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Intuit Inc. (NASDAQ:INTU)

F1Q09 Earnings Call

November 19, 2008 4:30 pm ET

Executives

Jerry Natoli - Vice President, Investor Relations, Treasurer

Brad D. Smith - President, Chief Executive Officer, Director

R. Neil Williams - Chief Financial Officer, Senior Vice President

Scott D. Cook - Chairman of the Executive Committee, Director

Analysts

Bryan Keane - Credit Suisse

Heather Bellini - UBS

Adam Holt - Morgan Stanley

Brad Zelnick - Banc of America

Michael Millman - Soleil Securities

Laura Lederman - William Blair

Gil Luria - Wedbush Morgan

Brent Thill - Citigroup

Brendan Barnicle - Pacific Crest Securities

Operator

Good afternoon. My name is Patty and I will be your conference facilitator. At this time, I would like to welcome everyone to the Intuit first quarter and fiscal year 2009 conference call. (Operator Instructions) With that, I will now turn the call over to Jerry Natoli, Intuit's Vice President of Investor Relations and Treasurer. Mr. Natoli.

Jerry Natoli

Thanks, Patty. Good afternoon and welcome to Intuit’s first-quarter 2009 earnings conference call. I’m here with Brad Smith, our President and CEO; Neil Williams, our CFO; and our founder, Scott Cook.

Before we start, I’ll remind you that our remarks include forward-looking statements. A number of factors could cause our results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon. They’re also in our Form 10-K for fiscal 2008 and our other SEC filings. All of these documents are available on the Investor Relations page of Intuit’s Web site 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’ve reconciled the comparable GAAP and non-GAAP numbers in today’s press release.

A copy of our prepared remarks and supplemental financial information will be available on our Web site after this call ends.

With that, I’ll turn the call over to Brad Smith.

Brad D. Smith

Thanks, Jerry and thanks to all of you for joining us. We just announced results for the first quarter of fiscal 2009 that were in our expected range for revenue and significantly above our expected range for operating income and EPS. We’re pleased with the quarter, as we’ve demonstrated some resiliency on the top line and our ability to manage spending to deliver on the bottom line. We also provided initial guidance for the second quarter and updated our guidance for the full year, reflecting what we’ve learned since our last update two months ago.

Clearly business conditions have changed. We have seen three factors in particular that impact our business outlook for FY09: first, a decline in merchant transaction volume in our Payroll and Payments segment; second, fewer new QuickBooks users than we’d expected; and third some adverse conditions in our Other Businesses segment

As a result, we now expect our fiscal 2009 revenue to grow 6% to 10% instead of the 9% to 12% we originally guided. Let me share a bit more detail on these three factors.

Growth in new merchants plus growth in transaction volume per merchant has been driving Payments revenue growth over the past couple of years. Growth in transaction volume per merchant began slowing in our third quarter of last year and was flat in our fourth quarter. Like other payments processors, we have seen transaction volume decline as consumers reduce their spending. New merchant acquisition is still strong at 18% but it’s not strong enough to compensate for the lower-than-expected transaction volume per merchant. We now expect full-year Payroll and Payments revenue to grow 10% to 14%, four points less than originally estimated.

As for QuickBooks, it’s early in the season but paid new users, which make up about a third of our paid units in any given year, are running below expectations. Upgrades so far are actually in line with expectations. And we’re seeing a lot of Free Simple Start registrations, which should result in higher Small Business ecosystem revenue in the future. However, for this year, we now expect full-year QuickBooks revenue to grow 5% to 9%, about three points less than originally estimated.

The Other Businesses segment, which consists of our Canadian and U.K. businesses, Real Estate Solutions and Quicken, is being impacted by a stronger U.S. dollar and tough conditions for new license sales. Though less than 5% of our revenue is in a foreign currency, it’s all in this segment. Since we established our plan in July, the U.S. dollar has strengthened about 20% and that has created a $20 million reduction in our revenue forecast, which is partly offset by a $13 million reduction in non-U.S. dollar expenses. In addition, we’ve reduced our expectations for Real Estate Solutions license sales and Quicken revenue is being impacted by reduced consumer spending, particularly in retail. We now expect full-year Other Businesses segment revenue to grow from a 4% decline to a 2% increase. That’s about 10 points less than originally estimated.

Given this updated outlook, we’ve taken a hard look at our spending. Even with the reduced revenue growth of 6% to 10%, we expect to grow non-GAAP operating income from 9% to 13% year over year.

And we expect to grow non-GAAP EPS of $1.82 to $1.89, which is growth of 14% to 18%. These non-GAAP EPS figures include an estimated $0.04 per share benefit from the passage of the research and development tax credit.

Now it is important to note that within this context we see real opportunity. These are challenging times but this is an environment in which we should be able to build our customer base and strengthen our franchises.

Our products and services help customers save and make money. Said more simply: we put more money in our customers’ pockets. This is beneficial in all business climates and even more so when times are difficult. It’s one of the reasons our core offerings have historically performed well in weak economies and we don’t believe this time will be any different. And we believe this will be another good year for Intuit.

I’ll share more of my perspective later in the call. But first, here’s Neil to take us through the segments and financial details.

R. Neil Williams

Thanks, Brad. Let’s start with a high-level summary of our overall results. Revenue for the quarter was $481 million, up 8% year-over-year. The non-GAAP operating loss was $29 million, a $26 million improvement from the first quarter of last year. The non-GAAP loss per share was $0.09, $0.01 better than the loss in the first quarter of last year.

As a reminder, we normally lose money in the first quarter. That’s because so much of our revenue comes in our second and third quarters while most of our costs are spread fairly evenly over the year. We improved our non-GAAP operating loss because revenue increased in less-seasonal categories such as Payroll and Payments. We also were very disciplined in our spending.

The non-GAAP loss per share didn’t improve quite as dramatically as the non-GAAP operating loss because interest and other income was lower than last year.

Now let’s review the segment results. Total Small Business first-quarter revenue grew 11% year-over-year. Within Small Business, QuickBooks revenue grew 6% and Payroll and Payments revenue grew 16%. Excluding Homestead and ECHO, which were acquired in the second and third quarters of fiscal 2008 respectively, Small Business revenue grew 5%, QuickBooks grew 1% and Payroll and Payments grew 9%.

Though the season hasn’t started as strongly as we expected, we see some positive indicators. QuickBooks share is up about a point of share in retail. The category is down this year, but no one else is taking share from us. QuickBooks Enterprise revenue and our Web services customers continue to grow strongly. Our customer base growth has held steady in Payroll at 3% and our Payments customer base growth is still strong at 18%. And early feedback from accountants on the QuickBooks ’09 release is positive, with almost 40% have saying they are more likely to recommend QuickBooks 09 to their clients than last year’s version.

On the other hand, as Brad mentioned, Payments transaction volume per merchant is down 4% from last year. That’s lower than we expected. And we haven’t yet seen the inflow of new QuickBooks users that typically occurs in down economies.

However, we do consider this the best QuickBooks product we’ve released in years and most early product reviews have been favorable. We also have an update planned for December that will further enhance the online banking functionality for accountants and upgraders.

Finally, it’s important to point out that our Small Business revenue is still growing in what is historically our slowest Small Business quarter, even as small businesses themselves face a tough market environment. But we are being cautious and have updated our outlook accordingly.

Turning to Tax, we have not changed our full-year revenue guidance for Consumer Tax or our Accounting Professionals segment. TurboTax will go on sale in retail stores on November 28 and the season begins in earnest in January. We’ll provide tax season updates this year in the same time frame as last year. The first update is scheduled for February when we announce second quarter results. The second will be in mid-March. The final update will come when the tax season ends in mid-April. We’re excited about our offerings for this season as we continue to focus on ease, winning with free, and continued improvements in our marketing.

One more note on TurboTax: including federal e-file with our desktop products results in a shift of $10 million to $15 million in revenue from the second quarter to the third quarter.

Financial Institutions revenue for the first quarter grew 3% year-over-year as planned. This is down about $3 million from the fourth quarter of FY08. That’s because the fourth quarter included a seasonal up-tick in revenue associated with our Online Financial Exchange product, which financial institutions use to convert their information to a Quicken-compatible format.

Active online banking users grew 8%, a little lower than the second half of FY08 and down sequentially from Q408. New internet banking users continue to be added at about the same rate as prior quarters, but financial institutions are scrubbing their user bases and this quarter we had a relatively high number of internet banking users taken off the active list.

Bill pay users, which generate about four times the incremental revenue per user as online banking users, grew 18%. That’s up from the second half of FY08 and as we said at Investor Day, we expect to show continued user growth as we move throughout FY09 and expect to end the year with revenue growing at a double-digit rate. We have not changed our full-year revenue guidance for the Financial Institutions segment.

Other Businesses first-quarter revenue was flat versus the first quarter of last year. This segment would have grown 3% in constant currency. And as Brad mentioned, the strength of the U.S. dollar and revised expectations for our Real Estate Solutions business and Quicken have led us to reduce growth expectations in this segment by about 10 points. Of the 10, about 6 points are related to currency.

Moving to the balance sheet, we ended the first quarter with $747 million in cash and investments. We expect to generate about $1 billion in operating cash flow this fiscal year and we’ve got a $500 million revolving line of credit that we have not accessed. We have a strong balance sheet and we are not concerned with liquidity.

We have reviewed our potential customer credit risk, particularly with respect to retail and financial institutions. We continue to closely monitor the financial strength of our retail partners and believe we have taken the appropriate steps to limit our exposure. And we haven’t seen significant weakness in our financial institutions customers.

Capital expenditures in the first quarter were $67 million and we returned about $165 million of excess cash to shareholders by repurchasing 6 million shares of Intuit stock. We have $435 million remaining in our current repurchase program. Over the coming quarters, you’re likely to see us dial back our repurchases a bit but we’re still comfortable with the overall share count for the year that we guided back in August.

Let me conclude with this: we’re comfortable with this updated guidance in the context of the current environment and based on what we know today. In an environment where consumers and small businesses need products and services that help them save and make money, we should do well.

With that, I’ll turn the call back over to Brad.

Brad D. Smith

Thanks, Neil. In prior earnings calls and at Investor Day, I’ve talked about our focus on accelerating our growth rate by executing a clear strategy: that strategy is to deliver easy-to-use connected services to solve important customer problems by saving money and making money in an increasingly social, mobile and global world. We remain committed to our strategy and the objective of accelerating revenue growth. But today I’m going to focus on delivering results in this year and what we’re doing to execute effectively in the current market conditions.

As we all know, we’re in an extremely volatile business environment today. Even in this environment, we believe there are opportunities for companies who stay focused on delivering for customers to expand their franchises and strengthen their market positions. That’s what we’re doing.

Today’s environment is certainly different than what we anticipated when we set our operating plans for FY09. Since then, we’ve analyzed and created scenarios to identify levers we can pull to adapt to changing business conditions. That game plan has been vetted with our board of directors and it’s what our employees are focused on delivering. We’re playing offense, not defense.

This plan boils down to four key points: first, we are going to continue to focus on acquiring customers. We’ve proven that we can monetize them over time so the focus inside of Intuit is customers, customers, customers.

Second, we’ll grow revenue faster than expenses. We’ll maintain our operational rigor and we will adjust our spending as needed to the changing conditions.

Third, we’ll continue to pursue innovation. We made some strategic decisions at the end of FY08 to re-allocate investment to higher-yield opportunities, and we are not going to put those investments at risk.

And finally, we’ll look for assets in the market that will further strengthen our position and help us execute our growth strategy.

We are maintaining a balanced perspective, neither optimistic nor pessimistic -- I think it’s realistic. Reality comes with acknowledging potential risks and while some elements of our business are well insulated from tough macroeconomic conditions, some do face potential risks. Here’s how we assess them.

I’ll start with our Tax business. Taxes need to be filed regardless of the economy and our solutions are the best combination of value and customer experience. We feel confident this business will perform well.

We remain confident with Financial Institutions as well, particularly in the short term. People still need to pay their bills and manage their bank accounts. Regional and community banks and credit unions need to offer compelling solutions to remain competitive and keep their best customers. We help them do that. And this business unit operates with multi-year contracts, so we’ve got good visibility into the projected revenue stream.

We’re often asked whether consolidation in the industry will hurt us. We haven’t seen that and we don’t see the largest banks aggressively acquiring smaller institutions in this environment. When there is consolidation among institutions in our target market, we generally pick up about as many end users as we lose.

In Small Business we’ve got Payroll, Payments and QuickBooks. We feel confident with Payroll. We’re priced as the low-end disruptor and are generally paid in advance, starting at $99 a year. Retention rates remain the highest in the industry and we haven’t seen a significant change in that since last quarter.

We’ve already talked about the declining transaction volume in Payments. However, we’re very pleased with our new merchant acquisition. When charge volume picks up again, we’ll be well positioned for revenue in this segment to rebound nicely.

We’ve also talked about the exposure in QuickBooks to new small businesses postponing their purchases. Though it’s early in the season, the trends we’ve seen have led us to reduce our growth expectations for this segment. However, we still expect organic growth because we have the best product in years. It has new features like a free website and a company dashboard that appeal to customers. And we’ve made improvements that make accountants more likely to recommend it.

We’re also continuing to invest in demand generation and this should raise awareness and drive customer growth. And keep in mind that our flagship products in QuickBooks cost little more than a couple of tanks of gas. Price shouldn’t be an issue and if it is, we’ve got a free offer to appeal to those customers who are worried about cost. And as you know, we believe we’ll get incremental lifetime value from the customers we acquire using the free model.

So let me summarize: we believe in the strength of our products and our strategy for FY09. Our products help customers save and make money. We’re prepared to respond to changing scenarios. We remain committed to acquiring more customers and growing revenue and earnings per share and we will continue to invest in innovation and will take advantage of acquisition opportunities that may arise that improve our growth capabilities going forward.

By doing all of this, we’ll deliver the best outcome possible in FY09, while strengthening our position for the future. These are challenging times but these are the times when Intuit’s products and services are needed most.

I’d like to thank Intuit’s employees for delivering another strong quarter in a tough environment and with that, we’ll now turn to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Bryan Keane of Credit Suisse.

Bryan Keane - Credit Suisse

Good afternoon. I guess my first question is just looking at the second quarter guidance that you provided, it’s a little different than the street’s estimates. I think it’s a little bit lower and I just was hoping to get some color on why that might be, why the street might have modeled it. I know historically going back in history, the second quarter has had lower growth rate because of timing of revenue recognition. I wonder if that’s partly the cause here. And then secondly, it sounded like there was some switch in e-file. Could you talk about that?

R. Neil Williams

Two things on the revenue side and one on the expense side that contribute to what -- to the phenomenon you are seeing there. The bundling of the e-file from a federal basis and our retail product as I mentioned is going to cause us to move our revenue recognition from the second quarter to the third quarter, which we estimate at this point is going to be about a $10 million to $15 million switch.

Secondly on the revenue side, we are continuing to see people file later in the season and we continue to see that trend of moving people closer to the filing date, so again more of our revenue in our online products which we collect when you hit send moves back close to the April 15th filing date, and that’s just a continuation of a trend we have seen.

In our expense side, we built in a pretty aggressive plan in demand generation, both in our small business products and in our tax products and we really haven’t moved away from that. We’re sticking with the plan to build demand and get customers in and tax in in small business, so it causes our expenses to be a little more skewed to the second quarter than you might have seen in prior periods. Those are the biggest factors causing that.

Bryan Keane - Credit Suisse

Okay, but it doesn’t seem like there’s anything fundamental driving the lower revenue. It seems like it is kind of filing later in the season and the switch of e-file recognition.

R. Neil Williams

That’s correct.

Bryan Keane - Credit Suisse

Okay, and then just historically as unemployment rises, haven’t you guys seen a pick-up in QuickBooks users and any way to quantify the potential impact of that?

Brad D. Smith

If you go back and look at the last three downturns, there’s some work that’s been done by Kaufmann Institute and a few others that will show that typically unemployment drives new business formations but there is a little bit of a lag effect there and it’s been different in each of the three downturns. I think what makes this one unique and therefore why we are not banking on any material upside in the next -- in this current fiscal year is this started as a consumer slow-down and we know that small businesses often finance their small businesses with either credit cards or home equity loans or lines of credit and we all know what the current credit conditions are in the market, and so net net, we do anticipate this won’t be different, that there will be new business formations happening but right now, we are being prudent and not building that into our plan for the balance of this fiscal year.

Bryan Keane - Credit Suisse

Okay, and then just finally for me, any thoughts on Intuit tax products getting an extra boost due to the economy as tax consumers look for low-cost alternatives away from tax franchisees and accountants?

Brad D. Smith

We believe the reason why we are holding our guidance this year on tax is two factors -- one is we know the government will want 140 million tax returns filed regardless of the economy. But secondly, we also appreciate the fact that we are in a category right now that’s growing about four times faster than the next nearest alternative, which is growing faster than pros and tax stores. And given that right now what consumers are looking for is the way to get their taxes done the easiest and the cheapest and to get the maximum refund, we stack up extremely nicely at $65 for one of our mid-tier lies of TurboTax versus $180 for a tax store. So I think all the factors play in our favor, which is why we are holding our guidance for tax despite what is going on in the marketplace.

Bryan Keane - Credit Suisse

Okay. All right, thanks a lot.

Operator

Your next question comes from Heather Bellini of UBS.

Heather Bellini - UBS

Thank you for taking my question. Brad, I had a two parts, actually. First if you could share with us what are your assumptions now regarding organic QuickBooks growth for fiscal year ’09? And I guess in general, what risks do you see in being able to achieve the new total revenue growth target you just put forth? I guess embedded in that question is are your expectations that things are going to get worse, stabilize, or get better? Thank you.

Brad D. Smith

You’re welcome, Heather. Good to speak with you this afternoon. So let me start first with the organic assumptions in QuickBooks. As you saw coming out of Q1, we saw about a 1% growth in QuickBooks and the rest of it was made up by Homestead in that segment. We have not built in any appreciable improvements in that in QuickBooks, so you are going to see very modest organic growth in QuickBooks for the balance of the fiscal year.

In terms of what we built into our assumptions, we have not built any improvements into the macroeconomic conditions nor have we factored in any material improvements in our own operational execution today, and so net net is I think what we see as reality is what we have reflected in our guidance. No improvements in the economy in the balance of this fiscal year and the results that we see, we’ve tried to do our best to come up with a range of scenarios and we’ve built those scenarios into the guidance for QuickBooks as well.

Heather Bellini - UBS

Thank you very much.

Operator

Your next question comes from Adam Holt of Morgan Stanley.

Adam Holt - Morgan Stanley

Good afternoon. My first question is actually a follow-up on your commentary around tax, understanding that people have to file their taxes, we have gotten plenty of negative data points out of the retail channel and I was wondering what specifically your expectations are for the retail component of TurboTax and how comfortable are you that those don’t change at all, given what’s happened on the retail side?

Brad D. Smith

Adam, I think first of all, it starts with -- it’s a universe of 140 million tax returns that will be filed and the choice will be up to the consumer whether they want to do those in desktop or on the web. We have seen for the last several years that the web is growing much faster than desktop. In fact, last year our units grew somewhere in the neighborhood of 37% online and in the low-single-digits, I think of roughly 3% in retail. So the net net is we don’t see that trend going any way other than the direction it’s already been going.

It comes down to someone’s comfort level with processing their taxes in one way or another. What we haven’t seen is a lot of people who process on the desktop switching over to the web. Now whether this is a catalyst or not is yet to be seen but what we do know is it’s immaterial to us.

Our goal is to capture the maximum number of tax filers out there in the marketplace and if they go to the web-based version, we’re happy with that as well. And so if retail has a tough time, we know that they are going to have to file their tax returns. We believe the alternatives are they can go back to paper and pencil, which will do two things -- it will take them a lot more time with more risk of mistakes and it will take them several weeks, almost up to 30 days to get their tax refund back, or they can go online into TurboTax or one of the other alternatives in the market and get their refund done with maximum deductions and get their money back quicker. So we think net net, we are going to do very well in this economy and we are going to do fine in terms of whether the retail market has a tough time with desktop or not.

Adam Holt - Morgan Stanley

Great, terrific and if I could just turn quickly to the financial institution business, it sounds like you feel pretty good about the visibility level there. At the analyst day, you talked about your backlog number being up close to 40% on a year-on-year basis. Can you maybe correlate for us or tie a little bit more closely what the backlog number means with respect to this year’s guidance, or said another way, maybe drill down on the level of visibility. And do you think that the financial institution end user number on the banking side this quarter was an anomaly or should we expect that to continue?

Brad D. Smith

So let me start with the backlog number -- we think the backlog number is a healthy indication of how well our products are being received in the market by banks who recognize that they need to continue to offer these services to their consumers and small businesses, so that’s a healthy indicator.

What we also recognize is once we actually get those contracts signed, we go through an implementation window and then that revenue gets recognized over a period of time because it’s subscription basis. And so net net, what we are looking for as leading indicators are the number of active users, whether it’s online banking or bill pay, and you will see that start to manifest itself as that pipeline turns into real implementations. So we said keep an eye on the trends over the second, third, and fourth quarter this fiscal year and we believe you are going to see the number of adoption, users adopting online banking and bill pay continue to increase.

Now what we saw this go around is we didn’t see a slow-down in the number of people signing up for online banking -- what we did see is an increase in the number of banks going in and purging customers that they felt weren’t actively using the products, and so they literally took out customers that weren’t actively using Internet banking. I couldn’t tell you if that purging is done because we don’t have that visibility into where each of the financial institutions are today, so what we are focused on is acquiring as many financial institutions as possible, making the products easy to use so many new users will adopt it, and then over time we think that will continue to net out to a strong healthy growth as we exit this fiscal year and go into next year.

Adam Holt - Morgan Stanley

Great. Thank you.

Operator

Your next question comes from Brad Zelnick of Banc of America.

Brad Zelnick - Banc of America

Thanks for taking my question. How much of a roll do you believe pricing will play in the consumer tax business this year, given the economic climate? Will customers be more price sensitive? Have you given any thought to aligning your pricing structure more closely with that of your competitors?

Brad D. Smith

Thank you, Brad. First of all, let me start by saying that at the end of the day, consumers have always looked for the easiest and the lowest cost way to get the maximum refund and we feel very good with our position in the market because our starting price point is free. And so it’s going to be pretty difficult for any competitive alternative to go lower than that.

In terms of retail or desktop, there really is only one other major competitor -- there’s us and it’s H&R Block. And what we have seen so far is that both us and that competitor have taken similar steps towards building the e-file into the actual purchase of the product and our data suggests they are somewhere in the neighborhood of about $10 within the price range of our product line and if we look back at history when the price points were aligned that closely, we do very well in the market.

So I would say in the desktop side, relative to the alternative, which is the major competitor in the market, we are at a price point we think is a good value for the price and in terms of the web, we have a range of price points starting with free, and so if there truly is price sensitivity in the market, we think we are well-positioned to capitalize on the market opportunity.

Brad Zelnick - Banc of America

Thanks and if I could just turn to the expense side of the equation, looking at your efficiencies there and you talked about the different scenarios that you vetted out with your board, can you just maybe speak a little bit more to what are the various levers that will enable you to modulate expense with revenue growth in these various scenarios? Thank you.

R. Neil Williams

As we’ve talked before, the main work that we’ve been doing over the last year or so is more closely aligning our resource levels and our expenses with our products and offering and with revenue there, so we are very closely monitoring which offerings and products are doing well from a user adoption and from a revenue standpoint and adjusting the investment level or the spend level based on the success metrics that we see there. So particularly in things like marketing and other more expenses where we can adjust more quickly, those are areas where we want to see a close match-up with the results and with the customer adoption an exception. So those are probably the main levers you would think about.

Brad Zelnick - Banc of America

Thanks.

Operator

Your next question comes from Michael Millman of Soleil Securities.

Michael Millman - Soleil Securities

Thank you. Regarding the tax, a couple of questions -- why wouldn’t you expect in this environment people to switch from the paid web to the free web? Secondly, why wouldn’t you expect taxpayers to actually accelerate their payment in this environment in order to access their refunds quicker? And also, I’m a little confused as to why if you’ve bundled the price, therefore increased the price of desktop and recognize revenues when sold at retail, that wouldn’t help the second quarter versus the third.

In regard to looking at the total guidance for the year, you indicated that you didn’t assume that the economy would get better during the rest of the year. It doesn’t sound like you assumed it would get worse either, so is it fair to say your guidance is very much dependent on which way the economy goes and maybe if you can just tell us what the importance of organizing tax documents is and means.

Brad D. Smith

Thanks, Michael. I took notes on that one to make sure I could cover each of the points because they are all very important. I’m glad you got them out there so let me take them one at a time.

First of all, why do we not anticipate seeing paid go to free -- a couple of thoughts here. One, we’ve been at the free game now for several years and what we have noticed is a little over two-thirds of the people who come in on the free products weren’t actually in the category prior, so it brings new people into the category out of a shoebox, out of a piece of paper, or out of a tax store.

Secondly is actually when you go into free, it tends to be for the simple filers and one of the things that you have to do is key in all the information and people who have been using a paid version are able to actually import their prior information electronically. You cannot import prior year information into the free version of the product and so literally what we have found is most people are willing to go ahead and pay a modest amount to stay on the paid version so they don’t have to re-key all that information. They simply import it from prior year.

So the two things that give us confidence, one is for two years of history we have not seen anything that would indicate that it cannibalizes the paid version and secondly, there’s benefits to actually using the paid version and importing the information prior year as opposed to going down to free.

Michael Millman - Soleil Securities

Unless they are unemployed and their time value of money has changed.

Brad D. Smith

Yes, in which case, Michael, I would tell you two things -- if we can retain that customer in the franchise, we know that once they get back on their feet they will stay with Intuit and so if they did downgrade to free, we would be happy with keeping the customer in the franchise because we’ve actually proven we can monetize them in year one and continue to monetize them over their lifetime. But we’ll wait to see how that plays out.

The second is accelerating -- you asked about accelerating the payments, people wanting to get their refund quicker and why don’t we think they would file earlier. I would hope that’s the case but the reality is a couple of things -- they can’t file until they get their W2s from their employer and many of us today, as we’ve now seen in this economy, now have equities. We have 401K plans and other types of investments that we need to get from various financial institutions and unfortunately those institutions have notoriously been late in getting that information to tax filers. And so at the end of the day, tax filers are a little bit beholden to the fact they can’t file until they have all their documents to be able to send in their tax return.

So we’ll see but so far procrastination has continued to be an issue. What we do like is if you want to go ahead and file a return with us today and then you get more documents, you want to go ahead and file a subsequent return, you can do that with TurboTax as well. So the sooner they file, the happier we are because we would like to help them get their money back.

The third is desktop and you talked about why would we see a shift from Q2 to Q3 if we’ve actually raised the price on retail and desktop and shouldn’t we see more revenue. First of all, the way we’ve actually bundled in the e-file price in the desktop, there’s accounting recognition which we will defer, about $10 million to $15 million into Q3, and that’s something Neil described earlier.

And secondly is while it could end up being the case, we just see a bigger shift of people going more online and we think that’s going to have a bigger impact on the overall quarter’s numbers than somebody actually getting a price increase in desktop.

The last question you asked me was about the economy and you heard the words, we hadn’t assumed any improvement in the economy. Does that mean we haven’t assumed any downturn? What we have actually done is we have done our best, as many people out there are trying to do, to assess what the high-end and the worst case is, and we’ve tried to put scenarios in place and the guidance we provided captures what we believe the high and the low end is. Now, no one has a crystal ball. I hope ours is as good as anybody else’s out there in the market but we’ve done our best to capture what we think the ups and the downs are, based upon what we are seeing today.

Michael Millman - Soleil Securities

And the other question was about organizing tax documents.

Brad D. Smith

Michael, could you repeat that piece of the question again? I’m sorry, I didn’t jot that one down.

Michael Millman - Soleil Securities

I was just curious as to what organizing tax documents meant in this press release you put out the other day.

Brad D. Smith

Organizing tax documents -- okay, I have to admit, you’ve stumped me, so as the team actually flips through here, what I would like to do if I could is I’ll go on to the next question and if I find that information, I’ll be more than happy to answer it so everybody can hear the answer.

Michael Millman - Soleil Securities

I appreciate your answers. Thank you.

Operator

Your next question comes from Jeff Keane of William Blair.

Laura Lederman - William Blair

It’s Laura Lederman. A quick question following up on the economy when you talk about the guidance reflecting a more positive and one of the more negative scenarios, can you give a sense of how negative and positive those are? In other words, I know you can’t give us an exact [inaudible] in the number or GDP but can you give us a feel for how negative the negative scenario is?

Brad D. Smith

So it’s hard to put -- I’ll try it this way. Like many people in the market, we don’t see any rebound in the economy at all until the fourth quarter of 2009 and that’s a calendar year basis, which basically means outside of our current fiscal year, because our fiscal year is August 1 to July 31st. What we’ve also seen is we’ve seen the early indications of new users not coming in on QuickBooks like we had hoped and the actual charge volume and payments going down and some of the currency fluctuations, so we’ve not built any sort of an improvement there. We’ve built a continuation of what we actually see happening today into the balance of the year.

So it’s really hard -- and we have also not banked on any sort of increase in small business formations despite the unemployment typically being a leading indicator for new businesses starting. We haven’t built any of that in as well.

So we’ve tried to be conservative, Laura, on this one. We’ve built what we think is reality into the low-end of our guidance but I think a lot of us have seen over the last six weeks, seven weeks, that it’s hard to predict these things but we’ve done our best to put a floor in and a ceiling in.

Laura Lederman - William Blair

But just a quick clarification -- the low-end doesn’t assume things get any worse in terms of QuickBooks volumes getting a little worse and payments and payroll getting a little worse than what you saw over the last six weeks?

R. Neil Williams

You know, Laura, the thing I would suggest there is as Brad mentioned in the call, we look at each one of the business units separately and we think the economy has very different impacts on each one, so you might think of the scenarios for payments and for small business being much more sensitive than our financial institutions or tax business. So when we run different scenarios by business unit and aggregate them for the total company level, we feel comfortable they fall within the guidance range we’ve adjusted but that reflects a much more, a higher level of sensitivity in the small business category than it would in consumer tax or financial institutions.

Brad D. Smith

I’ll just finish up on what Neil said by saying we have assumed that it can get worse, so as we’ve looked at QuickBooks and we’ve looked at credit card transaction volume per merchant, we haven’t just taken today in straight lines. We have actually looked at what we think could be a bottom-end scenario for us and a top-end scenario.

Laura Lederman - William Blair

Okay, that’s helpful. Can you also talk a little bit given the difficult retailers are having, whether or not you take more of the QuickBooks or actually tax for that matter on consignment and if that’s been factored in to cash flow at all, or is that not something you expect?

R. Neil Williams

You know, Laura, that is something that we are certainly open to and as we have on a case-by-case basis seen issues with retailers not taking in as much inventory early in the season. That’s something we are open to. I would tell you that we’ve not seen significant moves in that direction so far in the season.

Laura Lederman - William Blair

Okay, final question for me -- Brad, could you talk a little bit about [inaudible] and acquisitions? Were they likely to be quiet small or would you be more opportunistic than that? And just give us a general sort of loose guidelines on what you are thinking on the acquisition front.

Brad D. Smith

I would say, Laura, that as the part of our strategy in each of the businesses, we are very clear what we see as opportunity to accelerate growth and we’ve always had options in place to build, buy, or partner to accelerate the execution on that growth strategy.

Typically as we looked back at the last 10 years of acquisitions, we know that talent and technology acquisitions or services and products that can be sold into our existing base of small business and consumers are the ones that we have a good track record of executing well, and so I would typically look at those kinds of acquisitions as being the type of acquisitions we would capitalize on.

We obviously know what spaces we want to move into in small business, for example, and so now it comes down to if there’s an opportunity in the market that we think is priced right and there’s a good fit between our company and theirs, we’ll capitalize on it.

Laura Lederman - William Blair

Are there a number of things out there you are looking at or is this all theoretical or are there just a lot of properties out there that are interesting?

Brad D. Smith

Let me first start by saying we are not on a shopping spree. We actually have been doing some work for the last 12 to 15 months with each of the businesses and at the company level to say what are the spaces that we think we could accelerate our time to market with an acquisition, so we have had a list of potential players that we’ve continued to have dialog about and potentially had conversations with them and this market just provides a catalyst for some of those players to say hey, this is now a better time than others.

I would say that we are being very prudent right now and if it fits with our strategy and we think it’s going to accelerate our progress as we come out of the downturn, then we are going to capitalize on it.

Laura Lederman - William Blair

Thank you so much for taking my questions.

Operator

Your next question comes from Gil Luria of Wedbush.

Gil Luria - Wedbush Morgan

Thank you for taking my question. One question on payroll and one on financial institutions -- for payroll, what percentage of your revenue -- for payments, I’m sorry, what percentage of the revenue is driven by the size of the transaction? What percentage are you charging interchange, is comprised of interchange and how big of an impact has been the decreasing ticket sizes on that?

And the second question on financial institutions is what are some of the early results for FinanceWorks? Have you signed up any customers? What are some of the early feedback?

R. Neil Williams

On the first part, we really haven’t talked about publicly the composition of our payments revenue as to what portion comes from Interchange and those -- as we said on the call earlier, certainly we see the declining transaction volumes more than offset the growth in merchant’s volume we have seen but we really haven’t talked about the individual component pieces.

In terms of the financial institutions, last time I looked we had 70 that had signed up for it and been converted to FinanceWorks. I haven’t seen a more recent number, have you, Brad?

Brad D. Smith

No, Gil, that’s right and I would tell you the pipeline continues to come in strongly, so we are seeing really good progress and you asked specifically about the feedback. We are actually helping some of these financial institutions quantify that they have seen an increased adoption of the services they offer through FinanceWorks, which is good news for them because it’s fee revenue and so as a result, once we can actually capture that we are using that as a way to help other financial institutions make the decision. But it is having an impact on their business and we are getting good feedback.

Gil Luria - Wedbush Morgan

Great. Thank you.

Brad D. Smith

Before we go to the next one, Michael had asked a question about tax documents and I wanted to simply follow-up on that one quickly -- our accounting professionals division, APD, has introduced an Intuit document e-sort. It’s basically a new system capability that allows people to take the process of scanning documents that otherwise would have been paper and labor intensive and get those easily imported to an accountant so they can get them right into the tax preparation system. And it’s actually an exciting thing that will help professional tax preparers that use pro series or [Lesert] in our accountant base.

Scott D. Cook

The one thing I would add to that is that we find it’s -- since accountants bill for their time, time is money and the more time we can save them the more excited they get about our offerings. So this is one of several efforts that are dedicated to automate and save time for accountants and that’s such an important buying reason for them, when you can automate getting the documents into the software.

Brad D. Smith

Sorry, Patty. Next question.

Operator

Thank you. Our next question comes from Brent Thill of Citi.

Brent Thill - Citigroup

Thanks. Brad, you outlined a fairly aggressive ramp in your QuickBooks marketing campaign at the analyst day. I think you mentioned up 50%. Can you continue that type of ramp and still preserve the overall margin improvement for the year? And I guess at what point, when do you start to dial that back a little bit, considering the results are a little bit below what you expected?

Brad D. Smith

Thanks, Brent. First of all, the macro answer to the question is yes, we could sustain that ramp of investment and still deliver the margins. However, I would say that one of the benefits at Intuit is we have a very strong marketing organization and one of the things they have already done is they have quick reads on what part of the advertising mix is working well and what parts they would actually shift resources from into the higher ROI areas.

The second thing I would say is there’s always opportunity in a downturn and one of the challenges that’s happening is the advertising community is struggling to get advertisers to keep their commitments, which means that inventory that we may be willing to pay for in the back half of the year may actually cost us less than what we thought it would have cost us, so we can do one of two things -- we can either increase by keeping the level of spending the same and get more advertising dollar bang for the buck, or we can actually cut back a little bit and maintain the current advertising levels and have a little bit of savings at the same time.

So we are playing this thing in sort of a no-huddle fashion, which is we are seeing which is producing the best results and we also are keeping our powder dry so we can shift it and take advantage of market opportunities.

Brent Thill - Citigroup

Okay, and just a follow-up on QuickBooks, you’re number three in the most popular on Amazon’s software list, so obviously ranking pretty high. What is -- has there been a surprise on any of the SKUs between pro or premiere or anything else in terms of the initial QuickBooks uptake that has surprised you on the upside?

Brad D. Smith

You know, I would say not so much from a mix perspective. I would say there’s two things that have been a surprise -- one is we are very excited to see how willing the accountants are this year to recommend this version of the product over prior years. It’s up about 40% over last year’s version, which is very positive because we know many small businesses turn to their accountant for advice. Also, we’ve heard very positive feedback on the multi-currency, the free website, as well as some of the other feature functionality.

I will tell you we also have a mea culpa, and our mea culpa is this year we introduced some new functionality on online banking and it was really designed to drive new user adoption. We have about 4% of existing QuickBooks users today that use the current feature functionality in online banking and we wanted to get more, 96% of them who don’t actually use it.

What we did is we changed the user interface and the good news is it is easier for people who haven’t used it. The challenge is if you were used to using the old version, there’s a new learning curve and so we’ve heard a little bit of feedback on gosh, I wish you would have left it the old way for me because I was used to it. And so we are working our way through that and we took some learning to say okay, next time when we build a new user interface, let’s make sure we remember how to bring those 4% of customers along who are already using the old version as well.

I would say net net though, what you are seeing on the website of us being the third most popular software and what has been the upside surprise is despite the macro-economy, our upgrades are in line with our expectations and that’s two-thirds of all the units in a given year that we get in QuickBooks for people who are willing to upgrade to the newest version, and we are delighted to have that kind of result, given what is going on around us.

Brent Thill - Citigroup

Thanks, Brad.

Operator

Our final question comes from Brendan Barnicle of Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

Thanks so much for taking my question. Brad, I wanted to follow-up a little bit on your strategy around protecting EPS. You noted that it could get worse. Is the low-end of EPS guidance, can that be sort of achieved and protected, even if revenues were to sort of fall below where the current low-end of revenue guidance is expected?

R. Neil Williams

I’m not really sure I understand your question but I am going to take a shot at it -- I think what we have said is that we feel very confident with our ability to allocate resources and our investments against the offerings and categories that are producing the revenue growth we expect, and then the earnings per share is just really kind of a result. It’s not something we solve for it -- it’s kind of what happens at the end of the day. I think what you are hearing from us though is that we do feel a strong commitment and feel like we have the ability to keep our expense growth below our revenue growth, so when we’ve looked at different scenarios and thought about things we would do, as Brad stated earlier, we feel very comfortable about our ability to keep our expense rate growing slower than revenue, which provides the operating leverage that we are looking for in the guidance.

Brendan Barnicle - Pacific Crest Securities

Maybe just to follow-up on that -- were there any risks or significant changes in your spending patterns in the most recent quarter or areas that are sort of obvious areas to go to if we do end up with some more dramatic slow-down in the economy?

R. Neil Williams

There were no unusual items that I can think of in the first quarter and I think as we’ve talked about, we are looking to the performance of each business unit and the offerings within that business unit to really determine the revenue growth and to match up the investment level along with it and so as we look at the success of the demand generation advertising campaigns, as Brad mentioned, these are typically in very small pieces and so we can measure very quickly if we are getting the results and the uptake we anticipated from an investment and an offering, and we can adjust accordingly. So I think those are the levers we would pull as we see how the season plays out in the second and third quarter in our segments, and we feel like we have good transparency into those.

Brendan Barnicle - Pacific Crest Securities

Great, and then lastly, Neil, can you just remind us of what the assumptions are in share count, tax rate and interest income that’s embedded in the full-year EPS guidance?

R. Neil Williams

The share count is on the fact sheet that we anticipated. As I mentioned, we haven’t changed that, so the basic range is $3.17 to $3.20 and fully diluted was $3.28 to $3.31. As far as the income and expense and things like that -- the tax rate is on the sheet as well, it’s 33%. The interest income and expense is not a huge factor for us and we don’t anticipate a significant change in that.

Brendan Barnicle - Pacific Crest Securities

Great. Thanks for the help.

Brad D. Smith

Are there any other questions? Patty, that was it?

Operator

That does conclude our question-and-answer session.

Brad D. Smith

Okay, thank you. So let me wrap up by thanking everybody for their time this afternoon. I want to reiterate that I feel good with our first quarter results. I think we’ve been able to demonstrate, as I said earlier, some resiliency on the top line while also managing our spending and making sure we deliver on the bottom line. The other thing I would say is we feel that we’ve taken prudent actions as we revised our guidance to do our best scenario planning on what the low-end and the high-end could be and we’ve reflected that in our guidance. But most importantly I want to reiterate that the focus we have in the company right now is an offensive game plan. We think we’ve taken the right actions to strategically align our resources and our goal is to grow customers and gain market share so that we come out of this downturn, if you want to call it a recession or a slow-down, even stronger than we went in. And I feel confident with the plan we have in place, with the team we have on the field, and with the focus of our employees, so I look forward to giving you an update and speaking with you soon the next time we get together.

Neil, any closing comments?

R. Neil Williams

Thank you. No.

Brad D. Smith

All right, Neil’s ready too. Take care, everybody.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today’s conference call. This concludes the call. You may all disconnect.

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