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Intuit Inc. (NASDAQ:INTU)

F4Q 2009 (Quarter End 07/31/2009) Earnings Call

August 20, 2009 04:30 pm ET

Executives

Brad Smith - President and CEO

Neil Williams - CFO

Scott Cook - Founder

Jerry Natoli - VP, Finance and Treasurer

Analysts

Bryan Keane - Credit Suisse

Sarah Friar - Goldman Sachs

Kash Rangan - Merrill Lynch

Jim Macdonald - First Analysis

Gil Luria - Wedbush

Jen Swanson - Morgan Stanley

Ross Macmillan - Jefferies & Company

Jeff King - William Blair

Scott Schneeberger - Oppenheimer

Michael Millman - Millman Research

Philip Rueppel - Wells Fargo

Robert Simmons - Janney Montgomery Scott

Dan Cummins - Lime Rock

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's fourth quarter and full fiscal year 2009 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. (Operator Instructions).

With that, I will now turn the call over to Jerry Natoli, Intuit's Vice President, Finance and Treasurer. Mr. Natoli?

Jerry Natoli

Thanks Patty. Good afternoon and welcome to Intuit's fourth quarter and fiscal year 2009 conference call. I'm here with Brad Smith, Intuit's, President and CEO; Neil Williams, our CFO and Scott Cook, our Founder.

Before we get started, I'd like to remind everyone that our remarks will include forward-looking statements. There are number of factors that could cause Intuit's results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2008 and other SEC filings. All of those documents are available on the Investor Relations page of Intuit's website at intuit.com. We assume no obligation to update any forward-looking statements.

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 website after this call ends.

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

Brad Smith

Thanks Jerry and thanks to all of you for joining us this afternoon. Today, we announced fiscal year 2009 results, with revenue growth of 4% and non-GAAP operating income growth of 9%. These results were at the upper end of the guidance we provided you last quarter. I am proud of what we accomplished this past fiscal year. We had a good year. We responded quickly to the challenging macroeconomic environment.

We defined a game plan to play offense in the downturn, and we executed well. In doing so, we grew our customer basis, we gain share on all of our key businesses, and we generated top line revenue growth. We also delivered solid operating income growth, with margin expansion and double-digit EPS growth through our relentless focus on operational discipline.

Throughout the year, we kept our eyes on the horizon and we made the necessary investments to build the foundation for what we believe is even stronger future. We made smart internal investments in R&D and new product innovation and we closed on several strategic acquisitions that better position us for future growth.

Finally, we continued our evolution to become an increasingly connected services company. Over 56% of our company's revenue comes from these services and they grew 14% in fiscal year '09.

Like I said, we had a good year, but not a great one. We can do better. We learned a lot this past year. As we look ahead, we're applying the lessons we've learned. We're entering this new fiscal year with a stronger foundation of assets, a robust pipeline of new innovative ideas and an increased intensity in our operational rigor to deliver even stronger results.

I'll share more of my perspective later, but first let me turn it over to, Neil to walk us through the financial highlights.

Neil Williams

Let's start with total company performance for fiscal year 2009. Our financial results were revenue of $3.2 billion, up 4% on a year-over-year basis, free cash flow defined as cash from operations minus capital expenditures grew 20% to $630 million, non-GAAP operating income of $930 million was up 9%, non-GAAP diluted EPS was a $1.82, up 14% and GAAP diluted EPS was a $1.35, down 4%.

As you may recall, last year we recorded a pre-tax gain of $52 million for the sale of certain payroll assets to ADP, which added approximately $0.10 to GAAP EPS. We also had a $0.08 gain in GAAP EPS from discontinued operations from the sale of IDMS. Without these items, our FY09 GAAP EPS would have grown 10%, inline with our non-GAAP results.

In FY09, both our GAAP and our non-GAAP EPS benefited from certain tax items. We had a GAAP affected tax rate of approximately 31% due to tax benefits from a favorable settlement of prior year issues and the retroactive reinstatement of the R&D credit. These benefits added $0.08 to our 2009 EPS. Fourth quarter results were revenue of $476 million, flat to last year, a non-GAAP operating loss of $49 million versus a loss of $41 million in the prior year.

Both the GAAP and non-GAAP results include the $9 million charge we took for the write-down of assets and consolidation of workforces associated with the PayCycle acquisition that closed July 23. The operating charges associated with the acquisition were offset by our resource allocation efforts.

Fourth quarter results also include a $10 million charge we took for severance and facilities closures related to a recent allocation of resources primarily in the Small Business Group. We expect margin improvement in that segment as we see that benefits of these decisions going forward.

As Brad mentioned, we applied the discipline necessary to achieve strong operating results in 2009, and we are not going to let up on that as we enter the next fiscal year. Before we turn to the segment results, let me explain some changes we've made that effect the way we report our results.

In the fourth quarter, we aligned our Small Business Group into the following three operating segments. Financial Management Solutions, formerly known as QuickBooks, Employee Management Solutions, formerly known as Payroll, and Payment Solutions.

Beginning this quarter, we will report the results of all three main businesses in the Small Business Group. Guidance will be provided only at the Small Business Group level. Please refer to the fact sheet to see these changes, and the associated metrics.

Now, let's look at the results. Total Small Business Group revenues grew 4% for the year and 1% for the fourth quarter. Within the Small Business Group, our Financial Management Solution segments which we used to call QuickBooks finished the fourth quarter with $135 million in revenue or 5% decline over a very strong quarter a year ago. Our relative share in category has improved, and we've successfully focused on growing the category over the last few quarters. We had 12% unit growth in the fourth quarter.

The Employee Management Solution segment formerly Payroll had revenue of $91 million in the fourth quarter or 5% growth. Organic customer growth was flat, up 9% with the addition of PayCycle. We completed the acquisition of PayCycle in the fourth quarter, expanding our online Payroll capabilities, and strengthening our position as a leader and small business tasks. The acquisition is expected to be neutral to FY10 earnings.

The Payment Solution segment had $76 million in revenue in the fourth quarter or 10% growth. Customer growth continues to be strong at 14%; charge volume remains lower than last year, but seems to be stabilizing with the 9% year-over-year decrease in the last three quarters.

In the tax segments, our consumer tax business ended the year with 7% revenue growth and 12% unit growth. Remember that this past year, we eliminated charges for multiple returns, prepared with TurboTax desktop. We executed well and took share online and from tax stores.

We also learned that this tax saving was somewhat a typical. Historically, we've seen about 1% to 3% growth in overall tax filers. It appears that this year, the number of filers didn't grow as it had in past years, similar to what we've seen in past recessions.

Our Accounting Professionals segment executed well, ending the year with $352 million in revenue and 8% growth. We continue to focus on increasing Accounting Professionals productivity and growing our practices.

Our Financial Institutions segment achieved 4% revenue growth for the year and is exiting the fourth quarter with a 6% run rate. Not a stronger finish as we expected earlier in the year, but strong performance considering the overall state of the financial services sector.

We are pleased with the success our FinanceWorks product enjoyed in there first year of release and we're entering the new fiscal year with momentum. We generated $812 million in cash from operation this year. We repurchased $100 million of Intuit shares in the fourth quarter, $300 million for the full year.

We invested $187 million on the strategic acquisitions, Brad referred to earlier and $182 million in capital expenditures. We ended the fourth quarter with $1.4 billion in cash and investments. Our financial operating principals severed us well in fiscal 2009.

Going forward, we expect to continue to grow revenue faster than expense and generate operating income leverage and strong cash flows inline with our operating income. Discipline is key. We weigh both internal and external investments carefully. We expect all our investments to generate a risk adjusted return of 15% to 20% over a five-year horizon.

Internal investments include R&D, specific initiatives related to selling and marketing and infrastructure. Within the investment horizon, we had exclusive milestones that have to be met before we release further funding. External activities may include strategic acquisitions, partnerships and joint ventures.

We expect to maintain approximately $1 billion of cash and investments to ensure we have liquidity we need to run the business and to take advantage of strategic opportunities as they arise. This amount may fluctuate by $500 million, based on the seasonality of our business and on other changes in business conditions.

Resources that are not invested as I described earlier or maintained for general liquidity will be returned to shareholders. In the past, share repurchases have proved to be the most effective way for us to do this.

As we provide guidance for the coming quarter and fiscal year, let me be clear, our plans for 2010 assume that general economic conditions remain much as they are today. We are not expecting a strong rebound or significant weakening, until we see sustainable improvement in indicators such as, retail sales and new business starts. We will continue to utilize our game plan for managing in a downturn.

With that caveat, our fiscal 2010 guidance is revenue of $3.3 billion to $3.43 billion which is annual growth of 4% to 8%, non-GAAP operating income of $985 million to $1.025 billion which is annual growth of 6% to 10%, non-GAAP diluted EPS of $1.89 to $1.96, which is annual growth of 4% to 8%, GAAP EPS of $1.49 to a $1.56 or a growth of 10% to 16%, and capital expenditures of a $150 million.

We expect the following revenue growth by segment. Small Business Group 4% to 8%, Consumer Tax, 5% to 9%, Accounting Professionals 3% to 7%, Financial Institutions, 6% to 10%, Other Businesses, 6% to 10%. For the first quarter of fiscal 2010, we expect revenue of $479 million to $493 million or a growth of 0% to 2% versus the year-ago quarter, a non-GAAP operating loss of $79 million to $60 million versus a loss of $30 million in the year-ago quarter, a non-GAAP loss per share of $0.19 to $0.15 versus a loss of $0.09 per share in the year-ago quarter.

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

Brad Smith

Thanks, Neil. As we've said all year, good companies find ways to capitalize in difficult times to strengthen their position, and that's exactly what we've been doing. We use a quote internally, "We haven't waited for the storm clouds to pass. We simply figured out how to dance in the rain". I think we saw tangible results this year from the game plan we put in place last fall. We grew our customer bases. We expanded our share and we continue to drive revenue and operating profit growth.

Through it all, we didn't lose sight of our long-term objective to be an innovate growth company that helps consumers and helps small businesses achieve their dreams. We contribute to the customer's success by solving their most important problems and helping put more money in their pockets, and we do it with products that are easier to use and a better value than any other alternatives in the market.

While we have strong leadership positions in all of our core businesses, we still have plenty of headroom for growth. Many of our flagship products are category leaders but we have low penetration relative to the overall market opportunity. That's why we focus on growing the categories, bringing in new users so we can grow our revenue and our operating cost as a result.

As we look to the future, we see several growth catalysts that we believe will serve us well if we can capitalize effectively. The first catalyst is the demographic shift. This next generation of customers entering the market are 20 something do-it-yourselfers. They grew up with technology as a part of their lives. They typically look first to software and services to address the kinds of problems that we solve and that fuels growth in the categories in which we participate.

I'll give you an example. Many of the five million new tax filers entering the market each year are younger, first time filers, and they tend to turn to the web to solve most of their problems. That's one of the primary reasons why the tax software category has grown four times faster than the next closest alternative for the past five years.

Now, the second catalyst is a technology shift to more connected services. End users expect to be able to work on a desktop, over the web or using their mobile devices. Our leadership positions in both desktop and online combined with our recent expansion onto mobile devices positions us well for this transition. A case in point is our lineup of software as a service offering which now accounts for about $900 million of our company's revenue, grew 22% this past year, much faster than the company average.

The third catalyst is a shift to increasingly open environment, where more value is created as the user bases grow. With more than 40 million end users of customers, combined with our own push to more open platforms and services, our large customer bases are a valuable asset.

This year, our introduction of Live Community support and 11 of our flagship offerings, enabled millions of questions to be answered by other customer in ways that we could have never delivered on our own.

The fourth catalyst for growth is global expansion. As the economy becomes more global and the ability to localize products, become easier using hosted technologies, our ability to move into new markets is even more opportunistic and more compelling. You'll hear more about these global opportunities as we shared greater details around our end-market test and our new product launches in India and Southeast Asia in the coming fiscal year.

Now with these four external catalysts playing in our favor, our business strategy is clear. Our first strategy is to continue to drive growth in our core businesses where we still have lots of head room. This is a good time to be in the business of helping your customers, manage their financial lives, and to do it in ways that are easier and a better value than any other alternatives. The formula simply works and we've shown that we can grow our core businesses even in a tough economy.

Our second strategy is to build adjacent businesses and to enter new geographies. Now, we want stray too far from what we are good at, which is helping customers put more money in their pocket. Instead, we look to repeat the success that we've had in Small Business Payrolls, or Small Business Payments by finding other related areas that help users to save and make money. Give you an example.

One of the ways we are going to monetize our new Quicken Health Expense Tracker product is to having customers make online payments, using our payment capabilities, by finding that intersection between their health care needs, their financial decisions, and our core payments capabilities, we believe we can create a new business. I'll give you another example.

Mobile card acceptance, as you've probably seen we've introduced GoPayment, which help Small Businesses, turn a mobile device into the ability to accept electronic payment. It worked on the iPhone. It works on the iPod Touch. It works on the Palm Tree. It works on any mobile phone with the web browser.

Finally, our third strategy is to continue our transformation into a connected services company. As an industry analyst recently reported, Intuit is already the third largest cloud computing software company in terms of revenue. We're growing very quickly with leadership positions in most of the categories we serve. Let me be clear, we're not playing catch up here we've been leading the way.

Now like the products we build, we like to keep our growth strategies pretty simple. As a result, our highly engaged work force, our customer driven passion, our technical flexibility and our operational discipline, have enabled us to build a strong and a durable company. If we capitalize on these four growth catalysts and continue to execute our game plan effectively, we believe our future remains quite promising.

Now in closing there is no question in my mind that the coming year is going to be just as challenging as the past year has been. I believe we're well positioned to deliver another strong year in fiscal year '10. I want to thank all of our employees who worked tirelessly this past year and have continued to execute with enthusiasm and dedication. In my book they are second to none.

Now with that, I'd like to turn it over to your questions.

Question-and-Answer Session

Operator

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

Bryan Keane - Credit Suisse

The first one I have is on the consumer tax guidance of 5% to 9%. Traditionally, that's been 8% to 12% grower and normally you would think of being not really susceptible to economic conditions. So can you talk about why the lower guidance there?

Brad Smith

I think in the headline if you look at the last several recessions, the number of tax filers entering in the market tends to be flat year-over-year, and we are assuming no uptick in the economy in the next 12 months in our plans. So with that ability to basically have year-over-year flat filings, we think that the guidance we provided continues to show that we are going faster than the category. However, it is also reflective of the fact that we aren't going to see any upsides from new filers entering the market. So, that's basically what's driving the guidance we've provided for Consumer Tax.

Bryan Keane - Credit Suisse

In previous recession you were still able to grow double digits. Is that just because there was less penetration in the market?

Scott Cook

The way to view the effective recession is reducing the growth rate by about three points, because normally you've got market growth of about three points in the tax category and in recession you don't get it. So just take whatever the growth rate was at that time in a recession, take off about three points.

Bryan Keane - Credit Suisse

I don't know Neil if you can breakout the acquisitions that's in the guidance's, PayCycle and anything else, that will add to fiscal year 2010 revenue growth?

Neil Williams

PayCycle is clearly far and away the most significant one. You may recall we had some other small technology acquisitions earlier in the year that add to our capability in our Small Business Group offerings. So, they are part of what we have baked in for our Small Business revenue guidance.

Bryan Keane - Credit Suisse

How big is PayCylce?

Neil Williams

The revenue that they had come in was about $30 million in annual revenue but remember their plan is to integrate that with our online payroll offering and accelerate the growth of both. So, I am not sure their historical run rate is terribly relevant.

Bryan Keane - Credit Suisse

Just a last question from me. It looks like the organic growth of the customers in Payroll was flat. Is that finally showing some signs to the recession or do you expect that the organic growth in the Payroll client list to pick up?

Brad Smith

It's actually reflective of the change in definition. You may recall that one of the things we did with our Online Payroll product is we went into a period where we had six months free, and we've now got a common definition of what an active customers is across the company which is someone who is actively using the product, someone who has registered for the product or someone who is paying for the product. So, what we've simply done is we wanted to make it an apples-to-apples comparison, and as we move forward and we starting to move forward with other free products, you'll see us start to have more of an apples-to-apples measurement year-over-year.

To answer your question about the opportunity in Payroll, we still only have about 40% penetration into the QuickBooks space, so we certainly are not tapped out. However, the bigger exciting idea is with PayCycle now, we can go after 7.5 million small businesses who don't use QuickBooks who do have Payroll needs, so we've essentially opened up a new growth channel for our Payroll business.

Operator

Our next question comes from Sarah Friar of Goldman Sachs.

Sarah Friar - Goldman Sachs

First on the guidance for next quarter on the margin front. It seems a little bit lower than what we and the Street have been expecting. Is there a frontend loading of cost around PayCycle or anything in particular that would weigh on margins in Q1 because your guidance is actually much more in line?

Neil Williams

Sarah, as we've said a number of times, you can see a lot of movement between the quarters, and in the first quarter of 2010, we have our data centers in Quincy [owned] for the first time in the first quarter that wasn't there last year. So there is depreciation pickups from that, there is amortization of some software, it's less about PayCycle, and it's more about some of the investments we've made in 2009 that are coming online in 2010 in the first quarter for the full time. However, as we've said before, our expenses due tend to be front loaded as we prepare to get some of the products in the market later in the fall.

Sarah Friar - Goldman Sachs

Then Brad, just broadly, I known, you don't want to call any turn you are very much guiding to things staying as it is. As you look through your quarter, what was the linearity, did you start to see anything showing some signs for optimism in the SMB sectors you got into the last month of the quarter versus the beginning, for example?

Brad Smith

Sarah, I think you nailed it with your opening statement. Until we can actually see some of the leading indicators we look at, which is primarily charge volumes of shoppers who are shopping at these small business customers, and we can measure that through our payments business, which for three quarters now has been down 9% year-over-year. We've basically seen stabilization. We don't see a further deterioration, but we haven't seen any signs of recovery.

What I would tell you as we've got better in execution. In the fourth quarter, we are able to find the sweet spot between price promotions and unit lift and as a result, I think you saw a good 12% unit growth, but you saw a better performance from a revenue perspective. So headline here is, we're getting better at executing, but right now, we haven't seen anything that suggests that we're seeing the economy turn.

Sarah Friar - Goldman Sachs

One very final quick one, you made the comment on the use of cash and very clearly you see the best way of return that excess cash to shareholder through stock repurchase. Is there anything that would draw you to thinking about a dividend, I know that would open up the door to different class of shareholders as well or if that's just a no for now?

Neil Williams

Sarah, this is Neil. We think about dividend all the time and we think about the best way to allocate cash and capital impend and return money to shareholders. There is no built and buy as necessary against it. It's all about opportunities we have enhance the best use for the cash. So I would say it's something to open to and that we discussed from time-to-time, but we don't see it at this point.

Operator

Our next question comes from Kash Rangan of Merrill Lynch.

Kash Rangan - Merrill Lynch

Just to expand a little bit on what Sarah raised in Q1. It looks like you are assuming some more expense drag. I was wondering if you could just talk a little bit more about what exactly causing the expense drag. Is this pure depreciation, amortization or do you have actually relatively one time expenses? It seems to suggest that there is some sort of product launch activity that depresses the margins year-over-year in Q1.

Also, second and final, wondering if the guidance I would assume bakes in no economic recovery and if you do get one, what kind of upward levers are we assuming in or we'd likely to experience in the business model as the year progresses?

Neil Williams

I'll take the first one about the first quarter and I'll let Brad talk about levers as the economy improves. Really, there is not anything in the first quarter guidance that we see at this point that I would think of as a one time nature or big pop. It's typically as I mentioned, related to our data center in Quincy coming online and for the full year in 2010.

Some of it relates to software that we've purchased in mid year or intellectual property that we licensed for mid year 2009, it's in the plan for full year and 2010. So, there is nothing unusual or significant that I would point to as a one time charge in the first quarter. It's just as we talked about before, our revenue and expenses aren't necessarily evenly balanced throughout the quarters. So you want to speak about the.

Brad Smith

Yes. I'll be happy too. So Kash, what I would tell you the key levers would be if we start to see the economy turn and again we don't have any of this baked into our thoughts and our plans for the next 12 months. In Small Business, it would be two key levers. The first is the number of new business starts. If you look at the Kaufman study the last data I saw was, it's running about 50% of what it typically averages on a regular year, so about 500,000 net new businesses a year. Right now, we are running about 250,000. So, you will start to see new businesses enter the market, as a result we'll be able to sell them products like QuickBooks and get them into the franchise, but today there are just not that many starting.

The other big lever in Small Business is charge volume. Right now, as we said, after three quarters in a row in our Payments business, it's down 9% year-over-year. However, we are continuing to grow the number of new merchants in double digits, we grew 14% in this last quarter. Once that charge volumes starts to come back, that is just real upside for us cross that entire base of customers. So, that's Small Business.

If you look at tax, it goes back to the answer to the question we gave Bryan a little earlier. If we get that typical 1% to 2% increase in tax filers entering the market, that add to that several points of growth that Scott mentioned earlier in terms of opportunity for our tax revenue. Then finally is Digital Insight or IFID. We've continued to see the financial services sector struggle, and they have been very cost conscious. We have been able to fight our way through that, but as you know, we have seen some delays in implementations with new banks starting up.

If things start to turn around, we ought to be able to see that implementation model kick back on a regular rhythm, which just allows us to continue to grow our business in IFID. Those will be the key levers that I would look at.

Operator

Our next question comes from Jim Macdonald of First Analysis.

Jim Macdonald - First Analysis

Could you talk a little bit about your integration plans with PayCycle and also how you would view Payroll growth in this type of economy and then longer term? Thanks very much.

Brad Smith

Jim, first of all, I have to tell you I am very pleased with the integration process so far in PayCycle. We are doing something fundamentally different with PayCycle. What we bought was not only a great product and a great technology, we've got a great team with talent and the skill that we are going to need going forward. So we are doing a reverse integration, which simply means we are bringing the PayCycle team into our Small Business division, working for Nora Denzel. She leads that business, and we are sun setting our own product that was online, so we have one platform. So, that will be our future go-forward platform for online Payroll.

In terms of the opportunities in Payroll, I think there is nothing upside quite frankly. One of the fastest growing segment in Payroll is the online space, and with PayCycle in our fold now, we are able to get much more traffic to their product through our web properties. We are able to sell that product through our Digital Insight relationships and we are able to work that product to our accounting relationships which is very important in a Payroll decision. So, the top three channels you need to make a Payroll decision which is websites, banks and accountants, we have very strong asset that we think we can utilize to help grow the PayCycle business. Then in terms of overall Payroll growth, it's not only about penetrating the QuickBooks space, it's about also of going against those 7.5 million customers that don't use QuickBooks, and that's what PayCycle will allow us to do. So, lots of opportunity here. It comes down to us executing, and right now the integration is going very well.

Operator

Our next question comes from Gil Luria of Wedbush.

Gil Luria - Wedbush

You helped us quantify the impact of recessionary environment on tax of three percentage point. Could you also try to quantify what the impact has been for the tax rate that was raping up now from the bundling of eFile and several eFile in desktop products? How much of a drag did that cause on last year result?

Brad Smith

I'll tell you the rough number, because we were able to offset a number there is somewhere in the neighborhood of $50 million to $60 million in revenue. We though that with the ability to actually grow units, we'll be able to offset a whole bunch of that and as a result of the recession not bringing new tax filers in while we gain share. We weren't able to actually offset the revenue bundling we did, but we still think it's the right decision long-term. It's a right thing from a customer experience perspective.

It's a right thing in terms of helping make sure you can electronically file your return. It gets your money back in seven days from the RIS. In terms of a one-year execution, we just didn't have the tailwinds; we thought we will get from typical tax filings growth. So we just could not run it. So that's the short answer, somewhere in that $50 million to $60 million range.

Gil Luria - Wedbush

Well that sounds like about five or six percentage points of growth that you were missing this year. So, if I took 7% and added five, that's 12, less three for the recession, you still think you'd get a 9% growth in this upcoming year and you're guiding to 5% to 9% growth?

Brad Smith

Good math.

Gil Luria - Wedbush

I'll take that, to meaning that that's a little bit conservative. Then on the Financial Institutions business, one of the exciting things that you have going on there is the FinanceWorks and the fact that you've already been able to stretch that product outside of your installed base for Digital Insight, with the partnership with Metavante. Are there other partnerships that you see that you could get with other online banking providers to expand the reach of that product?

Brad Smith

As obviously, a conversation we're having in real-time as other players in the industry. I think it's a real opportunity as people began to realize that we have come up with the solution, it's very easy to use and helps the banks win by having a product that consumers and small businesses will adopt. Metavante is clearly the one that we've announced and we are excited about that partnership. Yet, I do believe there are other opportunities in the marketplace to partners just as we have with Metavante.

Operator

Our next question comes from Adam Holt of Morgan Stanley.

Jen Swanson - Morgan Stanley

This is actually Jen Swanson calling in on behalf of Adam Holt. I just had a couple of quick questions on the QuickBooks business. First I just wanted to ask about the new versus upgrade units and I think last quarter you said that upgrades were holding steady or new units were coming under pressure due to unit slowdown the new business starts. Is that still the case or are you seeing upgrades are going to come under pressure as well?

Brad Smith

Yes, Jen actually our upgrades continue to hold firm coming in exactly as we thought they would when we set the plan last August and the pressure continues to be with the new business start as I said a little earlier running about half the normal rate according to the Kaufman's study.

Jen Swanson - Morgan Stanley

Then just also on the free to pay conversions and the revenue that gets pulled through, with some of the customers you might be free on QuickBooks that are using other services. Has that continued to see kind of the traction that you found past quarter is that all, is that changed at all or are you still seeing good uptick on some of the add-on services?

Brad Smith

We're still seeing good uptake. We're able to monetize those free customers and as we've shared their incremental to the franchise, and so we like what we are seeing that's free and you'll see us continue to carry that forward as we go into the new fiscal year.

Jen Swanson - Morgan Stanley

Just finally real quick on Financial Institutions, you mentioned in the prepared remarks that the momentum there continues to be good, your guidance is calling for revenue acceleration in that business. However, it does seem like there continued to be some delays in terms of implementation times. So how are you thinking about the timing of when we can start to see that acceleration in the business?

Brad Smith

I think it comes down to when Financial Institutions feel like the economy is stabilizing and they are able to start to play offense again. So, as you know, the biggest lever we have in the business is increasing the penetration of end users in the banks we already have installed. So getting more consumers to adopt online banking and they use more bill pay services.

So that's why we are able to continue to grow that business and improves its quarter-over-quarter results. Then once the economy turns its one of those key levers that I shared little earlier that will just be tailwind force in terms of getting more banks on board.

Operator

Our next question comes from Ross Macmillan of Jefferies & Company.

Ross Macmillan - Jefferies & Company

Thanks. I guess it's a cost question and gross margins. May be you could just help me understand what's driving the lower gross margin in Q4 and how that's going to play out? I know you don't guide specifically to it but, I presume some of this is amortization of some of the cost run in the new data center, but if you could add some color to that and help us understand kind of how we should think about gross margins in fiscal 2010, that will be great. Thanks.

Jerry Natoli

This is Jerry. I will take that one. What you are seeing is steady shift in our business from product to services and mix of expenses that are associated with those products stream. It would show up in different places on the P&L. So, the gross margin is likely to continue to go down a little bit if services grow even though the operating margin for the company we expect to continue to improve.

Ross Macmillan - Jefferies & Company

So, it's really a shift above the line more than anything else?

Jerry Natoli

That's it. Yes.

Ross Macmillan - Jefferies & Company

Just one another one. Brad, last quarter we had a nice spike in free simple start activations in fiscal third quarter. It's still above the level that it was in Q1 and Q2 and Q4, but it was down sequentially. What sort of moves that around? Is it just promotions or is there anything else that sort of moves that number around a lot? Thanks.

Brad Smith

First of all, we felt pretty good with our fourth quarter, growing 54% in terms of free simple starts, so that was a bit healthy growth year-over-year. I think what you often saw there was, we got much better at our value messaging, being clear that the products that you can move into QuickBooks will return good or alike for you. That's a $13,000 on an average basis for a small business owner. So customers began to see the paid versions of the products in the fourth quarter represented that way, and some more have been moved into paid. So, you saw our paid unit grow 12% in the fourth quarter, and our free grew 54%, and I think it's simply us giving better at helping people understand free doesn't necessarily end up being the best value, you can actually buy a paid product and get a good ROI.

Ross Macmillan - Jefferies & Company

Just a final one. I recall originally we had though about a double digit growth exit rate for the FI business, and clearly the economy has kind of got in the way of that, but is there anything structural changing to make you believe that it couldn't grow at 10% plus.

Brad Smith

No there is not. In fact, if anything, our confidence and my personal confidence and our Digital Insight, Financial Institutions business and their execution just grow everyday. We have gotten very good response in the market from our FinanceWorks, and our Small Business FinanceWorks product. In fact, they've driven the penetration into the base up to 20%, and are excited about the opportunity there going forward.

Obviously, the deal to sell with Metavante outside of the Digital Insight base is exciting, and we are getting much better at improving the ease of use of product which is driving internet banking and bill pay usages. You saw bill pay up 20% again in the fourth quarter. So, as soon as the economy starts to strengthen, if our execution remains the way it is, that business like most of our core businesses, there is a double digit growth opportunity if we execute well.

Operator

Our next question comes from Jeff King of William Blair.

Jeff King - William Blair

Could you just talk about your expectations for TurboTax unit growth and also give us an update on the Health product and when that should start to hit the top line?

Brad Smith

Jeff, we don't provide guidance for units. We provide it at the revenue level, but if you take a look at what the past couple of years have been, we've seen units tend to outpace revenue as you start to see, free become a bigger piece of the mix and our ability to grow the category and get customers in. So right now, we'll stick with the guidance we've given you on the revenue side and just note that typically units are little bit ahead of a curve there.

In terms of health care, we are excited that the product is in market with Cigna and United. You may have seen a press release this past quarter, where United has now rolled it out to 700,000 of their end users on their plan, and by the end of this calendar year, we're rolling out to 20 million. So the products in the hands of consumers, we've gotten good feedback.

We also have some very interesting test underway that I alluded too earlier. Well, we are looking for ways to monetize those relationships using the ability do electronic payments. So far, we think that it's promising and living up to what we hope it would be, but not anything, that I'll have you put into your financial models, until we know more.

Operator

Our next question comes from Scott Schneeberger of Oppenheimer.

Scott Schneeberger - Oppenheimer

Couple of questions on standing, first one on the P&L side, with regard to marketing and R&D, I realize you guys are obviously intending just to grow revenue fashion in the cost lines. Could you just speak a little bit on where the focuses of spend will be this year, where you're going to pullback and push forwards on the range?

Brad Smith

Our overall principals which Neil talked about a little earlier, Scott, it's to grow revenue faster than expense. We do see opportunities to continue to invest the dollar to get a dollar in sales and marketing. So we'll continue to invest and growing the top line and getting customers into the franchise. From an R&D perspective, we like to see about 17% to 18% of R&D expense as a percent of the revenue, we think that keeps up from the leading edge and competitive.

However, we are getting much better in getting an ROI out of every dollar we invest and we are also finding efficient ways to get high quality R&D done. For example, we've expanded our facility in Bangalore, India and we are getting really good results from our regions there. So you see greater efficiency in R&D, but we don't have a plan to reduce our R&D spend level. We're simply planning to get more out of every dollar we spend.

Where we are getting some leverage here is continuing to focus on our general and administrative expenses and over the next several years, we'll continue to get more efficient there. So as our company grows, we'll have G&A get more to everyone as to be as the percentage of overall revenue. Did that answer your question?

Scott Schneeberger - Oppenheimer

Along the same theme, I noticed the CapEx guidance this year is a little bit lower than what you delivered in FY09. Could you speak to some of the put and takes there?

Neil Williams

Yes Scott, this is Neil. As we've talked about in prior calls, 2008 was a big investment year for us and infrastructure with the datacenter in Quincy we've talked about before and with some other office facilities. So we think that those investments have been made. We are shifting in the realized mode now and you are seeing the CapEx guidance come back more inline with what our normal depreciation or what our typical amortization would be. So I think we're getting back to what we might consider more of a run rate than what you saw in the last couple of years.

Operator

Our next question comes from Michael Millman of Millman Research.

Michael Millman - Millman Research

Historically a great priority of the company was double-digit top line growth for the year. Can you talk about what kind of sensitivity there is to GDP in order to get to there and then I have several other questions?

Brad Smith

Yes, Michael, this is Brad. I'll go back to our principles haven't changed. We still fundamentally see this company as growing double-digits organically supplement of acquisitions and we'll grow revenue faster than expenses. I think the reality we are doing just right now, the same reality that most companies are. We're in a pretty tough macroeconomic environment and so when you don't have the new businesses starting up at the normal rate, you see the charge volume down in our Payments business. You see banks struggling to stay afloat, 77 has failed in the first part of this year alone, and you don't see new tax filers entering the market. We are able to execute through most of that. I mean, we gained share in every single business this year and we grew customers, but we just aren't able to offset that larger macroeconomic environment.

I think the short answer to your question is, if we continue to execute the way we are and the sun comes out between the clouds, you will see this company return to its normal double digit growth levels.

Michael Millman - Millman Research

In tax, because a couple of things have been touched upon, but more specifically, is there plans to raise the price? Last year you raised the price on desktop. Can you talk about whether you plan to do that, and also on the commercial web? You talked about how recession cuts tax returns, but on the other hand, it looks like in this past year, recession got a lot of trading down, presumably from paid retail preparation into doing it online, and whether that in an improved economy going to improve? On the health care, you were looking at 20 million uses. Is it a business in which you don't expect to get revenue generation from direct use of the product? If so what is the cost of those 20 million units that are going to be used?

Brad Smith

First of all, in terms of our pricing strategy, we'll talk more at Investor Day when we actually rollout what our products and pricing lineups tend to be, but as you know, we don't want to foreshadow too far in advance because it's a highly competitive industry. I would simply say that we continue to price for value, and on the low end, the entry price is free. There we were actually able to disrupt the higher price alternative. If we are able to create value, we'll capture higher price. So that's our philosophy, it has been then and we'll talk a little more about that as we get closure to the tax season.

In terms of the shift from retail over to the web, that wasn't necessarily an economically driven thing. That's been going on for the last half a dozen years. For us, it's actually neutral, because if you buy the desktop product, you can do multiple returns for every unit you buy. If you move over the web, you actually have to pay each time you follow tax filing. So, we don't loose on that equation, we actually win, which is why we are super excited about being the leader on the web and growing that business 30 plus percent this year and picking up share. So, that's kind of the tax portion of it.

In terms of health care, the beauty of the product that we've introduced so far is that consumer pays nothing. At the end of the day what we wanted to do is have lots of consumers using this product to try to manage their health care decisions, and to be able to make sure that they are paying payments when they owe the payments to the right doctor or to whomever they owe the payment to. We are finding different ways to monetize that product, and one of the ideas is actually our ability to do electronic payments. At this point we really though we wouldn't put anything into a model as we are still very early in the adoption curve and we haven't at this point seen enough sustainability to say okay, this is what the business impact will be. Once we see that, I assure you we'll be the first to talk about it, because this has been a 2.5 year slog, and we can't wait to see this thing actually start to produce the results that we believe it's capable of.

Michael Millman - Millman Research

How much do these 20 million uses cost you currently to put out there and are United or Cigna paying you anything for the usage?

Brad Smith

Let me start with the first. Most of our efforts have been the R&D effort. Right now, what happens is these plans are doing the marketing and selling directly to the employers and to their end consumers. So, they are putting it on their website. If you go to Cigna, and you go into my.cigna.com you'll be able to see Quicken Health Expense Tracker there, the same thing on the United's website.

So, it's not costing us to actually do the sales and marketing because it's a benefit to the end-user for the plan to offer it. In terms of whether we are getting paid or not, we haven't disclose that at this point, in terms of what our relationships are with those first two plans.

Neil Williams

This is Neil, Michael. One thing I would want to clarify though is that as Brad said, it would be available to 20 million users he didn't say that we would have 20 million users. So, the insurance companies make it available to their customers. It's too early to know, how many of those are going to adopt and actually use the product. The cost of providing the software and service at this point is not significant to our expense run rate.

Brad Smith

That's a good point of clarification Neil.

Michael Millman - Millman Research

Are the insurers going to charge the companies whose employees are using this, anything for this?

Neil Williams

Too early to say, that would be Michael, until we know more about the value consumers really derive from this and how well they like to use and help, they use it, those questions are still be answered.

Brad Smith

Michael, I'll just get you one quick point here. One of the big benefits here for our plan to provide this to the employers is it eliminates the explanation of benefit that piece of paper that comes in that most people don't know what it means. So this is not a bill, and that drives 40% of all the calls into the HR departments and the plans.

So by having this product, we developed to translate into plain English and let's you know, what you owe and what you don't owe. Their hope is that they're actually going to reduce some costs on the back end. Just like banks do, with things like bill pay services. The plans today have simply said, hey, I want to get this in the hands of the employers, because its good for the consumer and it reduces my cost on the back end, and so free, is not an issue with that at this point for them.

Operator

Our next question comes from Philip Rueppel of Wells Fargo.

Philip Rueppel - Wells Fargo

Couple of questions just a kind of clarification on your last response on consumer tax. Is the guidance for next year is really just assume kind of a similar economic environment, where you have the fewer filers or is there some price degradation associated with your guidance?

Brad Smith

Phil, it assumes the same economic environment we're dealing with today.

Philip Rueppel - Wells Fargo

Then just a little bit more on QuickBooks. Could you give us any idea on pricing in that arena, is there any change from last quarter and that kind of continued differential between revenue realization and unit growth is that really just a shift from free to paid and that will wash through over the course of next year or so?

Brad Smith

Yes Phil, similar to what we talked about the tax at this point we're not announcing our pricing decisions before we roll the product out. We'll talk little more at Investor Day, Analyst Day, in September on that. I'll however say what you are starting to see is better execution, price promotions relative to unit growth.

So we reacted very quickly and very aggressively when the economy turned. Then we got much wiser by doing tests to say if you actually discount the product by X you can get the same unit list, you don't have to go as deep. So you are going to see a better execution on our side in terms of getting the right value price equation.

In terms of our actual pricing for the products for next years line up, we'll talk more about that as we are closer to the Analyst Day.

Operator

Our next question comes from Sasa Zorovic of Janney Montgomery Scott.

Robert Simmons - Janney Montgomery Scott

This is Robert Simmons instead of Sasa. We were wondering about your thoughts on cost containment and either you're going to pass it on to investors or invest back into the business, and also the trade-off for EPS growth versus revenue growth?

Neil Williams

First of all, I think as Brad mentioned, we are trying to get sharper and sharper in our measurement of our return on the dollars we invest and making sure that all the dollars we spent for our operating expense or our investment dollars are well spent and are driving customer solutions and customer satisfactions. So, there is a lot of work going on in the organization, and as we have said, it's not a one-time program or one-time shot, it really is an ongoing process to be much more disciplined and diligent about the dollars we spend and match them up to product categories and to services that are growing quickly and that are growing revenue from customers.

As I described, we really look at opportunities to use cash either by investing in initiatives or making external investments or returning that cash to shareholders really through a very similar lens of what is the return to the company, focusing on a longer term growth potential above your investment horizon typically and trying to grow the company.

So, as we've demonstrated in this most difficult year in 2009, we have been able to improve the margins at a time when revenue was under extreme pressure. If we can do that and we continue to do that in 2010, when the revenue comes back through payments or through retail sales or whatever venue the leverage model works well in our favor. When revenue is going up, we are going to be in great shape. So, that's the way we think about the expenses and investments in this environment.

Operator

Our final question comes from Dan Cummins of Lime Rock.

Dan Cummins - Lime Rock

I have just couple of quick question about PayCycle. Could you tell us what's the acquisition impact that you assume in the 4% to 8% revenue growth guidance for fiscal 2010. I believe they had 85,000 accounts, so just two related questions. One, is this $30 million to $35 million business currently? The increment in terms of you Payroll account quarter-on-quarter, I think its only 79,000, so, were you having or you had recently some account attrition in your existing Payroll business? Thank you.

Brad Smith

Let me start with the second part of the question first, and then we'll come around for the impact on PayCycle. First of all, on the payroll customers count, our retention remains at best-in-class levels, so what we had is similar to what I described a little earlier. We changed the definition of what we wanted to use as a customers count, and we pulled out those that are free, that were trialers and weren't actually becoming active users, and we did that out of both numbers. So, net, net, it was roughly flat year-over-year, and I think that's pretty akin to what you are seeing in the payroll industry overall. We have been able to hold a little better than most, but we weren't able to get the growth we have been getting in terms of new payroll customers. I think PayCycle is going to give us the whole new opportunity to do that. The second part of the question which was around, what is the uplift of having PayCycle into 4% to 8%guidance I think you asked for next year?

Dan Cummins - Lime Rock

Right.

Brad Smith

Jerry will answer on this.

Jerry Natoli

Sure. PayCycle is running a little less than $30 million in revenue in the last year, and as Neil said earlier, we'll see how fast we can grow that in the coming year. So, we are not going to break it out separately in the FY10 results.

Dan Cummins - Lime Rock

Could you give us some sense of whether you're taking share in terms of what kind of net interest?

Brad Smith

Sorry Dan, you are breaking up.

Dan Cummins - Lime Rock

I'm sorry. I was looking for some color on whether you're taking share of what type of competitors?

Scott Cook

It's really going after the end-penetrated market, that's really the opportunity here. The folks who are payroll needs who don't have QuickBooks today weren't using a service. Is that it Patty?

Operator

Yes, sir. I'm not showing any further questions. Would you like to proceed with any additional remarks?

Brad Smith

Yes. I just simply want to close by thanking everybody for their questions today and for your continued support. I feel good about the results we had in fiscal year '09. Again, I think we can do better. We've got a clear game plan to win. We got some catalysts that if we can capitalize on them, we'll continue to accelerate our performance.

We are accounting on any rebound in the economy in the next 12 months as you heard, if any of that starts to turn then hopefully that's going to upside for it. Again, I want to thank our employees, because our employees have weathered the storm, have continued to executive and our customers are benefited and hopefully our shareholders feel the same way.

So with that, thank you very much, and we'll talk to you soon.

Operator

Ladies and gentlemen, thank you for participating in today's conference call. This concludes the call.

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