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Intuit Inc. (NASDAQ:INTU)

F2Q09 Earnings Call

February 19, 2009 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

Analysts

Bryan Keane - Credit Suisse

Jim Macdonald – First Analysis Security Corp.

Heather Bellini - UBS

Adam Holt - Morgan Stanley

Ross Macmillan - Jefferies & Co.

Laura Lederman - William Blair

Philip Rueppel - Wachovia Capital Markets

Brent Thill - Citigroup

Scott Schneeberger - Oppenheimer & Co.

Michael Millman – Millman Research

Gil Luria - Wedbush Morgan

Operator

At this time, I would like to welcome everyone to the Intuit second quarter 2009 conference call. (Operator Instructions) With that, I will now turn the call over to Jerry Natoli, Intuit's Vice President of Corporate Finance, Planning and Analysis, Investor Relations, and Treasurer.

Jerry Natoli

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

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

Good afternoon everyone and thanks for joining us. Earlier today we announced our second quarter results and updated our guidance for the fiscal year. We delivered a strong second quarter with revenue within our expected range and operating income and earnings per share significantly above our expected range.

For the full year we now expect revenue to come in a bit below our prior expectations but we still expect to deliver positive revenue growth. And we expect earnings growth for fiscal year 2009 to be very strong. I’m pleased with our team’s performance and with the company’s results relative to the environment in which we are all operating.

Results like these certainly aren’t typical as you look out across the industry and while it’s clear that we are not recession proof, we are proving to be resilient.

Our performance is holding up because our products and services are needed most in times like these. Our offerings help people save and make money. We do this by helping them be more productive so they can accomplish more with less. We help them with tax compliance so they avoid paying penalties, and we make our products and services so easy that our customers have the confidence to do things themselves rather than paying expensive fees to someone else to do it for them.

When it’s all said and done, we put more money in our customers’ pockets and that’s exactly what every consumer and small business needs these days.

When you look across our businesses, we earn the majority of our revenue and profits from products and services that have not been materially impacted by today’s economic environment. For example, taxes still need to be filed regardless of the economy and while it’s still early in the season, we expect another solid year in tax.

Our financial institutions revenue is driven by long-term contracts and we have pretty good visibility into that revenue stream.

And our payroll business continues to show positive customer growth and good retention. Now remember, our payroll business benefits from the low-cost provider relative to outsourcers. And the flat-fee pricing in our do-it-yourself payroll business makes our revenue less susceptible to reductions in our customers’ employment levels.

However, as I mentioned last quarter, some of our businesses are more exposed to the economic downturn. These businesses include QuickBooks, Real Estate Solutions, and Quicken. Each of them has come under increasing pressure as the economic environment has deteriorated. As a result we have reduced our full year revenue expectations for these businesses and adjusted the outlook for the company as a whole to reflect these changes.

Now despite this increased pressure, we are adapting and we are managing the business for success. We have a clear five-point plan to deliver positive top-line growth and strong earnings growth for the year. And we have tangible proof points to demonstrate that it’s already working. I will say more about that later in the call, but first let me turn it over to Neil to walk us through the results of the business segment and the financial details.

R. Neil Williams

Let’s start with company-wide results. Second quarter revenue was $791.0 million, down 5% year-over-year. Growth would have been 2% without the year-over-year changes in deferred revenue in our tax businesses. As a reminder, the deferred revenue will be recognized in the third quarter.

Our non-GAAP operating income was $172.0 million, well above our expected range. Note that this is in spite of about $58.0 million in operating income that shifted from Q2 to Q3 because of the change in revenue deferrals.

Our non-GAAP EPS of $0.34 was also well above our expected range. Earnings remain strong even in this economy. That’s a direct result of the operational rigor we use to run the company and we have also taken a number of specific actions to meet the challenges we face in this environment.

First, we are slowing our hiring. We are continuing to hire key talent for long-term success but we are evaluating all open requisitions and making sure they make sense in both the long and the short term.

Second, we are evaluating our performance-based compensation program and adjusting our expected payment levels to take the current environment into account.

Third, we are monitoring our marketing costs and adjusting our programs to make sure we are getting the lift in customer acquisition that we expect from our investments.

And finally, we are being disciplined about our discretionary spending and are taking a hard look at what is truly necessary. While we are managing expenses carefully we are also continuing to invest for the long term by aggressively pursuing new customers and protecting our R&D innovation pipeline.

We believe we have the right balance of short-term rigor and long-term vision. You will hear more specifics from Brad on these matters later in the call.

Now let’s review the segment results. First, the tax segments. Consumer tax second quarter revenue was $187.0 million, down 25% from a year ago. This includes a shift of about $70.0 million in revenue in Q2 to Q3. As a reminder, bundling our federal e-file service with our consumer tax desktop product caused us to postpone recognition of revenue until later in the year. Without that revenue shift, we would have seen growth of 4%.

It’s still early but so far the tax season is playing out about as we expected. We continue to see people filing later in the season and customer growth is coming from the online version of the product.

Our Accounting Professionals second quarter revenue was $133.0 million, which amounts to 14% growth. This includes about $12.0 million of revenue shifted in from the third quarter. Fewer services are bundled into our professional tax solutions this year, which means more of the revenue is recognized up front. We have included a table in the posted version of the script to help track these changes.

In the total Small Business segment, second quarter revenue was $322.0 million, up 5% from a year ago. Adjusting for the acquisitions of Homestead and ECHO made in FY2008, revenue would have been flat for Q2.

In the QuickBooks segment, second quarter revenue was $164.0 million, 2% less than the same quarter last year. The growth rate would have been about 4 points lower without the acquisition of Homestead. The decrease in revenue is primarily due to fewer than expected paid new QuickBooks users.

On the plus side, our upgrades remain on target and our online edition and enterprise products continue to add to their customer bases. Online edition customers increased by 9% and enterprise customers grew by 21%. Revenue for those businesses was also quite strong.

While the number of paid new customers is lower than we originally planned, our focus on customer acquisition is paying off and we are pleased with the total number of new customers acquired this quarter.

In the Payroll and Payment segment, second quarter revenue totaled $158.0 million, which is up 14% from a year ago. This growth would have been 8% without the ECHO acquisition.

Merchant acquisition growth remains strong at 14% however, sales volume per merchant declined 8%, a rate we believe is in line with what other processors are seeing. Our payroll customer base was up 2% and our retention is holding steady. And we’re particularly pleased with the rapid growth of our online payroll service.

In the Financial Institution segment, revenue was $76.0 million, in line with expectations, and up 5% year-over-year. Personal Finance Works launched in the first quarter and we are pleased with the reception from customers and the banking press. And so far more than 160 banks and credit unions are live or implementing the solution. And our pipeline for new sales remains strong.

This quarter we launched small business finance works and though it’s early, we’ve had good customer response.

Our Internet banking user base is up year-over-year but down sequentially as conversions of newly signed institutions are taking longer than we would like. But we are seeing record growth in Bill Pay users as we continue to make significant improvements in the end user experience.

In our Other Businesses segment, second quarter revenue was $73.0 million, down 21% year-over-year. This is due to weakness in our Real Estate Solutions business and Quicken and includes the foreign exchange impact from a strengthening dollar.

On the balance sheet, Intuit ended the second quarter with $802.0 million in with cash and investments. Our cash flow remains strong and we expect to generate about $900.0 million in operating cash for the fiscal year.

Our deferred revenue was $472.0 million, up $135.0 million from second quarter 2008. This is due primarily to the deferral of revenue from Q2 to Q3 for the e-file bundling and growth in our subscription-based businesses.

Capital expenditures were $50.0 million, in line with expectations and we are on track to hit our $200.0 million capital spending estimate for the year.

Our stock repurchase program returned about $35.0 million of cash to shareholders and we have $400.0 million left in the current authorization.

Turning to guidance, while we remain committed to accelerating our top-line growth rates in the long term, there is clearly short-term pressure on revenue in today’s environment. We still expect to deliver a strong tax season and are reiterating our prior guidance for the Consumer Tax and the Accounting Professional segments. We are also reiterating our prior Financial Institutions and Payroll and Payments guidance. We have lowered our full year revenue outlook for QuickBooks and our Other Businesses segments.

As I mentioned earlier, upgrade units of QuickBooks are coming in as anticipated but new users are under pressure. Our paid new users comprise about one-third of our total paid users in any given year. We now expect QuickBooks revenue of $580.0 million to $620. 0 million, or a 7% decline to flat with last year.

In our Other Businesses segment Real Estate Solutions customers slowed their spending significantly and we are not anticipating recovery in the near term. We are also seeing declines in our consumer-driven Quicken business. Because of this, we are bringing down our full year guidance to $270.0 million to $290.0 million, or a 19% to 13% decline.

As I mentioned last quarter, foreign exchange has impacted this segment accounting for approximately 7 points of the year-over-year decline.

With these changes, our fiscal 2009 revenue guidance for the company is now $3.13 billion to $3.25 billion which is annual growth of 2% to 6%. As mentioned earlier, we are aggressively managing expenses and expect to deliver strong operating income and earnings per share for the year.

We now expect non-GAAP operating income of $917.0 million to $970.0 million and non-GAAP EPS of $1.78 to $1.89.

Now these ranges are a bit wider than we normally set, reflecting the uncertainty in the economic environment. But despite that uncertainty we believe it is important to provide transparency into the results we expect to deliver across the range of revenue outcomes that we believe are most likely.

And with that, I will turn the call back over to Brad.

Brad D. Smith

As you each know, good companies find ways to capitalize on these difficult times to strengthen their position. Now we strive to be one of those companies and I am convinced that we have the right strategy to win, in this or in any environment.

Our goal remains unchanged. We strive to an innovative growth company that helps consumers and small businesses achieve their dreams and the way we contribute to their success is by helping them put more money in their pockets. We do this by using easy to use connected services and as we look ahead, increasingly these services will capitalize on the market trends of social, mobile, and global to accelerate our growth.

Now clearly we have seen some fundamental changes in the economy in the recent months. These changes have only bolstered my confidence that we are on the right path. We don’t view this as a short-term downturn. In fact, we think of it as a new normal. A new normal that plays well to who we are and what we deliver as a company.

We are adapting to this new normal with a five-point plan. It’s a plan to play offense, not defense, and it’s already producing tangible results. Let me share some of the specifics with you.

The first principle in the plan is to say laser-focused on customers, customers, customers. They need our product like never before and we need to acquire them, serve them, delight, and retain them like never before. So growing our customer base is our number one goal. As we have proven in each of our businesses we have the means to monetize customer relationships over time and generate profits even if we originally acquire the customer with a free product.

Now we are being aggressive in our demand generation and promotional offers and in the use of free products to bring new users into the franchise. These are all proof points of this first principal in action across the company and you are going to see more of that in the coming months. The results are already evident. QuickBooks is just one example.

As we reported on our last call, total QuickBooks units were down about 3% through the first quarter. But thanks to our aggressive demand generation the retail small business accounting category as a whole grew 13% in the month of January and QuickBooks gained an additional 4 points of share over the same period last year.

Now total QuickBooks units in Q2 were up 5% and we are now up year-to-date in the worst small businesses spending environment that any of us can remember. So we’re getting smarter every day and we will remain focused on growing our customer bases as our number one priority.

Our second principle is to deliver improved operating leverage with strong operating income growth. We now know that revenue will be less than we expected, so to balance the equation, we are adjusting our spending. It’s as simple as that. We will continue to make good resource allocation decisions throughout the year but as you heard Neil talk about the levers, we have levers to adjust our spending and we will continue to adjust if conditions erode in the second half of the year.

Our third principle is our unwavering commitment to growth. We can’t diet our way to success long term. We are investing to grow our business in smart ways that will help us come out ahead when this turbulent chapter ends. An example here is the investment we made in the small business stimulus united stimulus program that we launched in late January. The program helps small businesses get started with free and discounted offers. We continue to see that many of these users immediately upgrade to a paid product or they begin using one of our tax products such as Payroll or Payments.

These free offers target newer businesses rather than the more established smaller businesses and so the customers tend to be incremental for us. And here’s something each of you have been asking us in the last several quarters on the calls. Our free Simple Start offering generates about $30 in revenue per activation in the first 12 months. And we’re not seeing any significant cannibalization of our paid products.

Now I want to put that into context. That product had a list price of about $99 in retail that would typically be promoted at $49. When we give it away for free we make $30 in the first 12 months, so free is clearly not fee.

Our fourth principle is to protect and nurture innovation. Even as we adjust our short-term spending, we need to plan for long-term success by keeping the innovation pipeline flowing. For instance, over the next several months we expect to come out with an online payroll service for Mac users. We will also be introducing online payroll functionality that will appeal to accountants, and the inclusion of our online payroll offering will be going into the small business Finance Works platform, just to name a few.

Our fifth and final principle is to take advantage of inorganic growth opportunities as they materialize. We have a strong balance sheet with lots of cash which lets us invest for the long term and capitalize on opportunities that make good, strategic, and financial sense.

As you know, we began making proactive changes last summer before the economic storm truly hit and it’s paying off. We believe that we were better prepared for the downturn than many companies and we continue to be proactive to ensure that we stay that way.

The formula we use to run this company still works. Having talented and engaged employees focused on delivering great things for customers so that we can grow revenue and profits.

On the employee front we were named one of Fortune magazine’s 100 Best Companies to Work For for the eighth consecutive year and our employee engagement scores in our recent survey remain at best-in-class levels. Our priority is to ensure that our employees remain focused on delivering for customers and that our employees understand that we remain committed to their continued engagement.

One action we are taking to reinforce our commitment to our employees is to change the timing of this year’s restricted stock unit grants. Now typically we grant restricted stock units, or RSUs, just after the end of the end of the fiscal year. This year we will grant them in our third fiscal quarter. The competition for top talent in the technology industry remains very strong and we have great talent. Our goal is to keep it that way.

Now I want to be clear, these grants exclude me and the senior executives of the company. The stock compensation expense associated with this grant will reduce second half GAAP EPS by $0.02 per share.

Now when it comes to delivering for customers, our employees are simply unmatched and they are energized by our company’s commitment to help our customers save and make money in these very difficult times. Our customers also recognize and value the role that we play in their success. For example, in a recent survey 70% of QuickBooks users told us they believe that using QuickBooks helps make their business more profitable and most of those users say the improvement in their bottom-line profitability is as much as 20%. At the same time, they can get up and running in the QuickBooks franchise with a product like Simple Start for free.

Now I want to be clear, this is information we haven’t even told the prospects about yet so just imagine the ability to communicate that we have an offering that could improve your bottom line, if your situation is like other small businesses, by as much as 20%.

So the ability to help people save and make money at a low cost during very difficult times is why we expect to grow our customer base, strengthen our position, and enable faster growth in the future. That’s just part of how we are doing things to do right by our customers and it makes me really proud to be a part of this company.

Now the final part of our formula is growing revenue and profits. Even though the year is playing out differently than we had originally planned, we will deliver positive revenue growth and very strong earnings growth while continuing to invest for the long term.

So to close, by continuing to execute against our long-term strategy while managing through the current environment with the five principles that I have outlined, we remain confident that we are going to grow even stronger for our employees, our customers, and our shareholders.

And with that I will turn it over to you to answer any questions that are on your mind.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Bryan Keane - Credit Suisse.

Bryan Keane - Credit Suisse

Now that tax season is on its way, are units in revenue growing or are units in revenue growth going to be at par this year for tax season or will units grow faster than revenue growth? Just looking for a little color on the delta there.

Brad D. Smith

As you know, we’re still early in the game. But what we do see right now is the performance in retail as a category is actually down year-over-year but we saw very strong growth on the Web. You will see those results posted in our tax update.

Right now, in terms of our forecast for the year, we haven’t changed our guidance on revenue and you can take a look at how the units are tracking. I think for this particular year we’re going to let the cards play out as they are but we’re going for customers. We want to deliver on the revenue guidance we’ve given for the business and we’re going to give as many customers and many units as we can.

And since there are so many things in the year that are different, we wouldn’t have any better prediction for you than what we have already guided.

Bryan Keane - Credit Suisse

It looks like the retail side is a little weaker but the Web is probably stronger. I’m just trying to figure out if that matches up to plan or is it still too early to tell how that’s going to equate out to the revenue.

Brad D. Smith

Great point. That’s a trend that’s been going on for several years. The Web has been the category growth and retail continues to decline. This year we are seeing a more precipitous decline in retail as the overall retail environment with the economic situation is being impacted, but we’re also seeing a commensurate growth in Web online. We’re seeing very strong results there.

So I think you’re going to see that trend continue as it has, for the past couple of years, this year.

Bryan Keane - Credit Suisse

And just looking at the tax theater, is there any reason why the free file alliance units are down 15%. I guess I would have thought that might pick up in a recession.

Brad D. Smith

I think it’s a combination of things and at the end of the day it will really come down to how the end of the season plays out. We are seeing a delay in tax filing that may impact some of the free file tax situation. We also know that in the commercial market now you have offerings that are free. Not only ours but also competitive offerings. So there are more alternatives available to tax filers than there were several years ago and I think it’s a combination of all those things that may be impacting the free file alliance.

Bryan Keane - Credit Suisse

On the QuickBooks side, it looks like you are getting solid unit growth but I guess it’s below expectations on the amount of paid users. It sounds like you still are able to get some revenue from them over the next 12 months but is there a bigger kick they’re after? In other words, once you get them into the ECHO system so to speak, you can cross sell more and more products to get that number up higher than the $30 I think you mentioned.

Brad D. Smith

You’ve got it. As we’ve talked about in our investor day updates, we have proven that over a five-year period we actually increased the average revenue per customer three times, 3x. And so this is all about an ECHO system play. The first thing is for us to convert non-consumption to get people into the category with the new unit and then from there we’re able to monetize them by either moving them up in the chain with upgrades or attaching payroll and payment. So the lifetime value of that customer is what we’re focused on and we do believe that this is just precursor for future growth.

Operator

Your next question comes from Jim Macdonald – First Analysis Security Corp.

Jim Macdonald – First Analysis Security Corp.

Could you talk a little about whether you think the retail drop is due to the economy or due to the higher price point because you had to bundle the e-file.

Brad D. Smith

I think if you look at retail overall, software categories are tending to have a tougher year this year in retail whether it’s small business accounting or its tax or its office productivity suites. Retail overall is having a difficult environment. To separate that from a multi-year trend that we’ve seen where people tend to choose now online offerings of tax as opposed to the desktop offering, and that’s been going on for several years.

So I think if you put the two together, there is a natural inclination for new customers to come in and choose online and you also have a tough environment in retail.

In terms of our price point, we’re actually holding our share relatively well compared to the premium we have over the competition. You know, the results are published out there from MPD where our share, we’re actually pleased with how strong we’ve held despite the fact that we have a price premium that we took this year.

So net-net I think it’s just a continuation of what you have typically seen with new products moving move online or new consumers, and then the second being the fact that there’s an economic environment out there that people are struggling with and they’re not going to retail.

Jim Macdonald – First Analysis Security Corp.

You talked about Web payroll being strong and I know it’s early days yet and you have some other products coming out here, but could you kind of quantify that a little bit and talk about, are you basically trying to take over, maintain your accounting relationship with that accounting offering you talked about, versus the competition?

Brad D. Smith

As you know, payroll for us is one of our core strategic businesses and we think it has a lot of runway overall and one of the new trends in the last several years has been online payroll and our product has been out in the market now for about a year. We have made some fundamental changes to functionality as well as pricing. We actually have an offering in the market that allows a new business to get up and running pretty quickly at a pretty low price, about $100 a year.

And so we have seen traction continue to build on that product, especially as the economic environment has gotten tougher and they look at alternatives like outsourcing to ADP or PayChex, we’re seeing the momentum really build.

In terms of the functionality riding for accountants, as you know, accountants are a key decision maker in helping a small business choose a payroll solution and the easier we can make it for an accountant to work with a small business on their payroll, the better our product success will be. So that’s what we’re building into the product is to enable the accountant to use it and also to work better with their small business clients.

Jim Macdonald – First Analysis Security Corp.

Would it be private label? Will the accountant be able to use it to offer payroll?

Brad D. Smith

At this point we haven’t revealed all the details because we don’t want to get too far ahead of our headlights with competition. But you know the space pretty well and we know what’s important to the accountants and so we are going to make sure that this product is more compelling than anything else they have in the market.

Operator

Your next question comes from Heather Bellini – UBS.

Heather Bellini - UBS

Two quick questions. One would be on the cost side, which you did a great job with this quarter. How sustainable is that and how much more room do you have to adjust costs? And the other would be, particularly on the QuickBooks side, how did you come up with your guidance. I guess what I’m getting at there is are your assumptions that the environment is going to continue to deteriorate or are you taking a snapshot in time right now and assume that it’s going to be stable?

Brad D. Smith

Let me start with the first question. On the cost side we do believe that we have the levers in place, that we can adjust the spending, depending on how our business performance is coming in while not damaging the franchise in the long term.

So to answer your question, we still have more opportunity, depending on how we feel the business results are coming in, to do the right thing short term while also protecting the long-term growth of the franchise.

On the QuickBooks forecast, we did see an uptick in December and January but we did not treat that as an ongoing trend. So we have assumed no improvement in the performance for small business overall. And in fact, we’re seeing some deterioration in other parts of the business, particularly with the charge volume and payment, so at this point what we have tried to do is we’ve tried to do our best to find the basement. So we didn’t build any of the uplift we have seen in December and January. We are assuming that conditions will not improve in small business but we’re going to do our best to continue to deliver results like we did the last 30 days, to be better than what the overall market looks like.

Operator

Your next question comes from Adam Holt - Morgan Stanley.

Adam Holt - Morgan Stanley

I was hoping to circle back to Brian’s question about QuickBooks units. If you look at just the paid units that were sold in the quarter, they were actually up about 3%, I was wondering whether there was any actually moving down the stack in terms of average selling prices going lower for the paid units, outside of the fact that there were less new paid units than you were expecting.

Brad D. Smith

There’s a little bit of that. I would tell you what we’re actually seeing, which is interesting, is the enterprise product, QuickBooks enterprise, which is our most expensive SKU in the product line, is actually growing faster than anything else. And online editions are right on its heels and it’s a subscription business that costs about $240 a year and so it’s also a more expensive product.

But we have been heavily promoting the Pro and Premier SKUs and obviously we have been out there with free Simple Start so we have seen a little bit of mix shift but overall it’s nothing that surprised us. It’s pretty much what we would have hoped to deliver in the first half of the year.

Adam Holt - Morgan Stanley

And if I could shift to the tax business, the IRS is out with some pretty bullish expectations for the category for this year and there is some question as to whether or not you will see spill-over impact from last year’s stimulus to this year’s tax season. Could you give us your latest thinking in terms of what is now underpinning the updated tax guidance from a category perspective?

And secondarily, I know it’s real early in the season, but you do have close to 5.0 million TurboTax web units, what has been your experience thus far in terms of converting folks that were free last year to paid units this year?

Brad D. Smith

Let me start first with the question around the category as it relates to the IRS numbers. A couple of thoughts here, keeping in mind that what you will see is through the balance of the year the Pro returns will start to build and they tend to be later in the season, and the do-it-yourself e-file solutions tend to come in early and continue to sustain throughout the season.

So I think the snapshot in time is showing the effects of several things. One is just where we are in the season, but the second is, as we thought, returns don’t always equal units. In our particular case we sell a desktop version of TurboTax and there is a typical 2.1 returns filed for every unit we sell. So they really don’t correlate one-to-one.

So what we’ve built into our assumptions is the last five year’s trend, which is about 8% to 9% category growth and that’s what we’ve got built into our model. If this year the numbers come in better our goal is to continue to grow the category and to continue to pick up shares so we will take advantage of that.

The second part of your question was free and whether we’ve seen a change fundamentally year-over-year. We are still seeing people who used free product last year move up to paid. There is a slight deviation from what we saw the prior year but nothing that has us alarmed. In fact, continues to keep us bullish on free aggressively because we see that it is incremental to the category and it does grow our franchise long term.

So there has been no seismic shift. There has been a subtle shift but something that we continue to believe is the right long-term business strategy for us.

Adam Holt - Morgan Stanley

And would that subtle shift have to do with retention of those free customers or how those free customers are interacting with the software?

Brad D. Smith

It basically comes down to if you want to import your prior year information you would pay for the product the second year. If you want to rekey it in, you would go ahead and use it free again. They are staying with us, we’re not losing them but there is just a very subtle, and I do mean subtle, deviation in the percentages that we had assumed and as a result we are still keeping them in the franchise and we’re pretty confident that in the long term we will be able to monetize those customers.

Operator

Your next question comes from Ross Macmillan - Jefferies & Co.

Ross Macmillan - Jefferies & Co.

Just circling back on to costs, the big delta, at least from our perspective, was really on sales and marketing. I know you have levers. I’m just curious, are you getting a lot of benefits just because of random advertising being so much cheaper? In other words, is a lot of the benefit you’re seeing on sales and marketing the fact that it’s a lot cheaper to run your marketing campaigns this year than it was last year?

R. Neil Williams

We are really not using that to reduce our overall spend. In categories where we are seeing the cost burn impressions come down, we’re basically using that to increase the impressions where we’re getting a one-for-one return, where we’re getting a good uplift in customer acquisition for the dollars we spend.

We do have some dollars that shift from category and from quarter to quarter, so those numbers do move around a bit based on campaigns that we have going on but the lift we’re talking about in terms of our expense levers are adjusting our spend for the return that we’re getting back in. So we invest more in programs that are bringing in customers and we scale back ones that aren’t. It’s not an indication of the market.

Ross Macmillan - Jefferies & Co.

So the shift this quarter was more just to do with other things such as being tighter on discretionary expenses, etc.?

R. Neil Williams

Exactly.

Ross Macmillan - Jefferies & Co.

And then, on the financial institutions business, you commented that you have seen a sequential decline in Internet banking end users. I guess that’s a couple of quarters we’ve seen that trend now. And I think you made a comment with regard to activation pace. Can you just recap on that and provide the color?

Brad D. Smith

First it’s important the Internet banking year-over-year is up about 3% but certainly over a few quarters it’s sequentially down. The challenge we’re seeing right now is the sales pipeline remains robust and strong but the implementation in switching over to our platform from their current platform is getting delayed. Many of these banks are going through a lot of short term decision making on their own and the resources they would typically devote to this integration and implementation are getting pushed out.

And so that’s literally what we’re up against on the Internet banking side. And we still have a healthy pipeline, we have good transparency into the status of the banks and so we still feel long term we will be able to turn that number around. It’s a short-term phenomenon.

Ross Macmillan - Jefferies & Co.

So the modest decline is really just a function of maybe some churn in the base and the lack of speed, if you will, on those new implementations to mop up that . . .

Brad D. Smith

That’s correct.

Ross Macmillan - Jefferies & Co.

Going back to this issue on TurboTax, that decline you saw on retail units, I’m just curious what’s happened in the early part of the season. Do you actually think you could end up with a better number on the retail side relative to what you have seen thus far this season, or is that not the assumption? In other words is the negative 14 the kind of run rate you would expect to see for the entire season or do you think you could maybe call some back on retail?

Brad D. Smith

It’s hard to predict. I will tell you what we’re doing: we’re playing the game to win at retail so we have the right level of promotional activity, we have good, tight measurements to know if we’re winning share or losing share and we’re not going to give up an inch in retail, but for us it’s all about capturing more tax filers, whether they’re in the desktop in retail or they’re online on the Web and growing the category. And that’s the way we’re going to bring in the year. And for everyone who is going to make a decision at retail, our goal is to win that decision. If the overall category in retail is down then we want to make sure we won more than we lost in that category.

Ross Macmillan - Jefferies & Co.

And is that what you’ve done so far this season?

Brad D. Smith

So far this season in the retail category we are where we thought we would be in share with the price position that we took and on the Web we have internal data that we track that suggest that we are gaining some share, which I’m very excited about because that’s the future of the category.

Operator

Your next question comes from Laura Lederman - William Blair.

Laura Lederman - William Blair

Just a few follow-up questions, one on Heather’s questions about QuickBooks. You mentioned that your modeling, that it’s staying weak and not putting in the kind of uptick you saw in January and February. Can you talk a little about what the uptick was? Was it in units, was it in ASPs? Can you talk about how those months were different than the ones before?

Brad D. Smith

The overall category had not grown for 12 months, in retail. And in December when we began our aggressive promotions and began to really amp up our advertising, it grew about 2% and we saw our units start to tick up. In January the category grew 13% and our units ticked up at a pretty sizeable rate which was able to reverse what in the first quarter had been a year-over-year downtick in units to actually now we’re up in the positive range year-to-date.

So net-net it was a unit uptick. It was driven by our aggressive demand generation and some promotional activity and we’re excited about that because we know that those customers will start to buy payroll and payment and eventually upgrade and so that’s the game that we’re on right now. So it was primarily around units and category growth.

Laura Lederman - William Blair

Also looking at cash, can you talk a little about buybacks versus acquisitions versus this type of environment, the desire to hold on to cash, just addressing what you plan to do with the balances there.

R. Neil Williams

As we mentioned last quarter, we did pause on our share buyback program just because we’re anxious to see what kind of opportunities become available in the marketplace. We do see this as a great period to invest, to invest in talent, to invest in technology, and even other opportunities that may come along. So we’re going to wait and see how the season plays out but for now we are going to let the cash position build a little bit.

Laura Lederman - William Blair

On Homestead, you talked a lot about QuickBooks but Homestead is being hit by the economy, too. Can you give specifics on that?

Brad D. Smith

Our Homestead business continues to perform at a very strong rate and we’re actually seeing more people coming in and looking for ways to generate sales and get customers and so they’re looking for websites. So the overall Homestead business is benefiting from the fact that it’s a part of the Intuit family and we’ve got it on our websites and the performance is at the expectations we would have hoped.

Operator

Your next question comes from Philip Rueppel - Wachovia Capital Markets.

Philip Rueppel - Wachovia Capital Markets

A couple of more questions on QuickBooks and your revised forecast. First of all, are you assuming any share loss as you go forward or is this really the assumption of category growth that’s been revised. And along those lines, is it just continued loss of new paid customers or do you see that spreading into the other categories of QuickBooks and/or the upgrades?

Brad D. Smith

Let me start first with the first question. Our goal is to grow the category and to grow our share in the category. And what we have seen, we’ve actually picked up about 4 points of share year-to-date in the category, so we don’t see any share loss. We are continuing to grow online with QuickBooks online addition, which is one of the stronger performers in the portfolio and then we are clearly growing the category in share at retail as well.

In terms of the second question around the new paid units. We did see an uptick in January in new paid units but year-to-date the things we feel good about is upgraders are on plan with what we had planned. We are also seeing very strong performance in free and as I just shared a little earlier, we are making money off of free in the first twelve months and we will make more money as they move into their second year because many of them are buying payroll and payments which is a subscription service and more of that revenue will fall into the second twelve months.

And in terms of new paid units, if we can sustain what we did in January, then we will start to see that number uptick but we haven’t built that into the balance of the year forecast because we don’t think one month makes a trend.

Philip Rueppel - Wachovia Capital Markets

And on the market share commentary, if you look at consumer tax, is this also an environment where you think you can gain share over the course of the year or is it one where maintaining share might be the best thing for revenue and profitability?

Brad D. Smith

Our goal is growing the category and as a result trying to do that and try to grow faster than category and pick up share. So yes, we are playing to grow the category and to grow share. And we think we can do that and still deliver in the guidance range that we’ve provided.

Operator

Your next question comes from Brent Thill – Citigroup.

Brent Thill - Citigroup

Just on the pricing environment, can you just walk through how aggressive you will get on pricing. Do you expect to hold prices here or will you get more aggressive if you continue to see the deterioration that we saw. As a quick clarification on the QuickBooks side, is that what drove the unit volume in the quarter?

Brad D. Smith

Is the question specifically focused on QuickBooks?

Brent Thill - Citigroup

On the small business accounting and QuickBooks.

Brad D. Smith

So right now we’ve been testing a lot of what we call AB tests, what are the best offers that generate the highest uplift in units and revenue and we’re always looking for what’s the best one that will draw the biggest uplift and exceed the break-even point. That promotion tends to be the one that we’ll run at the time and as you know, promotions start to get fatigue and we switch around. So we have had promotions that include three free, where we’re putting a bundle together between payroll, payments, and QuickBooks. We have others where we have discounted the QuickBooks Pro product to $129, or even a net to zero for 24 hours at Staples.

Every one of those promotions we measure rigorously to make sure that we got the units we wanted and that it delivered the revenue at the cost that we were looking for. And I think you’re going to see us continue to experiment with promotions as long as they continue to deliver a positive ROI.

And that will be the way that we manage the balance of the year, is that we will continue to go for units but we’re going to make sure that it delivers the right short- and long-term lifetime value that we’re expecting.

Brent Thill - Citigroup

And can you comment on the tax pricing relative to the competition at H&R Block?

Brad D. Smith

Yes. In retail we currently have a price point that is about $10 more expensive than H&R Block, which is why I feel very good about where we’ve been able to hold the share and literally within the range that we thought we would. On the Web it’s kind of hard to be lower than free and so we have a free offering on the market, some of the competitors do as well so that comes down to making sure you have the easiest to use and the best offering and you’ve got the most aggressive marketing and I think our team is doing a very good job there.

So from a pricing perspective we’ve got a $10 premium in retail and on the Web we’re out there competing aggressively and growing pretty quickly.

Operator

Your next question comes from Scott Schneeberger - Oppenheimer & Co.

Scott Schneeberger - Oppenheimer & Co.

Following up on the TurboTax thing, the mention of your belief that you are taking some share in the early season, what do you see for the overall industry? Do you have IRS data? Could you just go a little more in depth on what leads you to believe that you are taking that share?

Brad D. Smith

Let me start with in retail share gets measured by NPD and that gets published and so we’re able to see what we’re doing in retail. On the Web it’s a combination of two things. What the IRS publishes that we also realize that returns don’t equal units, so we also work with internal sources and external companies. The company called comScore and we try to do our best to measure our progress and results relative to the competition using these outside research firms and that’s what gives us our indication that we are doing a good job in the marketplace relative to our competition. But we will actually know the final results at the end of the season when everything has been tallied and the numbers get produced.

Scott Schneeberger - Oppenheimer & Co.

Do you feel that this is going to another year of roughly a 60/40 paid-prepare/do-it-yourself split? Do you think that will change significantly over the course of the season?

Brad D. Smith

No, I don’t think so.

Scott Schneeberger - Oppenheimer & Co.

In the release on units you mentioned shifting into the third quarter, was that to mean that most of the 6% growth was derived in February versus January? Anything we should read into that? Any slow start in January?

Brad D. Smith

No, I think it’s a combination of a couple of things. First of all, for the last decade we’ve seen the natural procrastination of tax filers to later in the tax season to file. This year I think there have been a few things that have accelerated it. One is, as you’ve seen, things like 1099s which typically are supposed out by the end of January when W-2s go out, actually now many companies are getting forgiveness to be able to send those out a little bit later. And you have a lot of financial services companies that aren’t getting the material out quite as soon as they would, and so I think there just a bunch of things playing into people filing their taxes a little later. And so that is the natural thing happening in the market.

On our side we made some changes to our product pricing which pushed some revenue from Q2 into Q3 and it’s the combination of those two things that we meant to talk about a little earlier.

Scott Schneeberger - Oppenheimer & Co.

And could you speak a little to the TurboTax online community and the benefits you are deriving there?

Brad D. Smith

As you know, last year we were able to introduce the live community inside of our TurboTax product and we had about 40% of our customers’ questions getting answered by other customers at a very high accuracy rate. So this year we have made sure that it is not only prevalent in TurboTax but we also have it in other products like QuickBooks and our ProTax products.

This year product, we continue to see a very strong adoption of the online community in terms of people getting questions answered and we also put it into the desktop version of TurboTax this year and we’re getting very positive results, not only in terms of customer participation, but in terms of their overall feeling about the quality of the product as a result.

Operator

Your next question comes from Michael Millman – Millman Research.

Michael Millman – Millman Research

On the QuickBooks you indicate that you saw some improvements in December and January and yet you have reduced your guidance for the year presumably based on the numbers that were in the first quarter that we’ve already seen. What drove you to reduce the guidance from the January guidance?

Brad D. Smith

Let me start with QuickBooks. We saw a 12-month period where the category wasn’t growing and as you know, coming out of Q1 we didn’t see the results we had expected and we had to readjust guidance. While we have seen stronger performance in December and January, we believe that there is still enough uncertainty in the marketplace in terms of the overall balance of the year performance, that we’re going to continue to aggressively push the promotions, which we think will drive units, but we also believe that the revenue and our ability to drive that revenue in the second half is something that we think it was more prudent for us to adjust the guidance the way we did.

If you just put it all together, in Q2 our units were up about 5% but our revenue was down about 2%. And so that’s why we believe it’s much more appropriate for us to readjust the guidance, even though we’re going to be much more aggressive and continue to try to drive the units in the category.

Michael Millman – Millman Research

So I guess the answer was that you actually did see further decline. Did you not expect to have a decline in the second quarter in QuickBooks revenue?

Brad D. Smith

No, we didn’t. Which is why we have now adjusted the guidance for the balance of the year. But also we were pleasantly surprised to see we could grow the category and grow units in a very challenging time for small businesses and so we think that we need to continue to be very prudent about what our guidance is the balance of the year in QuickBooks.

Michael Millman – Millman Research

On tax, you said that you get 2.1 usage out of the boxed. This year, wouldn’t you expect to see that to be greater now that you’re allowing 5, and secondly, it looks like your units are actually growing slower than what we’re hearing about growth on the do-it-yourself side. Can you address that?

Brad D. Smith

Yes. So on the first one, it’s a very fair question and it could very well be that with the e-filing in there for desktop products you may have more than 2.1 returns filed this year, which is fine with us. We actually encourage the path along with the desktop product. There are no issues or concerns from our side there.

In terms of the growing faster or slower I think what it really comes back to is an apples-and-oranges comparison. We have our own measures internally, as I shared, on what’s our share, are we winning more or losing more than competition and our data suggests that we’re actually growing share on the Web. The NPD data tells us what the share results are in retail and I think the difference between that and what the IRS is reporting is simply the difference between returns and units because returns don’t equal units. A desktop product has multiple returns being filed.

Michael Millman – Millman Research

So when you look at the units, that may well get back to the first question.

Brad D. Smith

That’s correct. Absolutely. I think it’s a very good hypothesis that may end up playing out.

Operator

Your final question comes from Gil Luria - Wedbush Morgan.

Gil Luria - Wedbush Morgan

On the $70.0 million of consumer tax that you expect to push out from the second to the third quarter, could you assess for the level of certainty around that? Is this only an accounting recognition issue for the whole $70.0 million that you have already sold the units and you can only recognize the $70.0 million or is it contingent on anything happening in the April quarter?

R. Neil Williams

We have already sold the units and it’s simply a matter of deferring the revenue over the e-file curve since they paid for the e-file privilege when they bought the box.

Gil Luria - Wedbush Morgan

In the financial institutions business, it sounds like you’re getting a lot of banks to adopt a personal Finance Works product. What percentage of those banks are new wins versus upgrading existing digital insight customers. And the second part of it is what business model have you adopted for these new customers? Is there an up-front license fee or is more of a per-user fee that you’re going to ask those banks for?

Brad D. Smith

Let me start with the first. What we have been focused on is continuing to sell new banks with the digital insight platform and I will tell you than having the Finance Works as a part of that value proposition is helping keep our sales pipeline healthy. But we haven’t broken out what percentage of those banks that we reported are new versus the existing ones who are adopting it, because both are getting tremendous benefit from it.

In terms of the second part, on the model, there is a small license fee but we tend to get the bulk of the revenue will come from transactions and so that is the business model long term for Finance Works.

Gil Luria - Wedbush Morgan

Users or transactions?

Brad D. Smith

It is based upon similar to Bill Pay or Internet banking, which is on a per usage basis. That’s the model for Finance Works. So it’s on a transaction basis.

Operator

There are no further questions in the queue.

Brad D. Smith

Thank everybody for dialing in today. I am clearly pleased with our second quarter results, especially in light of everything you’re hearing in the marketplace. I also feel good with our balance of the year forecast. We are going to deliver positive revenue growth, we’re going to deliver strong earnings growth and more importantly, we are going to continue to grow our categories and our customer bases, which we know we can monetize over the lifetime value of the customers. We certainly don’t expect it to be an easy lift. We know that the market out there is very difficult, but if we stay focused and continue to execute we feel good about the prospects for the balance of this year and for many years to come. So thanks again and we look forward to speaking with you soon.

Operator

This concludes today’s conference call.

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Source: Intuit Inc. F2Q09 (Qtr End 1/31/09) Earnings Call Transcript
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