Intuit Inc. (INTU) Q4 2016 Earnings Report, Transcript and Summary

Good afternoon. My name is Latif and I will be your conference facilitator. At this time, I would like to welcome everyone to Intuit’s Fourth Quarter and Full Year Fiscal 2016 Conference Call. [Operator Instructions] With that, I will turn the call over to Matt Rhodes, Intuit’s Vice President of Investor Relations. Mr. Rhodes?

Thank you, sir. Good afternoon and welcome to Intuit’s fourth quarter fiscal 2016 conference call. I am here with Brad Smith, our Chairman and CEO and Neil Williams, our CFO. Before we start, I would like to remind everyone that our remarks will include forward-looking statements. There are a number of factors that could cause Intuit’s results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2015 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. Also, all reported results and guidance, except GAAP, net income and EPS, exclude DemandForce, QuickBase and Quicken, which have been sold and reclassified to discontinued operations. A copy of our prepared remarks and supplemental financial information will be available on our website after this call ends. And finally, I am excited to let you all know that I will soon be moving to Texas to lead finance for our ProConnect business. Therefore, today will be my last earnings call in the Investor Relations seat. It’s been a pleasure working with you all over the past 6 years and I will leave you in good hands. Jerry Natoli will continue to head up Investor Relations following my transition in early September. And with that, I will turn the call over to Brad Smith.

Alright. Thank you, Matt, and thanks for an amazing 6 years in the Investor Relations seat. I’ve got to tell you we are super excited to see the impact you are going to have in our ProConnect business going forward. Good afternoon, everyone and thank you for joining us. I will tell you we had an excellent finish to the fiscal year. For the fourth quarter, we delivered revenue of $754 million, which was up 8%. We have continued to build on our momentum throughout the year with fiscal 2016 revenue coming in at $4.7 billion, up 12%. Let me begin by sharing a few reflections on our business performance and I will start with Small Business. With the shift to the cloud and mobile solutions, the opening of our platform to enable third-parties to connect, and our expansion into new geographies outside the U.S., we have more than doubled our total addressable market. Our primary goal is to penetrate this large addressable market, growing our customer base and expanding share in every geography. Our Small Business ecosystem remains vibrant with total QuickBooks Online subscribers growing 41% this year to more than 1.5 million subs. We added more than 400,000 QuickBooks Online subscribers over the past 12 months. We are leaning in to new offerings, like QuickBooks Self-Employed, while continuing to post strong growth in QuickBooks Online overall. We finished the year with about 85,000 self-employed subscribers, which is up from 25,000 just one year ago. Outside the U.S, QuickBooks Online grew 45% to 287,000 paying subs. In short, QuickBooks Online continues on a strong trajectory and we are executing well against the consistent set of priorities. We are realizing our goal to be the operating system behind Small Business success, helping small businesses save time and money so they can thrive when times are good and they can remain resilient when times are tough. We are also delivering outstanding results against our other strategic goals to do the nation’s taxes. For the fiscal year, Consumer Tax revenue grew 10% with TurboTax Online units growing 15% and total TurboTax units growing 12%. We performed extremely well this past year, introducing two dozen innovations in TurboTax, which helped expand the do-it-yourself software category while increasing our share in the category as well. We fully anticipate another competitive tax season next year and our teams are already hard at work building on the next wave of innovations at a pace that promises to exceed this year. On the ProConnect side, revenue came in as expected at $428 million. Our ProConnect team is continuing to increase the focus on multi-service accountants. Those are accountants who do both books and taxes for their clients. This is in service to driving those accounting firm’s success, as well as growing our own Small Business ecosystem. To sum it up, fiscal 2016 was a strong year from start to finish. The QuickBooks Online ecosystem is driving Small Business growth and our tax businesses are celebrating a successful season. We are heading into fiscal 2017 with the wind at our backs, and we have some exciting plans underway as we look ahead. So with that, let me turn it over to Neil to walk you through the financial details.

Thanks, Brad and good afternoon, everyone. For the fourth quarter, we delivered revenue of $754 million, up 8%; non-GAAP operating income of $36 million; a GAAP operating loss of $56 million; non-GAAP diluted earnings per share of $0.08 and a GAAP loss per share of $0.16. For the full year, we delivered revenue of $4.7 billion, up 12%; non-GAAP operating income of $1.6 billion, up 36%; GAAP operating income of $1.2 billion, up 68%; non-GAAP diluted earnings per share of $3.78, up 46%; and GAAP diluted earnings per share of $3.69, up from $1.28 a year ago. As a reminder, our GAAP results for fiscal 2015 and 2016 reflect the decision to divest certain businesses in fiscal 2015 and the sale of those businesses in fiscal 2016. You can refer to our press release for more details. Turning to the business segments, total Small Business segment revenue grew 10% for the quarter and 9% for the year. QuickBooks Online subscriber growth finished the year strong at 41%, as we crossed the high end of our guidance to finish with 1,513,000 paid subs. Small Business online ecosystem revenue grew 25% for the full year and we expect some acceleration in fiscal 2017. Within the online ecosystem, our payroll and payments businesses posted healthy growth for the year. Online payroll customers grew 17%, online active payment customers grew 6% and online payments charge volume grew 15%. And while QuickBooks Online is driving the majority of our new customer acquisition, QuickBooks Desktop remains a resilient and important part of the business. Desktop units grew 14% in the quarter and 8% for the year as we saw a bump up in customer upgrades. Roughly two-thirds of the desktop units we sold in fiscal 2016 were upgrades as opposed to new units. New desktop customers were essentially flat year-over-year. Total Small Business desktop ecosystem revenue grew 4% for the year. For fiscal 2017, we expect units to decline modestly, and desktop ecosystem revenue to be flat to up slightly. Moving over to tax, Consumer Tax revenue grew 10% for the year. As Brad said, we will continue to invest in the product experience and to prioritize growth in customers above margin expansion. ProConnect revenue grew 51% for the year due to changes in our offerings that resulted in lower ratable revenue recognition in fiscal 2015. As I mentioned on the earnings call in May, we expect ProConnect revenue to be roughly flat in fiscal 2017. 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 $1.1 billion in cash and investments on our balance sheet, our first priority is investing for customer growth. When it’s the best use of cash, we will return cash to our shareholders via share repurchases. In fiscal 2016, we repurchased $2.3 billion worth of shares at an average price of $91. We reduced our weighted average share count by 7% net in fiscal 2016, and we expect to be in the market consistently in fiscal 2017. We have a total of $2.4 billion on our repurchase authorization, including $2 billion recently approved by our Board. Our plans include a cash dividend of up to $1.36 per share for fiscal 2017 with the first quarter dividend of $0.34 per share payable on October 18. This represents a 13% increase versus last year and reflects our confidence in our business strategy, as well as more recurring and predictable revenue streams. You can find guidance details in our press release and on our fact sheet. Here are the highlights for fiscal 2017; QuickBooks Online subscribers up 2 million to 2.2 million, growth of 32% to 45%, Revenue of $5 billion to $5.1 billion, growth of 7% to 9%, Non-GAAP operating income of $1.675 billion to $1.725 billion, growth of 8% to 11%, GAAP operating income of $1.33 billion to $1.38 billion, growth of 7% to 11%, Non-GAAP diluted earnings per share of $4.30 to $4.40 or growth of 14% to 16%. GAAP diluted earnings per share of $3.35 to $3.45 versus $3.69 in fiscal 2016. Fiscal 2016 earnings per share includes $0.65 net income per share from discontinued operations. We feel confident in our ability to deliver against our financial principles and our long-term strategic goals and we look forward to sharing our progress with you throughout this fiscal year. On a personal note, we will miss Matt’s outstanding contribution in Investor Relations. We are very fortunate to be adding his experience and business acumen to our ProConnect Group as we strengthen the connection between our accounting community and our small business ecosystem. And with that, I will turn it back to Brad.

Alright. Thank you, Neil. To recap, we are pleased with our fiscal 2016 results and I am encouraged by our trajectory. Our trajectory in small business as we continue to grow QuickBooks Online in the U.S. and in our prioritized markets around the globe, at the same time, we are expanding the category by solving new customer problems with QuickBooks Self-Employed. Our tax businesses had another strong year, turning at the innovation machine to compete effectively in the marketplace. We look forward to building on this success in fiscal 2017. We will talk more about these priorities and our strategy to execute against them at our Investor Day, which we are going to be holding on our Mountain View campus on September 21. We look forward to seeing all of you there. And with that, let’s open up to you to hear what’s on your mind. So Latif, I will give it back to you.

Thank you, Sir. [Operator Instructions] Our first question comes from line of Brent Thill of UBS. Your line is open.

Good afternoon. Congrats Matt, on the new role. Brad and Neil, on the operating margin side, you had a really solid year of operating margin improvement, up over 700 basis points year-over-year, the guidance implies a much slower rate of operating margin improvement, can you talk a little bit about why that is, where you are spending?

Sure Brent, happy too. You have to factor in the effect of ratable on the improvement increase in ‘16 over ‘15. But I will tell you the thing I feel good about in our ‘17 outlook is the amount of money that we are putting into the product itself to improve the product experience in the markets where we are focused. Really nice go-to-market plans and programs there to capitalize on the TAM opportunity we see before us. And I think we have given ourselves some good opportunities on the revenue side by not focusing on price increase to drive revenue growth. The revenue growth that you are going to see in 2017 is largely driven by customer growth and customer accounts, and as you saw this year in Consumer Tax in 2016, we think they are just big opportunities to grow our customer base and continue to expand. So, I think the margin expansion you are going to see in 2017 is going to be very well balanced between investments to drive growth and product improvements and also a very reasonable approach on the pricing side.

Yes. And Brent, this is Brad. Just to add to Neil’s thoughtful answer around where the investments are going, the other thing that we feel good about is when we moved the ratable in 2015, we provided a long-term guidance that we would return margins back to the mid-30s in 2017. And so with all those investments that Neil is talking about, we are going to be coming in where we said we would several years ago. So we feel very good we have a very strong business model that continues to get operating margin expansion. But at the same time, we continue to invest for the long-term growth.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Walter Pritchard of Citi. Your line is open.

Hi. Thanks. I am wondering if you could Brad, maybe update us on the composition of the sub adds you expect to see in 2017, it feels like your international subs are slowing, maybe more than I would have expected in your U.S. just sort of regular way subs are actually doing quite well. And maybe you can contrast kind of where you were a year ago when you look to that 2 million to 2.2 million and where you think the contribution is as you get to it next year?

Hey Walter, this is Brad. I will jump in on that and if Neil wants to add something, feel free to do that, Neil. Today, on our net adds, about two-thirds are coming from QuickBooks Online in the U.S, another third is coming from outside the U.S. of QBO and of course QuickBooks Self-Employed. We do feel the same way you do, that we believe that have more opportunity ahead of us in QuickBooks Online outside the U.S. I am constructively dissatisfied as is the team with our current growth rate, but that’s not without a lack of very solid plans that give me increased confidence as we look ahead. We have an increased focus on product market fit. We have really good lessons learned from this year in terms of go-to-market plans on a country-by-country basis. We have been adding incredible talent. You probably saw the announcement of Lucas Watson joining us after 17 years of global experience at Procter & Gamble and 5 years over at Google, and we just feel good about the outlook. So as we look ahead, we still feel good with our 2 million to 2.2 million. We think there is more opportunity in the levers in both outside the U.S. with global, as well as with QBSE. And we are going to leaning into to that, and we will talk to you more about it when we see at Investor Day, but that’s sort of the headline.

And Brad, can you maybe update us on any changes you are seeing in terms of attach, any trends there that are notable particularly on the QBO side with payroll payments?

Yes, we can. One of the things we would say is, for us, attach is an input metric. The most important metric at the end the day is the penetration into the base, which leads to an average revenue per customer. So on the attach rate this past quarter for new users, payroll is at 19%. Now keep in mind that has an increasing base of QuickBooks Self-Employed. And so as you add more self-employed customers who by definition don’t have employees, you are going to have an attach rate that looks like it’s going in the wrong direction. But that’s actually healthy when you actually normalize it. And our payments attach was at 11%. So right now, we feel good with those leading indicators. We think there is room to improve and we have a focused effort to do that particularly with the first time use experience. But they are all moving in the direction we want and we expect to have improved attach rate as we go into next year.

Great, thanks. And Matt good luck, tough shoes to fill there to keep the management team there shielded from our nagging. So that’s been good working with you.

Thanks Walter.

Thank you. Our next question comes from the line of Kash Rangan of Bank of America/Merrill Lynch. Your line is open.

Hey, I will echo my congrats Matt, one of the best in the business. Look forward to hearing more about your success in the business. Couple of questions for Brad and Neil, one is, can you talk a little bit more about what Lucas Watson’s particular emphasis of the company is going to be, what specifically about him attracted you, what do you think he could achieve for you guys definitely in the next 3 years to 4 years, and then I have a follow-up question with respect to payments? Thank you so much.

Yes, Kash, happy to do that. So for us, we were looking to replace someone who is almost irreplaceable. Caroline Donahue, who has been our Chief Sales and Marketing Officer and she is a 21-year veteran of Intuit. And she reached a chapter in her life where she wanted to step away, both girls are now in college. We love her. We celebrate her and we have taken a 1-year victory lap, because she let us know some time ago she was going to do that. And we began a very concerted search to look for someone who had digital experience, someone who had clear mobile experience, and someone who had world class marketing skills. And sometimes, you will find classical marketers from packaged goods who may not have as much digital experience. So you will find those who grew up in the digital world, but they don’t really understand the platform marketing aspects, and we think we found a Rainer in Lucas. As I mentioned, 17 years at Procter & Gamble through a range of different product lines, leading them across the globe. He ultimately took P&G online and led their digital efforts. And then from there, he was recruited away by Google and he helped monetize YouTube and more recently, has been leading their innovative global solutions around the world. And so, we are excited to have him as he brings both that classical marketing as well as digital experience. And what he will be doing is be leading our sales channels. He will be leading the company’s marketing efforts and the global country managers report directly into him. So, he will have the non-U.S. locations and that’s where his expertise will come to bear and he will work very closely with our general managers in the U.S. to try to help our global expansion.

Got it. My follow-up and final question, Brad, what was the attach rate for online payroll, online payment this quarter and what are your longer-term objectives in that regard? Thank you very much. Look forward to seeing you at the Analyst Day.

Same, yes. I am sorry, we were just looking because the attach rates for online payroll and payments. I mentioned these just a couple seconds ago and the payroll numbers are 19%, but that includes a base of QuickBooks Self-Employed in there. And then the second is on payments, it’s at 11%. So, those were the attach rates. I just want to make sure I heard the question correctly, Kash.

Correct. And also your objectives, Brad, for where would you like that to be in fiscal ‘17, ‘18 timeframe?

Yes. I talked about this in terms of the total addressable market. We know that about half of small businesses today, except credit cards and so we think there is a nice penetration upside opportunity in payments. In payroll today, you look at the audience of customers who have employees and we think we have got the opportunity to drive that number up north of 30%. In terms of what we will achieve the next 12 to 24 months, we want to continue to see sustained improvement. And so we don’t have a target that we published externally that said at the end of 12 months, we want to be here. But I can assure you that internally, we have goals and objectives to improve that number and get them closer to the numbers I just talked about.

Fantastic. Thank you very much.

Alright, thank you.

Thank you. Our next question comes from Jesse Hulsing of Goldman Sachs. Your question please.

Yes, guys. Thanks for taking my question. The total number of QuickBooks paying customers, including desktop really inflected this year, growing, it looks like by my calculation something like 23%. And if you exclude international self-employed, it was up I think 18%, which in the U.S. would be pretty strong growth. I am wondering what you think is driving that. Is it the economy? Is it share gains? Is it something else? And do you view this type of double-digit growth for total QuickBooks paying customers is sustainable moving forward?

Yes, thank you, Jesse. We feel good about that. So, for those who are looking at the fact sheet, the total paying customers were up 23%. We saw healthy growth across the board. We saw QuickBooks Online subs at 41%. We saw the desktop customers growing 8%. If you look at those that are new to the franchise in QBO, it was north of 80%. It was 84% this quarter. And so there is just healthy growth across the board. And what’s driving it is we are expanding the TAM. We are expanding the TAM in three ways. With the shift to cloud and mobile, more people are now considering accounting software than they would have in the past. They could come in and try it for free and then sign up for it if it’s actually improving their effectiveness. The second thing that’s helping us is we are getting the opportunity to connect our products with other products like PayPal and American Express and so it gives us more consideration. And last but not least is global expansion, which has opened up tens of millions of more prospects to our products that we couldn’t have served a couple of years ago. So, that’s one big bucket. It’s just expanding the TAM. The second is we did see a strong repurchase cycle in desktop this year. So, the desktop units rebounded and it was primarily because with all people who were coming at the end of their 3-year cycle and they upgraded and they were able to buy the newest version of QuickBooks desktop. And that gave us a little bit of bump here in the last pass of this fiscal year. But by and large, we do think this is sustainable. We have opened up the total addressable market. We think that cloud and mobile is going to help us. And we think there will be a group of customers that will still want to be on desktop and we plan to have a great desktop product as well.

Thanks. And a quick follow-up on margins, your segment margin for Small Business was up about 500 basis points this year. I am wondering when you look to your implied margin guidance for FY ‘17, how much of that is driven by Small Business continuing to expand its margins? And I guess longer term where do you think you can get Small Business margins, too? Thank you.

Yes, Jesse, this is Neil. And the lion’s share of that improvement really is driven by the shift in ratable. And I will tell you as we go forward as we reduce our hosting cost and see other changes made in our processing infrastructure, that’s going to be an opportunity for margins to expand a little bit in the Small Business space, but this is also where we are investing heavily in R&D and in go to market. This is a key area where we do not focus on margin percentages in the Small Business group. We are doing everything we can to encourage customer growth in this area and deeper penetration into those addressable markets you just heard Brad mentioned. So, we are intentionally not encouraging the team to expand the margins necessarily in Small Business, but to really focus on the top line growth. And so I think what you are seeing now is really more driven by some changes we have made in our hosting infrastructure and more predominantly the shift we made from ratable last year.

Perfect. Thanks, guys.

Thank you. Our next question comes from the line of Ross MacMillan of RBC Capital Markets. Your line is open.

Thanks a lot and my congrats to Matt as well for the move to the business unit. You will be missed. Brad, one for you just on international QuickBooks, can you just remind us which country just came online this year? And is there anything we can talk about in terms of incremental countries as we look forward into fiscal ‘17? Thanks.

Thanks, Ross. So, really the country that came online this year was France. We entered the first half of fiscal year in beta and they went to general release and it’s now up and running. And we have got a Z1 of the product out there and we are feeling good with the early trajectory. I would also say that Brazil, even though it came on at the end of last year, really start to hit its stride this year. That was through an acquisition of a company called ZeroPaper and then we introduced QuickBooks Online in Brazil. All the other countries, we have been out there for several years now. And in terms of new markets, we currently have a rest of world strategy where we are testing product market fit and we are looking at the download of customers looking for the product and using it. But we have not announced any new countries or any plans to expand at this point. We want to wait and see that we truly have a proven product market fit before we put people in the market and begin to develop it. So right now, I would just say we are focused on these half dozen countries we are in and we have opportunity with Brazil and France to get them up to critical mass.

Great. And just a quick follow-up, obviously, this year benefited from some of the ratable revenue shift and a very strong tax season and that’s part of the reason why the growth revenue guidance for fiscal ‘17 is lower. But I am just curious, the 7% to 9% range versus your double-digit sort of ambition, do you have any thoughts on when we might get back to double-digit growth on the top line assuming that’s still part of the strategic intent? Thanks.

Yes, Ross. Well, we absolutely see that as part of our strategic intent. We share our financial principles that we believe are enduring and we believe that we have a portfolio that can sustain double-digit organic growth over the long-term. You also hear us talk a lot about the first priority is expand our categories and to grow our customer bases. And if you look at the focus on customer growth this year, you saw TurboTax Online growing 15%, you saw QBO growing 41% and even QuickBooks Desktop growing at 8%. We know if we get that flywheel going, our ability to monetize those customers and to make – accelerate our revenue growth over time is the proven formula. So right now, our guidance is 7% to 9% given where we are, but our full intent is to continue to look for double-digit growth on a sustained basis. And I don’t know, Neil, if you want to add anything to that?

No, I think that’s perfect, Brad. And I think, Ross, when we see opportunities to grow customers faster than we might expect otherwise, we are going to go for that heavily. And I think the payoff comes when you expect to see that double-digit growth is when we begin to monetize those customers in later years. So, we see a big opportunity in front of us in ‘17. And we have intentionally really focused on the best ways to get those customers in.

Thank you.

Thank you. Our next question comes from Scott Schneeberger of Oppenheimer. Your line is open.

Thanks. Good afternoon. Congratulations, Matt. Brad, I was curious on the – you mentioned disappointment in international QuickBooks. Could you give us an update report on Canada and India, please and just elaborate on the statement and some of the things you have planned going forward? Thanks.

Yes, let me start with the disappointment first. We are pretty candid. We will stand up in front of you and share the things we feel good about and the areas we think we can improve. And when we stand up in front of you at Investor Day, I will show you the same thing I showed the board in July is when we have a base of 287,000 paying subs and we are growing at 45% and then you have a base of 1.5 million, when you include the U.S. and it’s growing at 41%, a 400 basis point disparity in growth rate I don’t believe is sufficient for the size of the base. We know we are capable of more. We have good products and we know we have the opportunity to get out there and accelerate this total addressable market and penetrating that market. So, that’s just the candid reality. We talk about it that way inside the company. But that said I got to tell you we have some real momentum being built up in the UK, early start in France and Brazil and strong momentum in Australia. Canada has rebounded. So, as we told you, our one issue we had in Canada as we had tried to sell QuickBooks Online in a box in a retail store. It was an experiment we had tried in the U.S. it didn’t work and we shut it down, but we let it go in Canada a little while longer. We saw the same sort of attrition issues. And so we pulled it out and we created to grow over a problem. That’s now in our rearview mirror. So Canada is moving in the right direction. India is the one that we are trying to develop a model that shifts away from the accountants and focuses directly on small business and then looks for ways to monetize that over the long-term. And we are running a series of experiments in India, but this is a very small part the base. But that’s the one that I would tell you that we still have several alternatives we are exploring, but we don’t have the go-to-market model figured out in India yet. And so that’s how I feel about overall global. I don’t want to paint a black picture over this. I think there are some really shining areas. But when you put it all together, 287,000 paid subs growing at 45%, I know we are capable of more and our aspirations are to accelerate that performance.

Great. Thanks for that. And then Neil, could you elaborate on acquisition pipeline and strategy there, some dividend increase you have been active in repurchase – share repurchase, so just thinking going forward about capital allocation, China has been a bunch of small tuck-in by talent acquisition, how should we think going forward just on the strategy? Thank you.

Yes. Scott, I think we are going to continue to look for opportunities to build on our product roadmap, to add feature functionality and add new technology really across of the board. Some of it internal that we use some things like privacy and security and infrastructure management. Some delivering feature functionalities like we have talked about in the past. But we have proven adding teams and adding technology really accelerates our product development cycle. And so we are keen to do that. You will probably – you will continue to hear about activities in that space. They are typically relatively small. And so it’s not a big commitment on our overall capital planning. But our – as you saw, our CapEx guidance for 2017 is back to more normalized levels. The cash flow generation of the company is very strong. And so we are comfortable that we have got plenty of room to do the acquisitions we need, to fund this increase in the dividend of 13% and continue to be active in share repurchase as well.

Thanks.

Thank you. Our next question comes from the line of Yun Kim of Brean Capital. Your question please.

Thank you. So Brad can you just talk about the cost of subscriber acquisition costs for QBO subs and how that have been trending and just try to better understand the overall the cost structure around the overall QBO sub adds and is there a big difference in acquisition costs between the regular QBO subs versus self-employed versus international subs?

Yes. So let me take this, Yun and then Neil and I can tag team. I will start first with LTV to CAC, which is lifetime value cost to acquire a customer. We all know is the metric for a fast business. And in the U.S, our LTV to CAC is north of 5.5%. So it’s a very healthy number with an opportunity to continue to improve as we become more efficient. Outside the U.S, as we are building the market and we are building up our brand, our LTV to CAC is not at that level, but it continues to improve with every cohort of customers we bring on. And so we have an overall rigor that is focused on LTV to CAC as we try to expand its new geographies and try to accelerate our customer base growth. In terms of QBSE, I do not believe that we have reported or talked about LTV to CAC. So I am turning to you Neil…

Right.

Okay. So that’s sort of the amount of material or the information we share at this point. I don’t know if that answers your question or not.

It helps a little bit. But it kind of leads me to the next question, which is you guys maintained the QBO sub-target for the year at 2 million to 2.2 million, which is fairly wide, is it fair to say that you guys are keeping your options open regarding your spend or is there some other dynamics in there that’s kind of keeping you the range that wide for the year?

Yes. Thank you, Yun for the question. Let me step back and talk about that for a minute, because we have a philosophy that we will update our guidance when we have a change in our outlook. And right now, there is no change in our outlook. We have been trying to message for some time that our goal is to keep our subscriber growth north of 40% and our QBO ecosystem revenue growth between 25% and 30%. And this quarter, once again showed that we were in those ZIP codes. And so we didn’t feel the need to go out and change the guidance which we have provided a year ago in the fall. But I do want to remind that when we first set guidance for QBO subs a year ago at Investor Day, the number has been 2 million in 2017. And last fall, we said we are going to move it from 2 million – 2 million to 2.2 million. If you kind of took our current trajectory and you do the 40% growth rate approaches squarely in middle of that guidance range. And we will talk to you at Investor Day about levers we are looking at around global – excuse me, global growth, QBSE and other things that can move us up in that guidance range. But since there is nothing meaningfully different, we did not want to change the guidance and signal anything that quite frankly, hasn’t changed.

I would just add Brad, if I could just add on. The cost and the acquisition cost is really not the constraint between the low and the high end of the range. We do measure very rigorously our acquisition costs by channel and by market. And where we have opportunities to bring in customers that are going to be profitable over the long-term, we have plenty of resources and we are more than willing to invest in those. And when we pull back investments because we had concerns about the quality of the sub long-term or about their ability to stick with us over a long period of time we really monetize at the rate we expected. But we are more than ready to invest when we see a channel, a product opportunity or a market that’s really going gangbusters. So the investment level or the resource allocations are not a governing factor on the resource range at all. It really is a factor of the opportunity size with how effective we are being with our product customization and localization for the market and our go-to-market campaigns.

Good add. Thank you, Neil.

Okay, great guys. Thank you so much. And just wanted to say good luck to Matt and thanks for all the help over the years.

Sure. Thanks Yun.

Thank you. Our next question comes from Kartik Mehta of Northcoast Research. Your line is open.

Hi, good evening Brad and Neil. A question on the tax side Brad, you talked about you expected competitive tax season and I am wondering, do you think that will only be in the online or would you anticipate any changes on the assisted side as well for the upcoming season?

Yes. Good evening Kartik, every year as you know, it gets highly competitive in the tax arena. And I would anticipate another season like that. I think that we have great competition. They have very proactive plans to continue to try to grow their customer bases and I think that would occur both online as well as in their stores. I know that’s a hotly contested market as well. So I would anticipate a competitive tax season from great competitors across the board.

And then as you look at your guidance for FY ‘17 on the tax side, what would you anticipate in terms of mix and price, I am assuming you would anticipate greater volume than price, but I am just interested how you break that 6% to 8% down?

Well, Kartik as you know, we have a pretty consistent rule of thumb, which is to expand the category and grow our share and grow our customers faster than we grow our revenue. And so really nothing has changed there. We are in the fourth year near – fourth year now of a multi-year journey to basically get taxes done with little to no effort at all. And we have been putting a lot of innovation into the product. Last year, there were two dozen innovations we introduced in TurboTax. The typical year was six. That platform is in place. And we anticipate as many or even more innovative new ideas going into the product this coming season. So it’s really going to be about the product doing a better job and it’s growing our customer base. We are not going to rely on price increases and we are just going to rely on continuing to expand the category and grow share.

And then just one last question Neil, as you look at the upcoming year, you have talked about investment and obviously growing QBO clients and tax clients, I am wondering at what point would you say you would want to increase the investment, what would you have to see to say, we should increase the investment because in the long run that will be beneficial for Intuit?

Well, as you can imagine Kartik, we have assumptions internally about the growth we expect in terms of customers that equate to the revenue that we are guiding and the expenses that we are setting aside. If we see those customer growth rates expand faster than we expected, we see investments playing off, then we have opportunities to reallocate within the company and put dollars to where they are getting the best return and the best outlook. I think we have a pretty rigorous process though of reallocating internally to things that are working really well and dialing back things that are not generating what we expected when we built the plan together. So we have an internal process I think works pretty well. We look at the customer growth and how we are doing with the revenue per customer quite frequently. LTV to CAC, Brad has already mentioned. And so we have opportunities to adjust and reallocate money that we are going to spend internally pretty frequently throughout the year. And we do that, as a matter of fact.

Alright. And Matt, I will look forward to talking to you offline about your decision.

Sounds good. Thanks Kartik.

Thank you. Our next question comes from Sterling Auty of JPMorgan. Your question please.

Thanks. Hi guys, congratulations Matt. Brad, you mentioned that there was a bit of a refresh cycle in terms of the desktop side, I am kind of curious, what do you think at this point is the major gating factor that prevented a bigger portion of those desktop users to moving to online?

Yes. Sterling, I would say first of all, there really isn’t a major gating factor other than their willingness to adopt the cloud. In fact the number of migrations who moved from desktop to QuickBooks Online this year within our own customer base was up 25%. So we have done work with our customer base in the desktop to figure out why they aren’t interested in the cloud. And reasons one through five are all basically, I am not ready to move to the cloud. I don’t want to put my data in the cloud. I don’t want to move to a subscription service. My current product is working just fine. My accountant is working with me and they have got a desktop version. Those are the kinds of reasons. In fact, only 14% cite feature parity. So we want to make sure we keep these customers in the franchise. We want to continue to get their accountant comfortable with using the cloud version. And we want to continue to let them know that we can help them migrate to the cloud when they are ready. As long as they stay with Intuit, we are happy. But right now, that’s sort of bucket one which is, there really aren’t any major barriers other than their mindset and comfort level with the cloud. The second side is the repurchase cycle. We see this happen. And last year, we had raised the price on desktop. We did it for the first half of the year thinking that might actually drive people to the cloud. What we now realize is it wasn’t a price issue, it was the mindset. And so when we brought it back down to more normalized promotions, we started to see the regular repurchase cycle happen again and that’s what carried into this year. And so I think what we see as a group of people who probably delayed an upgrade last year. And then this year, they came back in on their normal rhythm.

That makes sense. And then just one follow-up on the tax side, given we are in an election year, is there anything that you are seeing out of either parties that you think would have a material impact to the positive or the negative on your tax franchise?

Sterling at this point, we just want to remain focused on working with whoever ends up winning the election. We are big supporters of tax simplification. That’s the business we are in. We are big supporters of voluntary compliance, which is helping people voluntarily file their taxes. And if the government disagrees, let the government contest that. And at the end of the day, we want to make sure we are helping people keep their hard earned dollars in their pocket, only pay the stuff that they owe the government. And so whether it’s a Republican, a Democrat, an independent, we have a lot of years of working with both sides to try to make sure that we keep those three things front and center.

Thanks.

Alright.

Thank you. Our next question comes from the line of Jim MacDonald of First Analysis. Your line is open.

Good afternoon guys. You talked about accelerating small business growth rates, I assume that has to do with better monetization, but maybe you could talk a little bit more about how you – how that’s going to work?

Sure. Jim I think first of all, it has to do with both customers and monetization. On the customer side, while we continue to see strong growth in QBO in the U.S., we believe we have upside opportunity with better execution, stronger product, market fit and just a continued learning curve outside the U.S. And also we are in the early days of QuickBooks Self-Employed, 85,000 paying subs now versus 25,000 12 months ago. And we really learned a lot this year as we put the bundle together with TurboTax and we went after people like the Uber drivers and the Lyft drivers. So we think there is a lot of opportunity to continue to grow the customer base. Then when you get to monetization, there is an opportunity there and we can see the tailwind at our back or we can feel the tailwind at our back rather. One is, we see opportunity to continue to improve attach. The second is, as those customers move off of promotional pricing and they hit their 13th month, the average revenue per customer goes up about 50%. And the third is we did just pass through a modest price increase in QuickBooks Online. It’s gone out to the new customers. And we are in the process of rolling it out to existing base. And those three things combined help us drive the average revenue per customer, which ultimately drives up the QBO revenue. So it’s those two things that we see continuing to drive improved performance in QBO.

Great. And over on ProConnect, could you remind me why you are expecting a decline next year and kind of what you expect maybe longer term for ProConnect?

Yes, I can. I will start first with the strategic role ProConnect plays in the business. The accountants are not only the key to small businesses making their accounting, payroll and payments decisions, so they have a very important role to help us work with small businesses and help them be successful. But obviously, they also have a business that they monetize, where they do tax returns for consumers and small businesses. And we are laser focused on the multi-service firm. Those are the people who do both books and taxes, not only for consumers, but also for small businesses. And that’s a very large population. So, one of the things that we have chosen to do is we step back and said, let’s look at how we lined up our product and pricing to better serve those customers. And some of it requires us building better collaboration between QuickBooks and their tax products and so we are in the process of building that R&D out. And some of it is we needed to stop pricing for every single piece that we were giving the accountant. So, for example, this year we have chosen to give QuickBooks Online for accountant – to the accountants for free. We don’t charge them. Another thing we chose to do this year is not to take a price increase at the normal levels we would on the tax product. And instead, we are starting to build that into the accounting product. So, we have stopped taking price everywhere we historically did. And as a result of that, we are kind of backing off on the revenue growth short-term on the ProTax side of the house, but we think long-term that’s going to accelerate the overall revenue growth for the company.

Great. Thanks.

You are welcome.

Thank you. Our next question comes from the line of Nandan Amladi of Deutsche Bank. Your question please.

Hi, good afternoon. Thanks for taking my question. So, you touched on a little bit of this, Brad, but I was wondering as you look at the ProAdvisor network as it stands with your desktop ecosystem and as you think about building that out on the QuickBooks Online side, what are some of the puts and takes or the major differences that you see?

Building out the ProAdvisor network on the – I missed the second part of the question.

On the QuickBooks Online side, is it an additional – what’s your approach? I guess are you trying to convert your accountants over? Are you not growing it, because lot of the growth in the QuickBooks Online franchise is actually coming from self-employed and international, where perhaps the – and the target group is a little bit different even in the accounting community? So, I would just like to contrast the differences between the traditional desktop ecosystem versus the online accountant ecosystem.

I got it. Thank you so much. I appreciate the clarification. Well, first of all, one of the pieces of good news is, anyone who is in the desktop ProAdvisor network is also now in the cloud network. So, we gave them a cloud package. We trained them. We certified them. And they are increasingly recommending their customers to use QuickBooks Online. In fact, the last numbers I saw, we were north of 600,000 accountants who had at least one customer on QBO. And then those who actually have three plus customers have more than doubled in the last 12 months. And we see those as great leading indicators of not only cloud adoption on the accountant side, but them recommending it to their clients. So, that’s one thing, which is the desktop ProAdvisors have come along with us. The second is our ProAdvisor program is a global program. So, we are enrolling accountants in all the countries. And as I think you alluded to in your question, in some countries, the accountant’s recommendation carries even more weight than it does in the U.S. There are some countries where, for example, France, the accountant is the end-all and be-all in terms of making the final decision on whether this product is ready for small business client to use. So, we have partnered very closely with those accounting professionals to make sure that they feel good, they are certified and they are endorsing our product. So, by and large, what you see is on a case-by-case basis, this cloud-based product is available to desktop. It’s available in all the countries. We have a similar approach where we work with those local accounting professionals to make sure it meets their needs, so they in turn will endorse it with their clients.

And is QuickBooks Online made available for free across the globe to advisers?

It is. Yes, QuickBooks Online for accountants is available for free to accountants across the globe.

Thank you. That’s all for me.

You are welcome. Thank you.

Thank you. And our next question comes from the line of David Togut of Evercore ISI. Your question please.

Good afternoon. This is Rayna Kumar for David Togut. I noticed that QBO pricing – revenue per subscriber increased for the quarter roughly 1%. And this is the first time I have seen that after nine consecutive quarters of decline. I guess, what were the drivers of that increase?

Want to take that one, Neil?

Sure. I think Brad has mentioned to you and just talked about as customers are maturing in the QBO online ecosystem, they are coming off promotional pricing and our attach has improved a little bit. So, it’s a small increase. And honestly, we would prefer to see the customers growing really faster. So, this is kind of an unintended consequence, Rayna, to be honest with you. I think the healthier statistic longer term is to see the customer growth accelerate, but that’s the main driver between the improvement you see in the fourth quarter is just more of those customers coming off. We had a couple of big quarters a year ago, which meant that in the late third quarter, early fourth quarter, you had little bit more customers than usual coming off that promotional period and paying the full price. That’s just an indication that retention rates are holding up quite nicely as those customers do come off that promotional pricing. Once they have used the product for longer than a few months, they are pretty sticky.

Thank you.

Gentlemen, I am not showing any further questions. Would you like to close with any additional remarks?

Yes. Thank you, Latif. First of all, I want to thank everybody for their acknowledgment of Matt. It’s nice. He is sitting here and he has been blushing through the call. But we feel the same way you do. He is incredible. The good news is, Jerry Natoli is sitting right here next to him and he is ready to step in and take the game to the next level. We also want to just echo, we feel good about our results in fiscal year ‘16. We also really see momentum as we head into fiscal year ‘17. And we are looking forward to continuing to build this franchise over the long-term. But more importantly, we are excited to share with you those plans and those ideas when we see you on the Mountain View campus on September 21 at Investor Day. So until then, we look forward to speaking with you soon. Take care.

Ladies and gentlemen, thank you for participating. This concludes today’s conference call.