2 million QBO subs, what are the things that you are looking for qualitatively, quantitatively that could help you revisit that number? That’s it for me. Thank you.

Kash, this is Neil. Probably the best thing we can do is just continue to post good increases quarter after quarter and we have talked about a guidance of 800,000 subscribers by the end of Q2, which would put us right on track for the guidance we have given for this full year. So, one of the great things about monitoring this quarter-by-quarter is we will be able to see and you will be able to see as well if we are trending to the guidance into the outlook that we gave for 2015 as well as for 2017. So, we really can’t point to anything beyond that.

Thank you. Our next question comes from Jennifer Lowe from Morgan Stanley. Your line is open. Please go ahead.

Great, thank you. I wanted to double back a little bit on the comment that around a third of the base is now potentially primed to move over to QuickBooks Online and you would like to see that go to 70% by the end of this year. As you think of those customers in the Desktop base that have the potential to move to QuickBooks Online, what are sort of the things preventing that from happening right now? Is it just the change management around moving to a new solution, is it price, how do you sort of think about those blockers and what you can do to kind of get people past them?

Yes, Jennifer, it’s Brad. I mean, first of all, I think the most important thing is we don’t need to get that customer base to move over if they are not comfortable. We are getting 75% of our customers new to the franchise and that’s really what we are about is trying to increase the penetration into the total addressable market. The migration of these customers is really based upon their comfort level, their accountants’ comfort level and thus having the product ready to the point where they can move over and not lose any important functionality. So, what’s really today slowing that migration is the fact that we still have some areas like inventory, job costing, some sales forms customization that some of these customers want to have. And so we need to make sure we have that built out and in a place where they are going to feel comfortable moving over. And the second thing is just making the migration process seamless. We have a three clicks, three minutes conversion of your data from small business accounting. But at the same time we have to make that just as easy to move your payments and your payroll data. And so we have been working on that and it’s a combination of the features as well as having that migration process mapped out. For us the big juice is the accountants. And the accountants is increasingly excited about QuickBooks Online for their clients and now that we have rolled out the new version of QuickBooks Online for the accountants, which we unveiled at QuickBooks Connect, we are seeing a much more excited enthusiastic accountant base wanting to get their clients over to the cloud. So it’s those things that are going to really help these customers migrate. Keep in mind that we are agnostic, whether they stay in QuickBooks Desktop or they move to QuickBooks Online, its all goodness for us and we are ultimately trying to just increase the penetration into the total addressable market.

And then just one last one for me, I think Neil in your prepared remarks you mentioned that in fiscal ‘15 there will be some experimentation with the QuickBooks line up and with pricing to try and maximize adoption, can you just provide a little bit more color there whether that’s relevant to new users, existing users, both, how should we think about what potentially could play out?

Sure, Jennifer. Some of this you have already seen, we have raised the price of desktop when the new release came out this year to sort of rebalance the price value equation. And as Brad said make us of agnostic as to which product the customer chooses. We introduced QuickBooks Online as self-employed which is a simpler, less expensive version of add to the line up. And so – and we are testing the way we present those choices to customers in the lineup. And one of the beautiful things about online is you can do a lot of A-B testing to determine what resonates with the customers most. And I really we are going to continue to experiment with that with our promotional strategy and things like that throughout the year to determine what’s the right equilibrium for customers and we certainly don’t want the price value equation to be a barrier for someone to convert to QuickBooks Online. So those are a couple things that are out in the market already. And I think we will continue to experiment with things like that is year goes on.

Thank you.

Thank you. Our next question comes from Greg Dunham from Goldman Sachs. Your line is open. Please go ahead.

Hi. Yes, Frank Robinson on for Greg Dunham. The QuickBooks Desktop unit sales declined 23% much more meaningfully than the 10% - 11% from last year and last quarter, what are your thoughts or expectations for that going forward?

Yes, Frank it’s Brad. First of all, the desktop decline for the outright sale, the people who purchased it and just have the three year license was in the zip code of what we expected. We expected a decline of 20% to 25%, which you also have to look at on the fact sheet is the number of people signing up for QuickBooks Desktop subscriptions. And when you add in that growth of people who have moved off of an outright sale to subscriptions and then you also add in the desktop sales, the total base on QuickBooks Desktop is only down about 2%. And so net-net, it’s where we expected it to be 20% to 25% is where about we anticipated on the outright sales. We saw the migration moving to subscriptions and/or to the cloud version of the product, so we are right where we thought we would be in terms of the desktop performance.

Great, thanks.

Thank you. Our next question comes from Brad Zelnick from Jefferies. Your line is open. Please go ahead.

Thank you. This is Yun Kim for Brad. Again, very strong QBO subscriber number Brad another strong quarter of attach rate improvement for new QBO subs which to me indicates that the quality of new subs was pretty strong. Will – would we ever see a case or are you willing to accelerate subscriber adds that may be of a lower quality and may not result in attach improvement and along the line is the attach rate improvement somewhat driven by desktop QuickBooks transition who may have a higher attach rates than the new QBO to franchise? Thanks.

Okay. And can you – I am sorry could you just repeat the second part of your question I missed that?

Yes, sure. So I am assuming that the transition from desktop to the online have a higher attach rate than the people who are new to the QBO franchise, just wondering how has that improvement – how are you actually – actually I think that attach rate when people are transitioning from desktop to online?

Got it. Okay. Thank you. So first of all, the quality of the new subs to QuickBooks Online is very healthy and we are excited about the life time value of those customers. We talked about the attach rates earlier for new users. And we are opening up the funnel increasingly in two ways. One is as we begin to move globally, we are reaching into countries where we don’t yet have payroll and payments. And so I think what you are going to see is in early stage, where we may just have a small business accounting customer and then we will work with partners to close the payroll and payments gaps. And then over time, we will round that ecosystem out on our own. In fact, the two acquisitions we did in the first quarter of this year were both global acquisitions and so one of them was actually a payroll provider in the UK. So, that’s one of the things you will see in terms of what you categorized as maybe a lower quality customer for attach. We actually don’t view it as a lower quality we simply view it as an earlier stage customer or an earlier market for us where we are still building out the ecosystem. The other way that you will see the attach rates potentially getting impacted is as we go after QuickBooks Self-Employed, these are customers who today don’t believe they were big enough to need a small business accounting product that they do need to separate their personnel from their business expense and then come tax time, be able to send that data to TurboTax or to an accountant to be able to follow Schedule C. And so they may not have payroll needs, because they are a sole proprietor and they probably do need payments, but they may not have the same lifetime value. So, those are the two things that you will see ultimately impact the how big the funnel is and what the attach rates will be over time. Desktop to Online, you are absolutely correct we expect those attach rates from desktop customers moving over. They tend to be more established. Those should be healthier attach rates on things like payroll and payments. And so we are excited as more customers get comfortable moving to the cloud that, that’s only a tailwind for us.

Okay, great. And then just the same attach rate kind of question, what was the improvement, if any for the existing QBO install base?

Well, we track that in terms of total penetration into the base. And payroll was now at about 19% penetration and it was from a base of 16% penetration a year ago. So, that’s 300 basis points, which is pretty healthy against a total base and payments is now about 5% and that’s up from about 3% penetration a year ago, so once again, almost double. So, the total base is benefiting here as well.

Okay, great. Thank you so much.

You are welcome. Thank you.

Thank you. Our next question comes from Jim Macdonald from First Analysis. Your line is open. Please go ahead.

Yes, good afternoon guys. You talked about the QuickBooks Desktop price, any other price built into your assumptions for this year?

Jim, in small business or across the company or….

Well, I know you probably won’t talk about tax too much, so mostly small business.

Well, yes, obviously our pricing strategy is what we call pricing for value. So, on the lower end of the market, we often start with free or we introduce new products things like QuickBooks Self-Employed which are a little more affordably priced. And then on the higher end of the market, we will look for opportunities to take price increase and you have seen us do some of that with QuickBooks Enterprise, including moving to subscription versions of QuickBooks Enterprise. In payroll, we introduced a new pricing philosophy, which basically paid by employees to the number of employees you actually have a charge for each employee you add and that gives us a little pricing leverage as well. But by and large, there hasn’t been a fundamental change in our pricing strategy, it’s price for value, stay really competitive on the low end, make sure that we are disruptive, but taking value on the high end.

Great. As a follow-up, I think you have said in your remarks that your full service payroll doubled or nearly doubled, maybe you could talk a little more about that?

Yes, it did. As you know that is an exciting product for us that we introduced couple of years ago. It’s still early days. The subscriber base continues to build up. We are roughly now about 25,000 active customers in full service payroll. We just introduced the ability now to also sell it to QuickBooks Online customer. So, there is seamless integration between QuickBooks Online, which we think is really going to be an accelerant for this business. It’s priced about a third cheaper than the payroll outsourcers and yet provides the same value and benefit in terms of protecting you against any errors. And so, this is an exciting product for us. And we think there is nothing, but upside in this full service payroll product.

Great. Thanks a lot.

Alright, thank you.

Thank you. Our next question comes from Scott Schneeberger from Oppenheimer. Your line is open. Please go ahead.

Thanks. Good afternoon. Neil….

Scott, we lost you buddy.

Sir, if you have your phone on mute, can you un-mute your phone please? Our next question comes from Ross MacMillan from RBC Capital Markets.

Thanks a lot and apologies for my voice. I have got a cold so hopefully you can hear me. I had a question just going back to attach. I think what you are saying is that your QBO, that cohort of new customers, actually now not only has a higher attach across payroll and payments relative to last year, but I think higher than the aggregate base across the entire QuickBooks install base including desktop users, so I guess just if that’s true which I think is true, what is your expectation for that how evolves, do you think that there is going to be a shift back so that the QBO customers in aggregate will have maybe a lower attach than that cohort in the future, just maybe help me understand how you would expect that to evolve, that will be helpful. Thanks.

Yes. Ross, so first of all, your hypothesis is true. Not only are the cohorts attaching at a higher rate than prior QuickBooks Online they are also attaching at a higher than desktop. And this has been the thesis we have had all along. It’s much easier to sell additional services in the cloud than it is in a desktop product. It’s just a seamless part of the experience. It’s built into the workflow. And we have often said that we felt that we were not anywhere near the total potential of selling additional services to our install base, it was a matter of execution and making it seamless for customers. So just think about payroll today, in the small business base of QuickBooks Desktop customers, of the 4 million roughly 2.5 million of them actually have employees and pay a payroll service. And today we only have about 1 million of them as customers. So we never reached our full potential in desktop. When it transfers to the cloud and makes it a lot easier for us to introduce them to additional services same thing goes on with payments. One out of two small businesses are accepting credit and debit cards today. We had single digit penetration as we move to the cloud we think it’s a real opportunity for us to really increase that penetration. So there is upside here. And I think you are going to continue to see these numbers outperform the base as well as improve in terms of the cohorts.

That’s very helpful. Just a quick follow-up on aggregate QuickBooks customer growth, I know you said 22% but it’s a bit of a funky number because it includes perpetual units in period and subscribers which is obviously a growing pool of users. My adjustments suggest something around 5% growth if I annualize the perpetual units and I think that’s more in keeping with the 6% you saw last year. So I guess my question is what are your views on total QuickBooks customer growth, are we likely to see that total pool of customers continue to grow and do you think it could actually even accelerate from the 6%? Thanks.

Yes. So Ross, I would tell you I think first of all as you did the math you are in the zip code of what we are seeing too. So when you make all the adjustments, that’s pretty much in the zip code of where we are. And we do think that we will continue to grow over time as we introduce QuickBooks Online to a whole new base of customers and three out of four of them are new to the Intuit franchise that’s going to deepen our penetration into our existing markets. And as we introduce QuickBooks Online in new countries that introduces new opportunities for us to grow the customer base, but right now in terms of the aggregate number that you talked about that’s the we are viewing it and we think there is only upside potential there.

Great and maybe one very quick short last one on tax, just curious do you have any view as to whether the additional form surrounding ACA this year could have an influence on the timing of when parts of the filer base might actually file thinking that it could trade even more delays for a portion of the filer base, what are your thoughts around that? Thanks.

Yes. Ross, I think this is one we are going to have to wait and see how the consumer behavior plays out. I mean obviously we feel very good as we are heading into season with what our team has been to able to achieve and what we have tested over the summer. For the majority of our customers the only thing that we will have to do is check a box to be compliant with ACA. And then for those who actually have the Form 8962, we have turned that into a simple interview like question just like we do in TurboTax and we think we are going to make that pretty simple as well. Now whether or not someone sits at home and waits to file because they are trying to process the healthcare implications that something no one knows we are just going to have to wait and see. But we haven’t seen any behavior so far that tells us that that’s a guarantee.

Great. Thanks again and congrats on the numbers.

Great. Thank you.

Thank you. And our next question comes from Scott Schneeberger from Oppenheimer. Your line is open. Please go ahead.

Thanks. Hi guys. I hope you can hear me this time. I am going to ask two questions upfront just so I don’t get before I get dropped in a bad spot. First one, Neil I know retention is very important to QuickBooks Online over the long-term if you can just elaborate on that and who things are going near-term, just any comments on retention rate? And then the second question is just progress on your Check acquisition from earlier this year and you gave a little color on one of the two acquisitions you made in the quarter, maybe discuss the other one please? Thanks.

Okay. Do you want to talk about QBO retention? I will take Check.

Yes. You are right, Scott, retention is probably one of the biggest levers we have to improve the lifetime value of QuickBooks Online long-term as one of the things we are critically focused on. We were really pleased with our retention numbers for Q1 and we are looking hard to see what we can do to increase and improve that as we move throughout the year. There are number of things from the quality of the release when it goes out to our care experience to the agents and we have talked about it back in August that we have moved a lot of our care resources back onshore. We think that’s a critical part to ensuring that customers who are using QBO get the benefits and the experience that they expect when they subscribe and keeping them in the franchise. And as you well know, it’s much easier to drive engagement and to be connected to those customers when they are using it online. So, we like where retention started out in Q1. We think there is still opportunities to improve that and we certainly want to keep it high.

Yes. And Scott, it’s Brad. I will take the Check acquisition. I was just in Israel visiting the team last week, very excited about the opportunities here. We sequenced and prioritized the work that they are taking on in the first year. Anytime you bring two companies together, there is new ways of working together, you want to work through. So, their number one priority right now is getting the Check Bill Pay capability built into Mint, renamed as Mint Bills. They are also working with our Quicken base to do the same thing and we have a team working in concert with QuickBooks Online to begin to look at ways to facilitate payments between consumers and the small businesses to use QuickBooks Online. So, those are their top three priorities in that order. In terms of the teams coming together and how the employees are feeling, they are very excited, they were energized to be a part of this process and they see big opportunity ahead of them. And so we are pretty bullish right now on the Check opportunity.

You mentioned KDK that was the other acquisition we did….

Yes, go ahead. You can do.

Yes. The other acquisition Scott was a company called KDK in India and this is a company that does professional tax software in India, but the interesting thing about them to us is they have relationships with over 20,000 accountants in India, which as you know is a key means for us to get deeper penetration with QuickBooks Online. So, we are delighted with that. The team that came over from KDK is very engaged, very excited to be part of Intuit. And we are really just getting started, but we are delighted with the ability to reach more accountants with QBO and therefore small business customers through the accountant relationship.

Great. Thanks very much guys.

Alright.

Thank you. [Operator Instructions] And our next question comes from Michael Millman from Millman Research. Your line is open. Please go ahead.

Thank you. I am following up on your discussion about during this summer working with some of your tax clients regarding ACA whether you get or can describe fear or no concern about doing it on the parts of at least those you spoke with. And in the last two years could you tell us the percent I am sure I guess repeat the percentage of your new tax users that came from assisted trying to get some notion of how important that is and whether that could be delayed because of ACA?

Okay. Mike, first of all, in terms of the tests over the summer what we found was a great sense of relief. While it’s clearly something that sounds complicated on the surface and many of our competitors are trying to make that more complicated and scary when then get in and find just how user friendly the tools are like the Affordable Care Act calculator, our TurboTax exemption check process we can go in for free and see whether or not you are qualified for an exemption to the penalty. There is a tremendous sense of release – relief. And ultimately as you know about 100 million people visit TurboTax.com every year. So we have got a large audience coming in and I think we are able to break through that fear, uncertainty and doubt with very simple tools and ways to help people understand this isn’t a scary that some people would like you to believe. The second piece of it is – sorry you want to – you got to go ahead?

You were asking about the share we took from assisted Michael?

Yes. Go ahead.

Yes. So this is Matt. When we look at the category overall within software we took a couple of point of share. As you can see the software category grew about 5% last year a little better and assisted was roughly flat. So we think we took share across the board and we will continue to. One of the things we want to focus on is driving an experience online for our customers that gives them the confidence to do it themselves at about a quarter of the cost of going to assisted, so that will continue to be our focus.

Okay. So is it fair to say that you don’t see those on assisted staying where they are because of some uncertainty?

Michael, we don’t believe that’s the case. We have shared before that when you look at when Massachusetts introduced the similar concept years ago there was no behavior change in terms of people wanting to stay entrenched or even switch methods. We continue to see a shift towards do it yourself software and we believe that’s going to continue to be the case here with the federal program of the Affordable Care Act.

Alright. Thank you.

Gentlemen I am showing no further questions at this time. Would you like to close with any additional remarks?

Yes. Saeed, I would. I just want to thank everybody for the questions today. We are off to a strong start. We are clearly building momentum and we are looking forward to our peak season which is coming up in the next couple of months. We want to wish everybody a safe and happy holiday season and hopefully we will get the chance to speak with you soon. And with that we will sign off. So thanks a lot.