Intuit Inc. (INTU) Q2 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Sayeed and I will be your conference facilitator. At this time, I would like to welcome everyone to Intuit’s Second 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 would now like to turn the call over to Mr. Matt Rhodes, Intuit’s Director of Investor Relations. Mr. Rhodes, you may begin.

Thank you, sir. Good afternoon and welcome to Intuit’s second 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 2014 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’ll turn the call over to Brad Smith.

All right, thank you Matt, and thanks to all of you for joining us. It has been an eventful few weeks at Intuit and I suspect you have lots of questions. Before we get to your questions, I would like to provide as much context around the recent events as possible while keeping the bigger picture in mind. The bigger picture is straightforward. Our financial results are strong through the first half of fiscal 2015 and we are reiterating our guidance for the full fiscal year. Furthermore, our small business momentum has taken a step rate change in a positive direction. The growth in our QuickBooks Online subscriber continuing to accelerate at a very healthy rate. With that said, I know the tax is on everybody’s mind, given the time of year and the recent press coverage. So let me start there first. At the highest level, our tax strategy is on track. We are in the second year of a multiyear journey to achieve our product vision of taxes are done. This year’s TurboTax significantly expanded its data import capability. Nearly 75% of customers can now digitally import W2s directly into the product that is up from less than 30% last year. This is a huge step towards our vision if taxes are done, making tax spreads easier and more accurate and this has led to several points of improvement and conversion for customers who choose to import their data. The TurboTax experience now uses more advanced data driven insights to tailor the interview to your unique situation. We refer this as responsive experience and is saving significant time and questions off of the average taxpayers preparation experience. In addition, TurboTax users can now seamlessly move across platforms, working online on tablets or on smartphones with the ability to start, stop and continue their taxes on the device of their choice. And for the first time ever Americans with more straightforward tax needs were able to file both their Federal 1040A or 1040EZ returns as well as their state returns for free. This was a powerful offer for this 60 million Americans, many of whom with paycheck-to-paycheck and count on their tax refund as being the biggest paycheck that they will receive in the year. The collective impact of these innovations is showing up in the customer experience. So far this season, our ability to convert those who visit the TurboTax.com website and to those who file a return is up a couple hundred basis points. This improvement is on top of a big advance in conversion that we drove last year as well. Our net promoter scores for TurboTax Online are also up about a half dozen points, which is quite encouraging. This improved product experience is helping reduce customer care calls, which were down roughly 20% year-over-year. And when it comes to the Affordable Care Act, we worked hard to ensure that all tax payers could easily and accurately meet the new ACA requirements with TurboTax. Unlike some other tax services, TurboTax includes all the necessary healthcare forms for free. We don’t see any evidence that ACA is driving TurboTax customers to other tax prep solution. In fact, the ACA section of our product has been one of our highest converting tax topics this year, which gives us confidence that our ACA implementation is meeting our customers’ needs. Translating the sum total of these initiatives, total TurboTax units grew 11% through February 14 versus the comparable prior year period. TurboTax Online units are up 19%, while TurboTax Desktop units are down 7%, which takes to me the recent events of the past few weeks, which has not been our best in terms of customer confidence. There were no excuses when you make a mistake and we owned our mistakes and taken steps to make things right. At the same time, we’ve been at the forefront of the ongoing battle to fight fraud in the U.S. tax system, navigating lots of misinformation along the way. Let me share some important context around both of these events. First, let me address the change to the TurboTax Desktop product lineup, which we subsequently reversed. We didn’t live up to our customer expectations and our net promoter scores are down for the TurboTax Desktop product as a result. So why do we make the change in the first place and what have we learned from the experience. I don’t need to tell anyone on this call that we are in the midst of a massive platform shift of the cloud, and every established technology company is dealing with the balance of serving customers on legacy products while advancing their efforts and serving new customers on the next generation platform. It’s no longer a desktop software world. Our computers no longer come equipped with optical drive and shelf space allocated software is down 50% in retail stores over the last five years. But that said, a subset of customers simply do not want to move to the cloud. Many of these are long-term loyal customers, who have used the same product for 20 years, which is why we've always been steadfast in our position that we won’t push a software delivery model on a customer. With that context what happened? Well, last year, we had moved to a complexity baseline up in our TurboTax Online portfolio, steering customers to the best offering for their particular tax situation. This included moving Schedule C, D, E, and F from the looks into our premier and our home and business solution. These are the schedules that enable to file or to report items such as investment gains and losses and small business expenses. Our goal was simplification. So customers were clear, which product was right for their particular tax needs. For over 20 million online customers last year, the implementation went smoothly. So this year, we thought to complete the alignment by making similar changes to our desktop offerings. Our goal was to streamline product development and bring any new innovation from our online product back to our desktop customers as well. And for those who might eventually choose to migrate to the cloud, they would enjoy a consistent and familiar product experience. Good intensions but misinformed. These loyal long-time desktop customers simply didn’t want a different product experience. And they certainly didn’t want to have to upgrade and pay a higher price for the functionality that they have always had in the looks. In addition, we didn’t make the communication clear enough and we didn’t make the transition easy. For the 3% of TurboTax customers who were affected, it was simply unacceptable and they were right. So here is what we’ve done. Following a very public and heartfelt apology, we announced that next year, we will offer the TurboTax to looks Desktop software that our customers know and love, restoring all the forms that they've counted on for years. Returning Deluxe desktop customers who need to upgrade this tax season are now able to do so seamlessly within the product for free. More importantly, what lessons did we learn? First, know the customer. We're a customer back company and we didn't effectively apply our own expertise to this situation. Second, ease to transition; if you're going to make product changes, make sure you have early dialogue with the customers and make the transition slowly. And finally, act quickly and decisively. When you hear noise, assume smoke means fire and jump on the situation fast. Which takes me to the more recent news surrounding the concerns of increasing fraudulent activity in the U.S. tax system, particularly at the state level. As we have shared on many occasions, the privacy and security of our customers’ data is the top priority in our Company. We've been working for years to apply the most advanced technologies and techniques to ensure the safety and privacy of our customers’ information and we have been doing this in conjunction with the overall industry and with government as well. I was just in Washington three weeks ago, giving a key note to more than 100 policy leaders on this very topic. In more recently, Intuit and some states saw an increase in suspicious filings. As a result several states communicated their intention to stop accepting TurboTax e-file. So we took the precautionary step on Thursday, February 5th to temporarily pause the transmission of e-file state tax returns for all states. After our preliminary examination of the recent activities with the help of a third security expert was concluded. We believe and we continue to believe these instances of fraud did not result from security breach of our systems and the information being used to file fraudulent returns was obtained from other sources outside the tax preparation industry. We implemented targeted security measures to combat the type of fraudulent tax activity that we were seeing. These additional steps included the implementation of more advanced multi-factor authentication, which is a proven technology for protection against identity theft. With these measures in place, we resumed e-filing with the state the next day. Once, we felt comfortable that our customers’ privacy and security were not at increased risk. And we're continuing to work with the state as they build their own anti-fraud capabilities and we will continue to share best practices as we work towards the common best interest of the taxpayer. To assist any customers, who are victims of tax fraud, we’re providing a dedicated toll free number with direct access to specially trained identity protection agents, who will provide comprehensive support and filing assistance. So to summarize consumer tax, the underlying health of the business and the product innovations that we're delivering are having a meaningful impact on the customer experience and on our result season today. With that said, we suffered a self-inflicted wound on the desktop line-up situation, and we are leading the battle against an industry wide threat of cyber fraud targeting the US tax system. And all of this happened within the first few weeks of a 100 day tax season. But there is plenty of time left on the clock and if you look at the scoreboard so far, you'll see that the IRS data through February 6th shows that self-prepared e-file growth was up 70%, contrasted with assisted e-files down 4%. This leads us to believe that the do-it-yourself software category continues to gain share. TurboTax e-file growth and other third party data also indicate that we’re gaining a couple points of share so far this season. So we’re keeping the bigger picture inline and we’re going to emerge from both of recent situations wiser and even more focused. Which takes me to the pro-tax side of the business, where we’re seeing positive early trends and customer acquisition. In addition, we’re delivering more innovation in pro-tax than I have ever seen in my time at Intuit. We provided tools and training for our pro-customers to manage the ACA situation and to help their clients achieve the best possible outcomes. We’ve refreshed TurboTax Personal Pro, which we used to call CPA Select, and we expect the new interface and the accountants’ engagement tools to drive growth. We’ve launched Intuit Link, a data and document collaboration tool for accountants that save time and simplify the accountants to client communication and we’ve enabled eSignature capabilities that help accountants streamline their work and securely transmit signatures on important forms. I realize that I don’t need to remind anyone that it’s early in the season for both of our tax businesses, but I will. We’re staying agile and I am very pleased with our products and our pace of innovation. We’re focused on improved execution and delivering for our customers and shareholders for the remaining season. Now, let’s talk small business. As I foreshadowed earlier, the QuickBooks Online ecosystem continues to build strong momentum. We grew total QuickBooks Online subscribers by 50% in the second quarter that is up from 43% growth last quarter. We added 100,000 QBO subscribers quarter-over-quarter and we now have 841,000 paying subs worldwide. Outside the U.S. QuickBooks Online subscribers were up more than 170% to a 127,000 in line with last quarter’s rapid growth. Our QuickBooks Online customers continue to add payroll and payment solutions at a healthy clip. In the U.S., our new customer online payroll attach rate was 21%,. This is a step down from roughly 30% last quarter, but it’s due to a change from an opt-out payroll signup to an opt-in. We expect our attach rate to be in the low 20s over the next few quarters but we expect to see improvements in retention as a result of this change. Our online payments attach rate was 8%, which is up from 7% a year ago. To help fuel our international growth, we made two acquisitions in the past quarter that will add key features and functionality to the QBO ecosystem and targeted geographies. In the UK, we acquired Acrede, a provider of payroll solutions with global compliance and data security. They are easy to use cloud technology can be customized to deliver payroll across multiple geographies. We also acquired ZeroPaper, a developer of fast and mobile financial management tools for entrepreneurs and micro businesses in Brazil. In addition to these acquisitions, we launched QuickBooks Self-Employed, designed specifically for the rapidly expanding population of freelancers and independent contractors. As you may recall, there are roughly 12 million of these businesses in the U.S. Our QuickBooks Self-Employed Solution helps the smallest of small businesses, manage their finances throughout the year, and provides integration with TurboTax to simplify tax reporting. These sole proprietors generally don’t see a need for all the functionality and traditional QuickBooks online. They simply need to keep their personal and their business expenses tracked and separated for tax time. This product is gaining real momentum and I’m excited about the partnerships we recently announced with Stripe, Uber, Lyft, TaskRabbit, and others all centered around this particular market. We’ll continue to add partners to expand our presence in this rapidly growing on-demand services marketplace. So in total, it’s been an eventful first half of the year and it has been a strong first half as well. I’m inspired by our team’s commitment to overcome obstacles, while continuing to reimagine the tax prep experience in both our consumer and our pro-tax businesses and you’re going to see much more innovation from these teams over the next few years. On the small business half of the house, our small business subscriber growth is accelerating and we remain focused on global customer acquisition, all being powered by cloud-based services. With that overview, I’m going to turn it over to Neil to walk you through the financial details.

Thanks, Brad. First, I'll start with overall company results, which all came in higher than our guidance. For the second quarter of fiscal 2015, we delivered revenue of $808 million, up 3%, a non-GAAP operating loss of $20 million, a GAAP operating loss of $98 million, a non-GAAP loss per share of $0.06, and a GAAP loss per share of $0.23. These factors reflect our strategic decision to deliver ongoing services and releases for future desktop offerings. As a result, revenue for future desktop software licenses will be recognized as services are delivered rather than up-front. As we discussed previously, approximately $400 million in revenue will move out of fiscal 2015 into later years. The impact and quarter seasonality of this shift varies by business unit. The business with a shift is hardest to understand from an external perspective is probably professional tax. I’ll provide some data to help with modeling of the pro-tax business in a moment. Turning to the business segments. Total small business group revenue declined 1% for the second quarter. Again reflecting the impact of changes to the desktop product resulting in ratable, rather than up-front revenue recognition. QuickBooks total paying customers grew 20%. Small business online ecosystem revenue grew 26% and customer acquisition in our online ecosystem continues to drive growth. QuickBooks online subscribers grew 50%, accelerating from last quarter’s growth rate. Online payroll customers grew 23%, online active payments customers grew 3%, and online payments charge volume grew 20%, driven by an increase in charge volume per customer. Payments customers attached to QuickBooks Online grew over 90%. We’re focused on growing payments in the QBO ecosystem while de-emphasizing other services such as standalone GoPayment’s customers. Rounding out the online ecosystem, Demandforce customers grew 18%. Our primary goal is converting non-consumption to capture a larger share of the 29 million small businesses in the U.S. and millions more around the world. To do this, we’re leaning into QuickBooks Self-Employed which is part of our QuickBooks Online lineup as – and is included on the QuickBooks Online Subscriber line on the fact sheet. We had approximately 4,000 QuickBooks Self-Employed paying subscribers at the end of the second quarter. We’ll continue to call out the growth of this subscriber base over the next few quarters. Moving to the desktop ecosystem, QuickBooks desktop units declined 26% in the second quarter as we continue to emphasize QuickBooks Online. More than 80% of our new QuickBooks Online customers are new to QuickBooks rather than migrating from desktop. Within the consumer group, consumer tax revenue was up 54% versus the second quarter last year as we benefited from an earlier start to the tax season this year. As you may recall, last year IRS opened e-file on January 31, pushing revenue into our third fiscal quarter, so this year we’re returning to a more normal seasonal pattern. Our strong unit growth today benefited from our Absolute Zero Promotion, and our paid mix was also a bit better than we expected. In the back half, we face a tougher compare, but we still expect units to grow faster than revenue for the season. ProTax revenue was $11 million, down 69%. As we previously discussed, we expect a revenue shift of $150 million from fiscal 2015 to fiscal 2016 due to changes in our desktop offerings. To help with your modeling, we expect ProTax revenue of about $125 million in the third quarter of 2015 and about $100 million in the fourth quarter. We continue to take a disciplined approach to capital management, investing the cash we generate in opportunities that yield an expected return on investment greater than 15%. With approximately $1.4 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 second quarter, we competed two acquisitions, bring us to a total of four transaction so far this fiscal year, totaling approximately $90 million. We’ve also repurchased $555 million of shares in the second quarter with about 1.2 billion remaining on our share repurchase authorization. We intend to be in the market consistently during the year. Our board approved a $0.25 per share dividend for our fiscal third quarter, payable on April 20th. 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. Looking ahead, we have reiterated our financial guidance and raised our QuickBooks Online subscriber guidance for fiscal 2015. We also provided guidance for the third and fourth quarters and you’ll find our guidance details in the press release and on our fact sheet. As a reminder, we will provide our next tax unit update in April, soon after the tax season ends. And with that, I’ll turn it back to Brad to close.

All right, thanks Neil. I know we’ve taken sometime here to cover a lot of turf, but I hope it’s been helpful context in advance of your questions. We have a lot of opportunity in front of us and at the end of the day, it all comes down to great people and I like what I see in our company’s culture and in our employees. It is truly my privilege to be able to serve alongside them each everyday. So with that, let’s open it up to you to hear what’s on your mind, Sayeed?

Thank you. [Operator Instructions] Our first question comes from Brent Thill from UBS. Your line is open. Please go ahead.

Good afternoon. Brad, on the tax side, you mentioned the conversion rate went up year-over-year. I’m just curious if you could give everyone a sense of what that conversion rate is today and what do you think you can do to continue to drive those conversion rates going forward?

Yes, Brent, thanks for the question. First of all, we would like to wait till the end of season and then at Investor Day we will share with you the year-over-year comparison and conversion rates and one of the reasons we want to do that is we’re getting better every week. One of the things I mentioned in the opening remarks is the responsive experience, which is our ability to actually look at the kinds of information that we can see in your tax return and compared to others like you and truly streamline the interview process. And so that’s enabling us to get more conversion out of people who are coming in and starting to return and getting them all the way through the end where they actually hit the send button. The other thing that we’re able to do here is we’re looking for areas where there were historical problems with entering data and then with the electronic import capabilities that we continue to advance. We’re getting a lot of that work done for you so reduces friction and it is a combination of those things, which we call the taxes are done, which is really improving our conversion and I will tell you the teams truly are making improvement week over week and we will see how we finish up the season.

Great. And just real quick for Neil, given some of the renewed focused on the cyber issues that are going on in the industry, there is certainly been a lot more investments that the companies have been having to make to protect themselves. I would assume given you haven’t changed the year on the bottom line that many of these increased investments around the cyber trend there are included in your guidance?

Yes, Brent, clearly that is a very important issue for us and so we are providing all the funding that we need in those areas. Anything that was not included in our guidance for the full year, we expect to reallocate from other investment opportunities within the company. So we have given a lot of thought and consideration, before we reiterated guidance for the full year.

Thank you.

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

Hi, yes. Thanks for taking my question. One more on tax, I mean clearly the numbers surprised as to the upset, especially given some of the bad press that we’ve seen in the market. Can you talk to whether or not that actually has been head wind to the business? And if it has what has more than offset that you mentioned conversion. But what are some of the other areas or we are just assuming that the headwind on some of the bad press is just overblown? Thanks.

Well, Greg, first of all we are not Hollywood and so unlike Hollywood for all PR is good PR. We certainly don’t like to have negative press out there about our product or have any of our customers frustrated. I think the first piece is the desktop lineup changes, we knew we made a mistake when we started hearing the feedback from the customers. But it’s important to understand that affected 3% of our TurboTax customers. So while the noise was out there and the press coverage was pretty strong, it really wasn’t a significant number of customers. And we worked really hard to get in touch with each and every one of them and to they make it right. And so I’d say first of all the scope of that wasn’t a significant as the press may have played it out to be. But from our perspective we took it very seriously, because every customer matters. And the second is on the industry-wide threat of cyber fraud attacking U.S tax system. This has been an industry-wide challenge. It is not a company specific challenge, despite some of the early press clippings, whether you look at our own competitors issuing open letters from their CEO and major newspapers. Or you know the IRS has been working with the industry since 2012 to solve this or even the state of Montana issuing in some press release last week, saying, hey this is happening to more than one company. I think most people understand that we are progresses, we are applying the most advanced techniques and at the end of the day they trust into it that we are going to process their information and protect the privacy and security. So I think the important thing here is the issue of cyber fraud is a threat to the tax system. We’re one of the many players that want to be a part of the solution, but you have to separate the signal from the noise. The press is not representative of what we’re seeing and as a result I think what you’re actually seeing in our business results, our customers trust our brand, our product is even much better than it was last year, so we’re improving conversion and that plays out in the marker place and that’s why you see stronger tax results then maybe what the press might may have led you to believe.

Great, thanks Brad.

All right. Thank you, Greg.

Thank you. Our next question comes from Walter Pritchard from Citi. Your line is open. Please go ahead.

Thanks, Brad, I’m wondering on the – you had a nice acceleration in the QuickBooks Online subscribers and you added about 100,000 in your guidance for the third quarter actually assumes you fewer than 100,000. If I look at prior desktop seasonality, back when it was a pure desktop business, you’d actually see a nice pickup from Q2 to Q3 in terms of subs. I’m just wondering is the seasonality change or is there some factor that you think drove Q2 that is a repeatable as we look into Q3 for sub adds.

We know that each of our businesses do have cycles to them and in small business we do see a larger group of people buying heading into the New Year. And then it tends to tail off a little bit into the latter half of that, our fiscal year, so heading into the spring and summer. The desktop will throw you a little bit out of whack there QBO was more of a realtime consideration and you have a mix today of more service based businesses, because we’re still building out advanced inventory to the mix of the kind of customer and QBO is slightly different than desktop. But right now what you are going to see is – we’re still in the early learnings of just how big QBO will be in each of the quarters. This is our best forecast for the fourth quarter and it really reflects the slightly nuance differences and the service based customers in QBO versus more inventory based in desktop and the second is there is a seasonal pattern to win the peak periods are for QBO, just like there is and some of our other businesses.

And just Brad, a follow up on that. So you given a number I think out of fiscal 2017 of two million subscribers and you talked about – about two thirds I’m sorry three quarters of those coming in though new customers and I’m wondering if what you learned in the second quarter especially on that last part the mix of customers coming in new versus installed based conversion, if there is any change in your view in terms of the long-term?

At this time Walter, we’re not changing that long-term view, that two million subs, our aspiration is not only to meet that but to exceed it. We’re continuing to see strength in new to the franchise customers and this particular quarter 80% of QBO customers were new to the franchise; about 20% were migrators from desktop. We’re doing everything we can to get desktop customers comfortable, we’re adding that advanced inventory capability, or continuing to finish off things like job casting, we’re running promotion, but as you learned from the TurboTax desktop experience I just walked through. Some of these customers aren’t going to be move in anytime soon and we’re fine with that, what we really like to see is we’re expanding the category, we’re getting new people into accounting software that never even used our product before. So right now, we are locked in on that 2 million number. And we just raised our forecast on subs this year. So we are not moving that 2 million yet. But if we continue to close in the way we are, we’ll talk to you about that in the future.

Great. Thank you very much.

All right. Thank you.

And our next question comes from Sterling Auty from JPMorgan. Your line is open. Please go ahead.

Yes, thanks. Hi Brad, you mentioned the ACA was not causing TurboTax users to leave to tax prep. I think the bigger concern that I hear from investors is whether you install to share shift in DIY. Given your prepared remarks it sounds like that is not the case I’m kind of curious if that just where we are in this part of the tax season and maybe that changes or is there something that you’re seeing that the ACA just isn’t having any impact on that, kind of category shift.

Sterling, it’s a fair question. And I think it’s still out there for many to think through. Our assertion from early on if you look to what happened in Massachusetts back in the days when Romney was governor. There was no shift between tax prep methods when a light program was introduced at the state level so our hypothesis was if we do our job, and we take the complexity and make it simple. This should not be a catalyst to the assisted category. And we worked really hard to do that. I think, the second thing is, we do know that as you go further end of season, you will see the assisted tax prep methods start to pickup a little bit as more complex returns get processed. But right now, this is about where we were this time last year with the assisted category growth through February 6 reported by IRS and then also where the DIY category was. And at the end of the season, the DIY category picked up a little bit of share. So I believe we are going to see the same thing happen this year. My last point I would say is, we anticipated, if there was going to be a big impact that ACA would impact earlier in the season. Because when you look at those, you don’t tend to have health insurance, there are often times those families that are living paycheck to paycheck they need to file early to get their refund. And the fact we haven’t seen the kind of shift that some of the industry we’re suggesting was going to happen, leads us to believe that our original hypothesis looks like it’s going to play out. We don’t expect this to be a catalyst. But we also were prepared to respond if anything changes based upon that, the balance of the season.

Okay. And then just one follow-up and you touched upon in your answer there. Can you help us understand given the timing differences on when returns are starting to be accepted et cetera. We end up with a lot of numbers over different periods of time. So lot of apples and oranges kind of reiterate for us what you think the tax season growth will be for the tax business? And kind of what the results that you just reported meanings in terms of hitting those goals?

Yes, Sterling. Also two things here IRS data through February 6, reported the category the self prep DIY category, digital category with that seven and system is down four. If I take our numbers and right now we reported the February 14th, if I move them back and make them apples-to-apples, the number of e-filed returns we submitted through the same date the IRS put their data out, we’re up 13%. So right after that, you can just do the math and say, okay, we’re growing 13, the categories growing 7, it looks like TurboTax is picking up some share. And that’s kind of where we were last year too. If you step back and look at our assumptions for the full season, our forecast were based upon the IRS total returns growing about 1% and right now that’s what the IRS has reported so far through February 6. The second as we anticipated that the do-it-yourself category would pick up about a point of share out of the total returns filed. Right now through the results of February 6th, it’s up almost 3 points. So it’s a little bit higher than that, but we know it works through the balance of the season, it does start to shift a little more to assisted, so that'll come down a little bit if history plays out. The third lever we assumed is that we would pick up share and so far the data suggest that we picked up several points of share, but we also know we came off of a very exciting program called Absolute Zero. So we’re going to say if we can hold our ground for the balance of the season and the last pieces revenue per return. We fully expect the customer growth will outpace revenues. We don’t expect that to be a big catalyst and that adds up to the 5% to 7% total guidance we gave for consumer tax. I know there is a lot in there, but I hope that parse the numbers out and gave you apples-to-apples of us versus the IRS and then what our assumptions were.

That was perfect. Thank you guys.

You’re welcome.

Thank you. Our next question comes from Ross MacMillan from RBC Capital Markets. Your line is open. Please go ahead.

Thanks a lot. I have two, so first on consumer tax, a lot of price changes this year across the portfolio. And Brad you’ve said a couple of times, you expect units to grow faster than price,. But by my math so far this season it looks like revenue per unit is a bit higher than last year and I’m a little surprised that just because you’ve obviously got the Absolute Zero program going on. Any comments on that – is my math right and any thoughts around that so far?

Ross, your math is right. As Neil was going through his opening comments, he said not only we have an exciting program with Absolute Zero, but our actual paid mix is higher than we had forecasted. A part of that is driven by the complexity base lineup we move to last year where we were trying to help customer to get into the right product. And so in TurboTax Online that’s actually helped us to get customers to the right product. And as a result our paid mix is healthier. People are getting to the Deluxe and the Premier versions of the product, which is where they should have been all along. And that’s one. Another one is just simply conversion and attach as we continue to make it more seamless and you’re able to find services that are important to you. We’re able to make that mix healthier as well. So those two things are adding to slightly higher revenue per return at this point in the season, but as you know, we still got about 60% of the season yet to go. And so we’re going to see how the ultimate assumptions play out when we’re done on April 15.

That’s helpful. And then just a quick follow-up on the small business side obviously with the introduction of self-employed and as you are pushing into international markets, there going to be quite different dynamics around ARPU or revenue per subscriber. Just from a big picture standpoint, how would you have us think about that as we progressed through this transition because I think right now you still got that ARR number on small business online ecosystem growing at a pretty nice clip.

Yes, Ross, I want to let Neil take that. I want to Batman to have a chance to speak here. I tend to halt the airways, so we’ll turn it to Neil on this one.

Yes, so you’re right Ross. I mean as you look at the self-employed product rolling out and products growing globally where we have less attach opportunities, you’re going to see the ASP be slightly coming down for QuickBooks Online ecosystem overall. We modeled all that in to the lifetime value equation we shared with you back at Investor Day and we’ll update as we get in at the end of this year. We’re closely monitoring how different things are impacting that as you heard us talk about on the call today. We like what’s happening with the tax particularly in the U.S. We made some acquisitions that will help us get to payroll faster outside the U.S., which will help those assumptions. And we’re waiting to see how well we do with the self-employed product that we’re excited about this point, but it’s still very early days. So the short answer to your question is that the lifetime value equation that we gave you back in Investor Day last year is still good at this point and we’re assessing as we go through each quarter the puts and takes and we’ll update that for you at the end of the year and kind of show you how it migrates from one to the other, but look for higher attach rates in the U.S. improved retention to mitigate some of the downward pressure you would see outside the U.S. where you don’t have the same attach opportunities and our product like QuickBooks Self-Employed, which clearly has a lower ASP and lower attach opportunity more likely than the traditional QBO product.

That’s very helpful. Thank you.

Thank you. Our next question comes from Kartik Mehta from Northcoast Research.

Hi, Brad and Neil. Brad, you talked about your desktop customers about 3% being impacted by the changes. So do you think the decline you saw in desktop 7% is the majority of that just people transitioning to online? Or I guess how would you parse out kind of the changes and then clients impacted versus transitioning to online?

You know, Kartik, if you look at the last five years of TurboTax desktop, the average has been a 3% decline, but two of those five years, the desktop was actually down about 6%. So it’s happen to be the two years where there’s a delayed opening to tax season, so it ramps up a little bit later. But I would tell you our 7% decline season today is reflective of just an ongoing secular trend that people moving out to desktop to the cloud and it’s probably in that 3% to 4% range and the rest of it honestly I think was just the result of us having made a bad decision on a desktop line-up and we’re going to have to work hard to earn those customers back. And so that’s the truth of it about half of it is secular shift to the cloud and the other half is a self-inflicted wound that we're going to fight for and try to get those customers back.

And Brad on the QBO side you said – I believe you said 80% are new to the system. As you look at those customers, are they new businesses or they existing businesses that are now switching over to QBO?

It’s a combination of both. New to the world businesses are finding it a lot easier to come in now and get up and running from any device they want to use including a tablet or a phone. And the other our existing businesses that historically have been using Excel spreadsheets. And so, it’s really a mix of complete new to the world and then those are new to the category.

And just one last question, Brad. Have you seen a change at all in your cost to acquire QBO clients based on the type of customers you’re getting and maybe if you see another competition out there?

We continue to see an improvement in our cost to acquire customers. As the accountants are getting more comfortable with QBO, the new re-imagined version, they’re recommending it and of course that recommendation leads to a faster, yes, from the small business side. We’re also getting better SCO and SEM and so ultimately our direct channels are more efficient and our account referrals are building [indiscernible]. And outside of the U.S. as were in each of the countries we are in brand building mode so the cost of acquire is more expensive in those countries but on a quarter by quarter basis, we’re seeing the efficiency come in there as well. So you put it all together and our cost to acquire is getting more efficient regardless of the competitive dynamic in any of those countries.

Thank you very much, Brad. I appreciate it.

All right, thank you Kartik.

Thank you. Our next question comes from Raimo Lenschow from Barclays. Your line is open, please go ahead.

Hi, thanks for taking my question. I wanted to stay on QBO. You have seen an acceleration of subscribers – of subscriber growth ever since you launched in your harmony of product. And how do you think about where that is going to max out what are the puts and takes to say like okay 50% of something, we think it’s good or can it go to 60% or 70%. I mean just – you know at some point, we’re going to hit kind of a number where you won’t accelerate and I just want to kind of be ready for that. And then also can you talk a little bit about the international business in terms of what are the stronger – which countries did you like and where the performance could have been better? Thank you.

You’re welcome. I wish that I had answer for your first one. I’d like to know when that’s going to max out too, not because I am anxious to get there, but I just want to see if we can blow past. You touched on it. We’ve had half dozen quarters here. Now, we’re continuing to accelerate quarter over quarter and we’re feeling very good about the trajectory. So right now, I can’t tell you that we’ve got a flat line that we drawn out because we think we’ve got a lot of opportunity ahead of us as we’re expanding the category, I wish that could be more helpful on that one. At global markets right now, with the acquisition we just made of ZeroPaper in Brazil that takes us into a new country that is now our sixth country, so we have Canada, the UK, Australia and India, before we’ve been talking to you about historically. We mentioned at Investor Day, we were doing a Greenfield launch in France and now with the acquisition of ZeroPaper in Brazil. In terms of the country, these one have had different characteristics. The Canada business is rocking and rolling. It continues to grow more profitable. As we look at the UK that is a very competitive market right now with many players over there, some established, some new. We continue to accelerate our quarter-over-quarter performance, but we still have work ahead of us to get into the number one position in that market. In Australia, of course, that is – somebody else’s home court. And so we’re there in an aggressive fashion to show that we can play in the most contested battlefield there is. And so far that has been our fastest growing market – by the fact you would expect that to be in the place where we’d have the most hostile environment. India is Greenfield. We’re truly creating the cloud category there because almost everyone there is desktop and quite frankly many of the products have a DOS like feel to them. And so we’re currently trying to create the category and get people comfortable at the cloud in India. France and Brazil are going to be our newest entries and right now we’re in the early learning phases there. One we’re doing organically, where we’re taking QBO and we’re literally localizing it and then rolling out in the market and in Brazil we’re doing it inorganically with ZeroPaper. And so each of the countries has a different set of characteristics. You put them all together and we’re growing 170% and we’re felling very good about our global trajectory and the fact is that we’re getting more efficient than our cost of acquire each and every quarter.

Alright, thank you.

All right.

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

Great, thanks for taking my question. Brad turning back the clock to February 6th on tax, it’s nice to see you’re taking share based on that 30% growth in returns that you have shared. Do you have any insight or thoughts on where the shares is coming from even just broadly weather from the larger or smaller competitors?

You know Brad, we really don’t at this point. None of our competitors as well tax act did report as a part of Blucora, but there wasn’t a lot of data that was shared there. They kind of reiterated their guidance for the season. The other major competitor is not going to be reporting until I think March. And so once they get their data out there and then we have [indiscernible], we’ll be able to have a better way to triangulate, but today I would tell you – it was just be speculation on my part.

Okay. That’s fair enough. If I could follow-up with one more on the change in new QBO payroll attach, going from an opt-out to an opt-in model. Could you maybe just give us a little more color why the change and talk about the impact of the bigger picture?

Yes, sure. I can Brad. What we try to do is, make it very seamless for you to come in sign up for QBO and have payroll included. What ended up happening is a portion of customers would come in and they would find in their first bill that they were paying for payroll. And in many cases, they didn’t have a need for payroll, if they didn’t have employees or they were using in other service and it became a point of frustration for them, they would drop customer care calls or in many cases they would just cancel their subscription. And so what we realized was, we weren’t clear enough and it was confusing. So instead, what we done is, we move to an opt-in model. We’re based upon certain moments in needs, you’re adding an employer, and you’re going into the employee tab we are able to basically make it more elegant to say, hey, do you want to have this payroll service. What we are seeing right now is, we’ve got cohort analysis and we are actually seeing an improvement in our retention. The couple of 100 basis points, and that’s one of the biggest leverage you have in a subscription business is improving your retention. And while we’re taking a step back because I think we had a false positive when we were out there in that 30% range of attach. We’ve taken a step back into the lower 20s. We’re actually improving the retention and we think that’s going to add up to a much healthier franchise over the long-term.

Thank you so much.

You’re welcome.

Thank you. Our next question comes from Gil Luria from Wedbush Securities. Your line is open. Please go ahead.

Yes, thank you. I wanted to ask about the impact of the true zero promotion. Have you seen a higher percentage of your online TurboTax filers in the promotion versus last year. If I’m not mistaken, the promotion lasted a couple of weeks longer this year. And in obviously went down from $15 to true zero, of the $15.2 million TurboTax Online use of this year was a higher proportion – in this proportion within the promotion versus of $13.6 million from last year.

Gil, the answer is more than last year. But the paid mix is healthier than we had forecasted. So we actually got the best of both worlds. I was looking at the analysis – Neil and I sat down with tax team on a regular basis as you might imagine free tax season and they are showing us the source of the new customers. And the two biggest franchise year-over-year, which are really encouraging, our first time filers people who never filed tax returns before, and then first time moving into the category. And those are basically both saying we are expanding the DIY category of this kind of offering. And so I think this is really exciting for us because we know we can get a customer in the franchise and we can actually monetize them and grow the lifetime value if their tax situation becomes more complex. So right now, we are seeing not only a better – a conversion than last year in terms of people coming on the promotion but our paid mix is healthier than we thought as well.

Got it. And then on the – in the fraud situations did you find that those customers that were affected by fraud that somebody else filed under their information that the attrition there was higher than the rest of population was that a significant factor?

It wasn’t and I tell you why first of all I want to make sure that I will clear in the opening comments that the headline here is our customers know they can trust Intuit. There is nothing we take more sacred in the privacy and security of their data and two things are fact today one is we’re up and running and processing returns in the federal and all the states and the second is there is no breach of Intuit systems. And that is not only the result of our own analysis but outside third-parties have coming in and run all their diagnostics with us. And we’ve reached that conclusion I think with the customers the thing that they appreciate if they’ve actually been the victim of having their ID stolen from one of these other high-profile sources that we’re all reading about in the newspaper. And in fact last week in Stanford University I tend to the Cybersecurity Summit with President Obama and others. Over 100 million identities have been stolen in the last 12 months that’s people walking around with somebody else’s Social Security Number and they were attacking the U.S. tax system and trying to file these returns, and so customers understand that this is broader and what we’re doing is we’re helping them navigate the process we’re getting them access the agents who can help them get their filing done for them. And so it’s not causing an attrition issue because they recognize this is in a particular product issue this is a systemwide problem and they were appreciating the help. So we have not seeing an increase in attrition due to that particular issue.

That’s great. Thank you.

All right, thank you.

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

Hi, thanks for my question. Brad with respect to the new user attach rates I know you mentioned that due to a different changing with – different methodology the numbers looking little different. But can you talk to how this trajectory should continue so as to enable you to hit or exceed your goals for the long-term are we looking at a hockey stick type trajectory or do you think that the trends so far a more normal progression towards the attach of payroll and payment. So you can hit your ARR objectives longer term?

Yes, Kash, we do see a continuation of a normalized attach rate we put in our prepared remarks that our payroll and QuickBooks Online we anticipate will be in the low 20s in the next few quarters. We see that moving up into a healthier mid 20s and beyond as we get pass the next few quarters. But we also see a corresponding offset which is an improvement in retention. And as a combination of those things that will drive lifetime value when we step back and we look at the payroll and the payment attach rates for new users in QBO and then you look at the penetration opportunity against the base. We really do see opportunity ahead of us and we continue to see that increasing and improving quarter-over-quarter. So aside from these next few quarters of payroll as we have to grow over this opt-in, opt-out saying we do see a continuation of strengthening attach rates for our payroll and payments products which lead to that lifetime value assumption we’ll share with you at Investor Day.

Got it. With respect to the desktop QB product are there any plans to at least curtail development offer if not curtail selling of it completely and going to a maintenance mode at this point so we can get the customer base to slowly shift to the online?

I was born at night but not last night and coming off of the TurboTax desktop challenge that we just had I’ve learned a pretty important lesson there which these customers are happy with their product we have committed to making sure that if they want to stay on the desktop we’re going to support them for as long as they want to use that product. But we’re going to make it really enticing for them to get to the cloud but we have zero plans to sense of the product or to do anything that will upset them and make them decide to shop someplace else. And I didn’t mean to be flip I meant to be self critical which has make a lot of mistake that’s okay make two mistakes and somebody ought to slam my hand in a door.

I appreciate the candor and finally maybe I missed this about six months back. Did you share an ARR goal for the online business longer term fiscal 2017 or 2018 and if you did I look at it but if you didn’t I would love to hear your thoughts on that. Thank you.

No, we did not Kash, we shared an outlook for company revenue which fairly is the QuickBooks Online revenues of portion that we did not get more specificity around the overall revenue guidance number.

Okay got it. thanks a lot guys.

.:

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

Hi, Good afternoon, guys.

Hi, Jim

Hey, looking at the February 14th tax dated at that point do you think the impact of a delayed filing last year versus this year is washed out and then I don’t know if you can quantify the effect of your Absolute Zero program do you think in that data?

Yes, Jim, our assumption is that the effect of that delayed filing last year and where we’re now its pretty much washed out at this point. We’ll have to see full season how everything shakes out but that’s definitely what we’re operating from in terms of the Absolute Zero promotion we like the results so far we’re going to wait till the end of the tax season and we’ll look back and say did it achieve everything we thought it would. But so far the early data suggesting very positive for us and we like the impact of the new franchise new to the world filers coming in we like the fact people are moving into the category for the first time. We like the fact that the categories expanded and also that looks like we picked up a couple points of share and all of that was still improving our paid mix. So far, so good, but we want to wait for the full season effect to see, ultimately what the impact was.

Great and then – down in Brazil on ZeroPaper. What are your plans about using their product versus – will their product become effectively QuickBooks Online down there. What are your thoughts on how that will work in Brazil?

Yes, Jim, Brazil is a unique market they have those notion of something called [indiscernible] and it’s sort of like an invoice here, the payment methodology and then you can convert that invoice into cash and that’s was ZeroPaper has done, it’s really for what we’re doing here with QuickBooks Self-Employed it does micro businesses, but down there it’s a tool that micro businesses need to do to basically get paid. And so what we’re going to be doing is taking the product and then importing it over on to the QBO platform and think of it in Brazil becoming the entry level skew and then eventually that will lead out to our more main line QuickBooks Online product. So it will remain in market, it is a Brazil specific product, but that’s a rapidly growing economy with a lot of opportunity and we’re going to put it on our platforms, you can naturally unlock and grow into QBO overtime.

Great, thanks.

Alright, thank you.

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

Thanks Steve and Brad. Just curious on the desktop, the pricing change obviously didn’t go as you had planned and that was one of the things that was probably going to subsidize Absolute Zero. I’m just curious you guys have obviously reiterated the revenue guidance for consumer tax. So I’m curious Brad how confident are you at this juncture of the year, we know it affected 3% of TurboTax customers and we saw our volume impact. But just on revenue per return, obviously you have a lot of moving pieces, so was that a headwind and you mentioned earlier some positives on revenue per return. Could you just compare and contrast these at this juncture. Thanks.

Yes Scott, so we’ve seen some puts and takes so far in the season. The take was we reversed our decision and we’ve give the customers the upgrade for free and that does account for some revenue that we would have originally had in our forecast, the flip of that is at Neil said even with that absolute zero we’ve had a healthier paid mix than what we had in our forecast. So when you put it on the blender, it’s comes out to us having the confidence to sit with you today and based on what we see reiterate our guidance for the full year. And I think it’s really just the combination of all these things.

Great thanks and then a following-up with regard to strategy and I guess we have to see at this year completes but just on going to free state with free federal. Is that something you feel that you can reverse out in the future or now that you’re there, is it something that you think is a permanent thing?

Well, we’ll certainly take a look at how the program played out at the end of the season and if it’s an effective program, then you will see us continuing to do things that we think makes sense for customers and makes sense for our strategic goals which is growing the category and our share. If it’s not a successful program, we have found that you can make the kind of changes and those kinds of promotions year-over-year and customers understand. So at this time point it’s pretty premature for us to speculate what's going to happen with that absolute zero next year next year, but so far we like the results given where we’re in the season.

Great, thanks very much.

All right.

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

Great, thank you. Brad I wanted to touch on some of the longer term targets around QuickBooks Online subscribers specifically the increased guidance for this year and then the targets for 2017 and if you look at those I’m curious how you think about those in terms of where the business is today with 80% coming in as new to the QuickBooks’ franchise, versus what your expectations within those projections are around desktop conversions or potentially future contribution from the self-employed product?

Yes. So Jennifer this is as we’re sitting here and speaking we’re looking at the assumptions we had and then what’s playing out in the market there hasn’t been anything that’s fundamentally different, I’ll give you a couple of tweaks. One is the product is continuing to perform in a way that we’re delighted by, its expanding the category and getting first time small businesses, as well as people here are new to the accounting software category in. So we originally had assumed that we will have a slightly larger portion of desktop moderator is going to the file, that number is nice at that level that we thought but we're getting more new to the franchise customers. And so the number hasn’t changed the mix has. And the other thing is QBSE QuickBooks Self-Employed this is new for us and we’re looking to make it a global product. Right now, we don’t count those customers in QBO, if they aren’t paid subs. And we do have deals with Lyft and Uber and other that we mentioned that today is a free QuickBooks Self-Employed but then ultimate the way we monetize and if you want to send that into TurboTax we have an attach rate that this shows up in a different business unit called TurboTax. So it’s a nice little one Intuit ecosystem in place. We’ll see as QBSE growth and becomes more meaningful as it part of the paid subscribers we’ll wholly break out so you can see it. But right now, it’s only about 4000 of the total number of subs so it’s pretty immaterial. So you put all that together, we’re hoping that we’re going to get more and more desktop customers excited about the cloud if not we still feel good about our two million subs because we’re getting more people into the franchise more than we had anticipated with the new QuickBooks Online.

Great. And maybe just a follow-up one quick additional question, when you talked about where those 80% are coming from you highlighted new businesses, you highlighted customers coming off of Excel. But curious if you’re seeing customers coming off of competing small business accounting solutions that might have not chosen to go with QuickBooks in the past, given the more limited online offerings that might be making different competitive decisions today.

Well, in the U.S. and I know that everyone on the call is familiar with this. We are primarily the player in the U.S. with QuickBooks desktop. The share is over 90% then you’ve got a couple of other players. The online players are relatively new in the United States. So if we were to actually growing the category, the read and do businesses that is started because the economy is getting healthy, there are part of 40% that is still in Excel spreadsheets. And so that’s really the opportunity there. Outside the U.S. and other countries we are able to convert some customers away from some of the competitive products. But we are also getting an influx of people coming off spreadsheet there too. But the mix is a little more – its more people coming from competitors and what you would see in the U.S., but by and large a lot of them are still new businesses and Excel spreadsheets.

Thank you.

All right.

And our next question comes from Michael Millman from Millman Research. Your line is open, please go ahead.

Thank you. Looking at fraud on online, can you talk a little more about the EITC fraud, which I guess has been ongoing and certainly block has been doing battle with that and got to move from Congress. And then secondly, and related to tax, can you talk about whether you’re seeing changes in lifetime value for the tax systems depended upon – or at least over the several years as you move more and more starting with zero or absolute zero currently. Thank you.

Hi, Mike. So on EITC, yes, I’m aware that our collected industry peers are all standing shoulder-to-shoulder and working with the government to try to take on the cyber fraud. And everyone has seen a different side of the animal and I know in our particular case the competitor you just mentioned, they are out there talking about two particular things, the need for license professionals and to keep an eye on earned income tax credit where they the observed some patterns that have been nervous as you might imagine we have algorithms and data we look at in our own. We produce this suspicious activity report and we have since 2012 that we provide to the IRS on anything that we see that may be unusual and then the IRS is the ultimate legal entity that determines whether that is a legitimate or a fraudulent return. And so as we look at our EITC data in the context of that, we’re seeing right now, that the growth of the EITC this year season-to-date is inline with our units. And we don’t see that particular category sticking out as any more suspicious in our mix today than any of the other variables we look at. But that is not to say that there is something that everyone in the industry have to keep an eye on, we just haven’t seen that particular pattern emerge in out own customer base.

Have you seen a change in that over the last three or four years?

Have we seen a change in the IT’s - I’m sorry can you just be lot more specific Mike?

Percentage of filers using EITC are collecting on it.

You know Mike I honestly can’t answer that question. I just don’t know that data of the top of my head. So I unfortunately I can’t answer the question. I apologize for that. And you have a second question which was the lifetime value piece. As you saw last year our revenue per return was down slightly as we grow our units and we grow our units faster than our revenue and ultimately our strategic goal is to expand the self-prepared category and then grow our share and we said that we would love every year and a half units grow faster than revenue because we know overtime the last ten values going to improve. The answer to your question about the individual tax payer are we seeing improved LTV? We are. But when you put it in an aggregated mix, you got a bunch of new people coming in they’re coming in at first year and absolute zero, it does inflate the revenue per return on an average. But what we saw last year moving to TurboTax Online with this new line up, we’re getting a healthier mix, have paid. I think that’s where one of the question’s earlier that cash or someone had asked, which is, is the assumption right, I think, revenue per return being a little healthier, the answer is yes, because on an individual tax return basis, we’re actually seeing customers move up the move up the product line. So at an individual level the LTV is healthy, but in aggregate when you bring more new people in and they come in and their promotion price it’s actually deflating the average.

Thank you

Alright, you’re welcome.

Thank you, gentlemen, that is all the time we have today for questions. Would you like to close with any additional remarks?

You know Saeed, I would. And I appreciate it’s a little bit past our normal time and we were wanting to do that, because we want to make sure we regard to everyone’s question. So let me just wrap up time, we want to thank everybody for your patience today. I know our opening remarks were a bit longer than usual, but we wanted to give you as much context as we could around the two recent events. If you could take anything away from this call, I hope that you heard that me, Neil, Matt and the others feel confident and where we are to the first half of the year and we’re excited about momentum we’re building in the back half. And with that I want to thank you for your questions and we’ll look forward to catching up with you on the after calls. Take care everybody.