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Intuit Inc. (NASDAQ:INTU)

F1Q10 Earnings Call

November 19, 2009 4:30 pm ET

Executives

Jerry Natoli - VP, Finance and Treasurer

Brad Smith - President and CEO

Neil Williams - CFO

Scott Cook - Founder

Analysts

Adam Holt - Morgan Stanley

Jim Macdonald - First Analysis

Heather Bellini - ISI Group

Analyst for Kash Rangan - Banc of America Merrill Lynch

Bryan Keane - Credit Suisse

Sarah Friar - Goldman Sachs

Brad Zelnick - Macquarrie

Laura Lederman - William Blair

Gil Luria - Wedbush

Scott Schneeberger - Oppenheimer

Brendan Barnicle - Pacific Crest Securities

Michael Millman - Millman Research

Sasa Zorovic - Janney Montgomery Scott

Ross Macmillan - Jefferies & Company

Operator

Good afternoon. My name is Patty and I will be your conference facilitator. At this time, I would like to welcome everyone to the Intuit first quarter 2010 conference call. (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 first-quarter 2010 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 a number of factors that could cause Intuit’s results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2009 and our other SEC filings. All of those 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 Smith

Thanks, Jerry, and thanks to everybody out there for joining us. It has been a busy start to our fiscal year. Let me share a couple highlights: In our first fiscal quarter, we delivered solid growth in our core businesses. In particular, we’re pleased with the strong double-digit growth in both QuickBooks units and Payments merchants. We are also pleased with the continuing acceleration of revenue growth in our Financial Institutions business.

In addition, our progress in successfully integrating PayCycle is on track, and we completed the acquisition of Mint.com in early November. These two acquisitions are great examples of our commitment to our connected services strategy. We’re both building and acquiring great talent, technology and products that extend our leadership position in the online space.

As I said, it’s been a busy start to the year, and the good news is, all of this activity is translating into strong financial performance.

Today we announced first-quarter revenue of $493 million, which is at the top end of our guidance range. Our results per share and our operating loss were both much better than the range we had originally guided. While this was due in part to a shift in marketing expenses from Q1 to Q2, we clearly performed well in the first quarter. Our Q1 financial performance enables us to absorb the impact of the Mint acquisition without adjusting our guidance for the full-year.

We still expect fiscal year revenue growth of 4% to 8%, operating income growth of 6% to 10% and free cash flow growth of over 15%. Said another way, we’re on track to deliver another good year for Intuit.

This is in spite of the economy. I’m often asked whether we see signs of an upturn. While we do believe we have seen the bottom, we haven’t seen any sustained positive trends in consumer spending or new business formations to suggest a rapid recovery. More positive indicators may come during calendar 2010, but we don’t expect them to materially affect our results this fiscal year. With that said, we do expect to deliver improved operating results without the benefit of a rebound in the economy. And we’re continuing to make the necessary decisions and the investments to position us for accelerated growth when the economy does improve.

I’ll talk more about this later, but first, let me turn it over to Neil to share the highlights of our first quarter financial results.

Neil Williams

Thanks Brad. Let’s start with overall company results. Our financial results included: revenue of $493 million, up 2% and at the top end of our guidance range; a non-GAAP operating loss of $39 million, $21 million better than the top end of our guidance range; a non-GAAP net loss of $0.10 per share, which was $0.05 better than the top end of our guidance range; and a GAAP net loss of $0.21 per share, $0.03 better than the top end of our guidance range.

In addition to the shift in marketing expenses Brad mentioned, our continued diligence on spending and resource allocation contributed to the better-than-expected results this quarter. The operating loss is slightly larger than we had last year, but it’s important to note that last year’s Q1 results included an unusual $17 million benefit from compensation-related items. Adjusting for that unusual item, the Q1 operating loss is $7 million less than it was last year.

In our Small Business Group, we continue to play offense, growing customers in all of our Small Business divisions. The economic environment remains similar to the past few quarters. Payments charge volume per merchant was down 8% year-over-year. This is slightly better than last quarter and leads us to believe consumer spending is becoming more stable. Total Small Business Group revenue in the first quarter was flat with a year ago.

In our Financial Management Solutions segment, QuickBooks units grew a strong 15%. Revenue declined 7%, about three points of which was driven by increased use of consignment in our retail channel and four points of which was driven by heavier promotion of QuickBooks 2009 than we had last year. We learned a lot last year about how best to balance our promotions for QuickBooks and expect to allocate our promotional dollars differently for QuickBooks 2010.

Our Employee Management Solutions revenue was up 9%. The PayCycle integration continues to go smoothly, contributing to strong revenue growth. And we continue to see strong retention of our existing Payroll customers.

Payment Solutions revenue was up 4% driven by strong growth in our customer base, which was up 12% in Q1. As I mentioned, charge volume per merchant was down 8% in the quarter.

Our Consumer Tax group had revenue of $22 million in the first quarter, up $8 million from last year. This increase is driven by more people filing extensions and then completing their tax returns by the Oct. 15 filing deadline than in the prior year. And including e-file in our desktop product resulted in revenue from tax year 2008 being deferred into the first quarter of our fiscal 2009. Our final unit share was up three points. We estimate the total number of returns filed with the IRS were down versus last year despite the strong finish.

TurboTax for 2009 will go on sale in retail stores on Nov. 27, and the season begins in earnest in January. We’ll provide tax season updates this year in the same time frame as last year. The first update is scheduled for February, when we announce second-quarter results. The second will be in mid-March. The final update will come in mid-April. We have confidence in our offerings for this season as we continue to focus on making TurboTax the easiest way for taxpayers to get the biggest possible refund. You’ll see customer-driven improvements, new marketing and advertising and a continued focus on winning with Free.

As we’ve mentioned, we expect the total number of individual tax returns filed with the IRS for tax year 2009 to be slightly down again this year.

The Financial Institutions division continues to gain momentum with 7% revenue growth and strong user growth. Internet Banking users were up 4% in Q1 and bill pay users were up 19%. Our sales activity remains productive. This quarter we signed a large regional bank that will become one of our largest customers when we convert them to our platform in 2010.

Our Other Businesses segment posted a 5% revenue decline in Q1, driven by a later Quicken launch than we had last year.

We expect to generate strong cash flows, in line with our operating income and maintain a strong balance sheet. We continue to evaluate internal and external investments against a risk adjusted return of 15% to 20% over a five-year horizon. Our priorities are to invest cash in internal growth opportunities, infrastructure that enables growth, and strategic acquisitions and partnerships. We also expect to continue to repurchase Intuit securities in the market.

In the first quarter, we purchased $300 million of Intuit stock, which used the remaining funds from our prior repurchase program. The board has approved a new repurchase program of $600 million. Over the past seven years, we’ve returned over $5 billion to shareholders in the form of share repurchases.

As Brad mentioned, we are reiterating our full year guidance inclusive of the Mint acquisition. For fiscal year 2010 we expect: revenue of $3.3 billion to $3.43 billion, or growth of 4% to 8%; non-GAAP operating income of $985 million to $1.025 billion, growth of 6% to 10%; non-GAAP diluted EPS of $1.89 to $1.96, growth of 4% to 8%. As you may recall, in FY09 both our GAAP and our non-GAAP EPS benefited from certain tax items. Adjusting for those items, FY10 non-GAAP earnings per share growth would be 8% to 12%; GAAP operating income of $785 million to $825 million, or growth of 15% to 21%; and GAAP diluted EPS of $1.49 to $1.56, growth of 10 to 16 percent.

For the second-quarter we expect: revenue of $800 million to $835 million, growth of 1% to 6%. This year we expect a $9 million shift in accounting professionals revenue from the second quarter to later in the year; non-GAAP operating income of $160 million to $175 million, compared with $172 million in the year-ago quarter; non-GAAP diluted EPS of $0.29 to $0.32, compared with $0.34 in the year-ago quarter; GAAP operating income of $94 million to $109 million, compared with $109 million in the year-ago quarter; GAAP diluted EPS of $0.15 to $0.18, compared with $0.26 in the year-ago quarter.

The year-over-year growth in revenue and earnings in Q2 is smaller than it would otherwise be because of the $9 million shift in accounting professionals revenue I mentioned. That revenue

would have passed directly to operating income. In addition, the operating expenses for PayCycle and Mint are in the expense figures this quarter.

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

Brad Smith

Thanks, Neil. Clearly, we’re off to a good start and we’re on track to deliver solid revenue and earnings growth in fiscal year 10. Our long-term mission of the company remains unchanged: to be an innovative growth company that helps consumers and small businesses save and do more with their money which basically putting more money in their pockets.

We’re making strong progress against our three key strategies we shared with you on investor day: first by driving growth in our core businesses; second, by building adjacent businesses and entering new geographies; and third, by accelerating our transition to connected services.

Let me share a few highlights of our progress against each of these areas in the first quarter.

In our core businesses, we continue to make progress behind delivering the customer benefit of helping our end users save and make money, and we’ll continue to do it in a way that is easier and a better value than other alternatives they can find in the market. We know this formula works -- it leads to positive customer experiences, it increases word-of-mouth, and that expands our categories and grows our customer bases.

In the first quarter, we drove double digit customer growth across our small business franchises. We increased Internet Banking and bill pay users in our Financial Institutions business, and we continued to expand our share of tax filers who filed an extension after April 15. These trends are positive indicators of our future growth potential because we have a proven model of increasing revenue per user over time.

In building our adjacent businesses, we also have good activity occurring across the company.

In our Small Business Group, our mission to help small businesses succeed and improve their bottom line by 20% is being strengthened by our move into the front office. We are developing solutions that help small businesses acquire new customers and to grow. In the first quarter, we tested TV advertising behind our Homestead Web site services and that contributed to 45% growth in new subscribers year-over-year. This value proposition clearly resonates for small businesses and it opens new front doors into the Intuit franchise.

Another example of capitalizing on adjacent business opportunities is occurring in our Financial Institutions business, where our new TurboTax Online Banking solution recently won best-in-show at "Finovate," which is the banking industry’s innovation contest. Through combining TurboTax Online and our Digital Insight banking platform, we’ve created a three-way win. For consumers filing their taxes, we can import much of the information required, eliminating data entry and reducing the amount of time required to complete their tax return and get their hands on a tax refund. For the financial institution, this service has proven to be a highly valued offering for their customers, with the added benefit of over 90% of the tax refunds being deposited into the host financial institution’s accounts. And for Intuit, it leverages synergy between two of our core businesses and creates incremental sales and a real competitive advantage.

And these are just a couple of examples of our focus on expanding into adjacent businesses and we’ll share more in the future.

Finally, the third element of our strategy is to accelerate our transition as a company to connected services. A recent example of this is our acquisition of Mint.com. Mint re-imagined the business Quicken built 25 years ago. Instead of simply tracking and categorizing expenses, they identified ways to leverage the user’s data with their permission to find savings on things like credit cards and home loans. We plan to make Mint’s innovative technology and “ways to save engine” available to millions of Intuit customers over time, starting with Quicken and our TurboTax.

Mint is just one example of our commitment and execution behind our connected services strategy. Whether it’s TurboTax Online, QuickBooks Online, our Online Payroll Services, Digital Insight, or the broad array of other hosted applications we offer, we are extending our leadership position in every online category in which we compete. And you can expect us to continue to invest more of our focus and more of our resources in these areas as we move forward.

Now look, if I sound encouraged, it’s because I am. Despite the economic uncertainty, we’re continuing to build momentum, and I like our position a lot. Our vision is clear. We have a clear game plan to win. We have three defined strategies to accelerate growth and we have a motivated team of talented employees who are making it happen.

Now before we get to your questions, I’d like to first pause and extend a special thank you to Steve Bennett for the leadership, professionalism and operational rigor he brought to our company during his eight years as our CEO and the last two years as a board member. Steve contributed a lot to Intuit, and was a wonderful mentor and friend to me personally and we all wish him the very best in his next chapter. In addition to that, I’d like to mention that we’ve nominated David Batchelder to stand for election to the board. David brings extensive outside experience and he will offer an institutional shareholder perspective on our board. We look forward to David joining the board after the December shareholder meeting.

And finally, I’d like to thank our employees who have helped contribute to a good start to a new fiscal year. We’re looking forward to the rest of the year and to capitalizing on the opportunities that we see in our future.

With that, let me turn it over to you for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Adam Holt of Morgan Stanley.

Adam Holt - Morgan Stanley

My first question is around QuickBooks. I understand that there was some pricing discounting that impacted the difference between units and total revenue this quarter but as we look into the next couple of quarters, can you talk to us about how you are thinking about what will drive that business between units and average selling prices? What should we think about as the mix being there?

Brad Smith

We clearly saw a spike in our unit growth that isn’t what we have anticipated for the full year. It was driven by the fact that we were depleting the QuickBooks 2009 inventory and making room for QuickBooks 2010. As Neil mentioned, we learned a lot about the balance between how deeply we needed to go with promotional offers and what kind of unit growth we can generate. So I think what you are going to see us continue to do is go for driving more units and category growth but doing that with a better understanding of how we can capture more price per unit.

So you are going to see the gap between units and revenue hopefully over the balance of this fiscal year start to narrow. But our ultimate goal is to continue to bring customers into the franchise because we know we can increase the revenue per user 3X over a five-year period by selling things like payroll and payments and other services. But we will be doing that with hopefully much less reliance on promotions through the balance of the fiscal year.

Adam Holt - Morgan Stanley

If I could just ask one follow-up on the FI group, it sounds like you saw a nice big customer win there. How were total signings in the fourth quarter for FI? And do you feel like that market has stabilized a little bit in terms of being able to sign new institutions?

Brad Smith

We have seen a continued healthy pipeline of sales in our sales pipeline for financial institutions. We have also seen as we have talked in the past that pipeline that was already sold, we are waiting for implementation to happen. Those are starting to break free. It’s not anything that I would scream as a tremendous rapid recovery but it is starting to move forward in the right direction.

Adam Holt - Morgan Stanley

And remind us how big the backlog is of banks that have not yet been implemented?

Brad Smith

We haven’t talked specifically about that. We’ve talked a couple of quarters about the fact that while our sales pipeline looked healthy, there were slips from one quarter to the next as the financial institution had to get their resources aligned for the implementation. And we are starting to see them free those resources up to get this implementation started.

Operator

Our next question comes from Jim Macdonald of First Analysis.

Jim Macdonald - First Analysis

On TurboTax, could you talk a little bit about your strategy this year? It looks like once again you are pushing for units at the low-end especially.

Brad Smith

Our strategy this year is consistent with our prior years and that is the biggest opportunity we have to grow TurboTax is to expand our category by capturing more people who are going to tax stores, continuing to convert people who are doing it paper and pencil, and converting more people who come into the category for the first time. So it’s always about expanding the category and capturing our share of those users.

So what you see us doing is we have a pricing strategy that begins on the low-end with free and we also continue to capture value on the high-end when our value proposition is one-third cheaper than a tax store. And ultimately the goal is to grow that category, grow our share, and then ultimately drive revenue as a result.

Jim Macdonald - First Analysis

And just as a follow-up, can you give us an update on your view of what is happening with the Free File alliance and with any possible legislation on refund anticipation loans?

Brad Smith

On the free file alliance, the free file association and the IRS continue to have very productive conversations. Nothing has been announced yet but I like the momentum. I think the whole industry and the IRS are moving in the right direction and when something has been completed, that will be announced.

In terms of the refund anticipation loans, the good news for us is as you know, we moved out of that business somewhere four or five years ago because we didn’t feel that that was aligned with how we operate as a company and the way we wanted to be working with our customers. So while I hear the intense negotiations and debate going on in the industry, regardless of how that plays out, that won’t have enough impact on Intuit.

Operator

Our next question comes from Heather Bellini of ISI Group.

Heather Bellini - ISI Group

I was wondering if you could -- I know it’s early with QuickBooks 2010 but I was wondering what you are seeing so far with this release versus last year and also was wondering if you could share with us any signs that things are starting to get better? Salesforce.com made some comments on their earnings call that they had seen their SMB start to uptick a little bit and I was just wondering if you could share any thoughts with us on that.

Brad Smith

I’d be happy to, Heather. I think first of all on QuickBooks 2010, it is still pretty early. We’ve been out in the market for four or five weeks. We’ve got some positive indicators, positive reviews from PC Magazine and others. If you go to Amazon.com and you read user reviews, they are positive. If we check the sentiments in the accountant community who recommends these solutions to small businesses, it’s very positive. But quite frankly, those are all words until we actually see the customer buying the product and using the product. And so far, we like the early results but there is still a lot of game left in the year, so I would tell you that we put our best effort into this product this year. The team is proud of it and they have a reason to be. The early result suggests that he customers like it but we will have to see if we can translate that sentiment into revenue and customer growth.

In terms of what we are seeing in small businesses, we continue to hear the optimism and the voices of small businesses but as I have said before, they tended to be the last ones to see the downturn and the first ones to believe we were coming out because they are resilient by nature and that is what I love about small business owners.

But what we look for is whether or not their businesses are getting healthy and the best indicator we have is charge volume. Are consumers shopping in their stores, are they using their credit cards and are they able to continue to buy? And while we saw a slight up-tick this quarter, charge volume is still down 8% year over year. It was down 9% for three consecutive quarters but I don’t think that is anything at this point that I would point to to say we see a sustained recovery.

So net net, I think we have seen the bottom in our rear view mirror. I don’t see a real fast upswing but we do see small businesses continuing to stay in there and fight it out and we are continuing to do our best to execute and help them.

Operator

Our next question comes from Kash Rangan of Banc of America Merrill Lynch.

Analyst for Kash Rangan - Banc of America Merrill Lynch

This is Jay [inaudible] for Kash Rangan. I had a quick question on QuickBooks online -- you had mentioned at the analyst day about just [inaudible] for QuickBooks online and we see the units [inaudible] through slightly sequentially. I was wondering if you could give us some color on your activities over there and I have one follow-up.

Brad Smith

We are continuing our effort and focus on QuickBooks online. We have increased our engineering effort. We have increased our marketing and promotions. You saw some healthy growth in customers, as you just pointed out, year over year. And we are just getting started, quite frankly. We are looking at the QuickBooks online platform as the new platform to begin to introduce a free version. It will be a less featured product that will basically help customers send a bill or send an invoice, and then if they want to unlock more functionality they will move into the paid version of the product.

So net net, nothing has changed since investor day other than we have made more progress on execution. We are seeing solid growth in customers and in revenue and quite frankly, it is still early in the game and we are just getting started.

Analyst for Kash Rangan - Banc of America Merrill Lynch

Okay, okay and one quick follow-up then on the Mint.com integration -- can you give us an update on how that is progressing and which areas of the portfolio do we expect to see the first kind of impact from Mint.com?

Brad Smith

We are just about a week into the game after officially closing. I am proud to tell you though that Erin Pastor and Dan Mauer, who leads our consumer group, have already worked out the plan. We’ve communicated internally. We’ve made some of the changes we needed to do to get the resources aligned. Erin has already defined a multi-year roadmap and a vision of where he would like to take the personal financial management business. And in terms of the first things you will see, you will see Mint continue to execute well in the market. You will see Mint being more tightly aligned with TurboTax. This year, if you use TurboTax you can actually access and get out to Mint to look for ways to save with your refund. And you will see us start to take the technology that we use in Mint and build it into the underpinnings of Quicken as well.

So those are the first priorities we have in this coming 12 months and even though we just have a week under our belts, it feels pretty good so far.

Operator

Our next question comes from Bryan Keane of Credit Suisse.

Bryan Keane - Credit Suisse

Saw you guys released desktop tax pricing the other week -- it looked like to me federal maybe dropped price a little but state, you raised it -- is that accurate?

Brad Smith

Actually on the low-end at federal, which was our basic products, we dropped $5. Everything else was basically the same year over year. And on the state, we did have a modest price increase. As you know, the game going forward is not about retail -- it’s about the web. And we haven’t released our pricing yet on the web and neither have our other competitors but we like where our pricing came out and where our competitors have announced their pricing in retail but that is yesterday’s news in terms of where this business is going.

Bryan Keane - Credit Suisse

Yeah, and do you guys have any ideas where you are going to come out on online pricing yet or we’ll learn that in weeks to come?

Brad Smith

We will be releasing that a little bit later, a little closer to game time. We do have a point of view on where we are going to come out but we just haven’t made it public yet.

Bryan Keane - Credit Suisse

Okay, and then just a question on the tax, I noticed the federal product is always a lot cheaper than the state product -- is there any reason for that, why that is?

Brad Smith

I’m not sure what you are point to on the federal versus the state. We have a good, better, best lineup in federal, a basic, a deluxe, a premiere. And those products pricing go up because we have more functionality in there and the state product is pretty standard, so I actually don’t think the federal product is cheaper than state. When you get down to the low-end of the skew, you do have a lower entry level price point for federal but by and large, the state product is less expensive than the federal products across the line.

Bryan Keane - Credit Suisse

Okay, and then just turning to the small business area, how much did PayCycle contribute in revenue in the quarter?

Neil Williams

We haven’t said, Bryan, publicly what the contribution there has been first quarter or for the full year. We didn’t break that out.

Bryan Keane - Credit Suisse

Okay, but I think at one point it was about $30 million annually, so we can just I guess assume that was about $6 million or $7 million I guess in revenue?

Neil Williams

Pre-acquisition, that was their run-rate. As we’ve said before, as we integrate it into our online products, it’s going to be harder to decompress but that was their historic run-rate, about $30 million a year.

Bryan Keane - Credit Suisse

And on an organic basis then, did the payroll business actually slow a little bit or does it -- what do we expect from the payroll business on an organic basis?

Neil Williams

In the first quarter, of our fiscal first quarter, is typically not one of the strongest ones for the payroll business as a whole. But we are still expecting good growth in the category in terms of customers, retention of our existing customers, and the PayCycle customers will just be on top of that.

Bryan Keane - Credit Suisse

Okay, and last question for me, the total business revenue grew 1% year over year in the first quarter and I think you guys are talking about 4% to 8% for the full year. Which areas of the business -- is it QuickBooks, the payroll business or the payments business -- which areas are about to accelerate in order to get us into that 4% to 8% range? Thanks.

Brad Smith

Actually, Bryan, we’ll see an acceleration across each of those but the payments business and the payroll business will continue to deliver the stronger growth, which we have seen for several years. But we also expect to have a healthy year this year relative to last year in QuickBooks.

Operator

Our next question comes from Sarah Friar of Goldman Sachs.

Sarah Friar - Goldman Sachs

Can I ask very briefly on the marketing expense that fell into this quarter -- out of this into next quarter, can you give us a size for that, Neil? I’m just trying to understand what the impact really is to guidance next quarter, where we would be without that.

And then if you could give us just a little bit more color on why exactly it is shifting around, that would be great.

Brad Smith

Neil and I would be more than happy to tag-team on this one -- it’s about half of our beat in the first quarter was marketing shift. The other half was what we are going to use to absorb the dilution of the Mint acquisition. And the reason why it shifts is because as we get into the fiscal year, we have programs that may be scheduled for the late October timeframe that we end up pushing over into November based upon how our performance is looking. And so we had a later launch this year with Quicken than what we had last year and also our marketing team and some of the things we are working on in our accounting professionals division shifted out more into the next quarter.

So it’s one of those calendarization things that depending upon when we feel like we are going to have the launch of the product and how that compares to prior year, it will shift between weeks and those weeks oftentimes cross a quarter.

Sarah Friar - Goldman Sachs

Okay, that is super helpful. And then if I could, just one follow-up question which I know you kind of get asked a lot, which is the value of offering a free or low-end price point to get people on ramp. If I look at the revenue per incremental user in the QuickBooks area, it is still down a fair amount year over year. Is there a point where we should start to see it grow again year over year or how much more are you are willing to keep letting that come down to keep seeding the market?

Brad Smith

I think there is a couple of points at play here. First of all, that revenue per user that you see going on in QuickBooks is more reflective of the deep discounts and promotions that we used this past year to continue to bring customers into the franchise when the small businesses were basically frozen in their tracks. You know, the economy hit hard, people were uncertain. And the reason why we do that is because we manage the business for life time value. We know that we can get a customer in on QuickBooks and then over a multi-year period, they upgrade to a more featured version. They will buy payroll and payments, they will buy supplies and support plans, and that is a real financial win for us over time, as well as for the small business. So our goal will always be to continue to expand the category and get customers into the franchise but I think you are going to see as I said a little bit earlier that we believe we can begin to rely less and less on heavy promotions as we head into the balance of this fiscal year.

The other thing I would tell you is we are learning that we have new ways of getting customers into our small business franchise beyond leading with accounting. For example, this most recent promotion behind homestead, helping customers sign up with a website and then eventually selling them payments or some other service we have is another good way of getting customers into the Intuit franchise and that takes pressure off of the promotional discounts on QuickBooks.

Sarah Friar - Goldman Sachs

Okay, so it sounds like maybe it takes a year to kind of run through but that we should start to see some year over year growth again begin as the economy improves.

Brad Smith

Yes.

Operator

Our next question comes from Brad Zelnick of Macquarrie.

Brad Zelnick - Macquarrie

Just to follow-up to Adam’s question on the disconnect between the strong unit growth that you saw in QuickBooks and the 7% revenue decline -- when we break that down and I go to your comments for three points due to increased consignment and four points from increased promotion, there is clearly an inventory issue going into the 2010 version. But firstly on the consignment, can you give us any perspective on what have the trends in consignment business year over year and what you expect them to look like going forward and perhaps the percentage of retailers that you work with that work on a consignment basis.

And then on the inventory issues, if you have moved so many units of 2009 this quarter as we look forward to 2010, I guess the question there would be whether or not working off all that inventory would be -- would have an impact and whether or not we should expect to see the typical three year upgrade cycle and whether or not you would expect users who just purchased 2009 to then be purchasing 2010.

Neil Williams

First of all on the consignment issue, I think we see retailers more and more looking for ways to get inventory in the store with less investment on their side. It’s much better for us to get the product on the shelves earlier on and so for the strongest retailers, for the ones where we have the best partnerships, I think it’s important for us to have good product on the shelf early on and consignment is a tool that we use to help us do that and we do see that becoming more prevalent in some of the larger retailers.

To your second point, as we think about going forward with that, I think that is going to be more prevalent and -- but it is critical for us to get the products out and I don’t see this changing the three-year upgrade cycle. It gets it in their hands quicker, they get it installed and gives us a better opportunity to do an attach and to sell them of their services faster. So we think it’s all upside for us and remember product they didn’t sell they’d return to us anyway, so it’s better to get it off the shelf and get it in the customer’s hands and get the relationship going and established, so I don’t really see that being a threat to the upgrade cycle.

Brad Smith

One other point I would say is keep in mind there is 27 million small businesses out there and we have about 4 million using QuickBooks, so we have a lot of opportunity to continue to grow customers and grow our revenue and I think that what we are able to do with discounts is we just continue to sell the momentum and we cleared the way for this next version of the product. So I don’t have any concerns either on this pantry stocking of our product or impacting our upgrade cycle.

Brad Zelnick - Macquarrie

If I could just ask one brief follow-up on the $9 million expected shift in professional tax revenue from Q2 to Q3, could you just give us anymore insight into why we would see that? Thank you.

Neil Williams

It’s all related just to revenue recognition and the professional community, a part of our revenue is recognized when the accountant actually uses the product and files a return, and so as we adjust the product offering and things like that for this season, the revenue is deferred and recognized when the accountant actually files returns and uses the product. So that’s why we see a shifting from Q2 into later in the year.

Operator

Our next question comes from Laura Lederman of William Blair.

Laura Lederman - William Blair

Sorry about the background noise. I’m at a conference. I wasn’t sure because of the noise here whether in answering Sarah’s question you talked about how much of the [inaudible] expense shift into Q2 or how much of the $0.05 you beat by [what is the expense shift] versus how much was from better cost controls?

Brad Smith

We said that about half of that beat in the first quarter was marketing spend shift from Q1 to Q2 and the other half of that beat we are going to use to absorb the dilution of Mint, so we can maintain our full-year guidance.

Laura Lederman - William Blair

Thank you. Can you talk a little bit about QuickBooks and what impact you think Windows 7 [might have] going forward?

Brad Smith

It’s a great question. I’ll tell you, the more people we talk to in the market, the more positive buzz we hear about Windows 7. We built nothing into our guidance or our full-year plan in terms of a positive impact from Windows 7, so if we start to see any momentum in PC upgrades and operating system upgrades, we know that sometimes those correlate with purchases of other software and I am hoping for a successful Windows 7 launch because that could be good news for many of us in the industry.

Laura Lederman - William Blair

Secondly, the Mint product, is there any tie to [Yodely] product there or does it all the IP underneath that product belong to Mint and actually not you?

Neil Williams

The Mint product will be using our customer central application for aggregation of financial institution data and so Mint had I think a prior relationship with [Yodely] to provide that functionality for the Mint product that will be shifting to our application. That’s the only relationship I am familiar with right now.

Operator

Our next question comes from Gil Luria of Wedbush.

Gil Luria - Wedbush

A couple of days ago, you introduced a customer management product and I was wondering whether you could give us a couple more details on that -- what is your sweet spot in terms of small business size for that? Is this a derivative of the product you were working on in India that is really more cell phone oriented?

And then the category is very large, and the penetration, especially at the low end, is probably pretty low. At what point do you see this moving the needle? What year should we expect this to move the needle?

And then finally, what line would this revenue go into?

Brad Smith

A couple of things here -- first of all, it is not the same product as the one that we are testing in India. They are two separate products. Secondly, we’ve been doing quite a bit of work over several years looking at how best to help small businesses managed their customer relationships and continue to acquire new customers. And as we have learned, many small businesses we deal with have fewer than 20 employees. They don’t have sales teams. They don’t need to manage sales pipelines, so products like salesforce.com and others meet the needs of lots of customers more up market but the customers we are talking about don’t tend to need that kind of functionality.

So what we have done is we have created a very simple, clean customer management toll that works both online as well as on a mobile phone, that enables the small business owner to get access to their contact information, their customers’ profile, and also access things like accounts payable, accounts receivable, invoicing items, and basic financial data around that customer. We will continue to learn more in the market with the product and we will continue to add out functionality based upon what we learn. And in terms of its ability to impact the financials, right now it rolls up in our financial management solutions group, SMS, and hopefully that plus homestead and other front office products we introduce will help accelerate the growth of that business over time.

Gil Luria - Wedbush

I assume it is integrated into QuickBooks?

Brad Smith

It is. Yes, the data flows from QuickBooks into this application and then you can access this application anytime, anywhere, whether it is through a website or through a mobile device.

Operator

Our next question comes from Scott Schneeberger of Oppenheimer.

Scott Schneeberger - Oppenheimer

Two questions -- first, on -- we had a little shift of marketing spend and some timing. Could you guys refresh us on seasonality with regard to marketing on a total company basis but take us a little bit lower into some of the segments?

And then just a discussion of how, what venues you are using -- obviously TV has been very good with homestead. Any new changes that you have seen that you would like to highlight at this time.

Brad Smith

I’ll probably hit it at a high level and you tell me if we answered your question sufficiently or not. The easiest answer on how our marketing spend breaks out tends to track our revenue, so you will see us start to ramp up more in Q2 and we will hit our stride in Q3, which is where the peak of our business is. And then depending upon the ROI on that advertising, we will continue into Q4 but that is always contingent upon whether or not we think it is a good investment of the dollar.

So you would see primarily Q2 and Q3. Our advertising means, still the number one reason why we are able to get new customers into the category comes from the fact that our product gets recommended by other users, so our primary focus of marketing is making sure we build great products that lead to word of mouth. After that, we have investments in online advertising, SEO and SEM, and we also have TV and radio advertising behind TurboTax and behind some of our small business products. And that basically ends up breaking out the bulk of our marketing spend. After that, you have some things like direct mail but that is primarily the way we prioritize our marketing spend today. Build a great product, make sure we are winning on the web because people are looking for solutions on the web. After that, TV and radio and then after that, direct mail and direct marketing means.

Scott Schneeberger - Oppenheimer

Thanks, Brad, that’s helpful and then one more, if I could -- on -- in the area of Quicken health expense tracker, in the press release in 2010 free access to 26 million people. I know this is a long-term opportunity for the company but just key things we can focus on this year to monitor progress?

Brad Smith

We are excited that now the third plan has moved into market. Medical Mutual of Ohio has now joined Signa and United and as we head into December and they get into their open enrolment period, they will be exposing that product free to 26 million consumers who are on those plans.

What is also exciting for us is we have been able to implement a pay now button using our small business payments application so that consumers can go in and understand how much they owe, how much their deductible is covering, and then they can actually click a button and pay now. And we are able to monetize that relationship because we get transaction fees on every payment that goes out.

The exciting thing is we have seen that the consumer satisfaction is two times higher than any other alternative in the market today in terms of figuring out what they owe, and also the doctors are getting paid 18 days faster because consumers are able to figure out what is their obligation versus the plan and they are willing to pay the doctor faster.

So we are starting to see some early indications. In terms of what we are putting into any outlooks, we are saying that over a three-year period, our hope is to get somewhere in the neighbourhood of one to two points of growth out of this business opportunity over the next three years. And right now our primary focus is on making sure that the customers like it and adopt it and that the patient, the doctors are excited about the fact that this is something they would recommend to their patients. It’s all about customer adoption at this point.

Operator

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

Brendan Barnicle - Pacific Crest Securities

Brad, we talked a little bit earlier about the CRM offering and what is going on in that space. Any other adjacencies as you look at sort of the SAS space outside of the core finance piece that you have been building on nicely that would make sense to go into next? This next add-on, things like HR, or other aspects of CRM or the marketing side, or collaboration or anything along those lines.

Brad Smith

We have quite a few small experiments going on now to see if we can find an important problem that we can solve well and turn it into a good business. In our small business space, one of the primary areas of focus is helping small businesses retain customers and acquire more customers, so think of homestead websites, think of this customer relationship management tool. We released a couple of other small web services applications that are along the same lines. If you move into our employee management solutions business, which is payroll, we have already formed a relationship with Hartford to do pay by pay workers’ comp. We are also running tests with a 401K services business to help you begin to offer retirement plans and other services to your employees.

And then when you start to move beyond that and you get into areas like healthcare, that is clearly all an adjacent business for us as a company and the last but not least, the things we are doing over in the emerging markets.

So those are the primary spaces we are looking at now in terms of adjacent opportunities.

Scott Cook

That’s a great and complete answer. I’d add one element of a different kind, which is the Intuit workplace app center, where our Intuit partner platform is being used by a wide range of adjacent business services and those are offered on the Intuit app center for our business customers. So this covers a range of adjacencies, like you can maximize your outbound marketing through vertical response; you can manage your sales leads through a thing called fuel station, also you can do web searches. You can book appointments online, or your customers can, through a service call [tester]. All of this integrates into QuickBooks and is sold to QuickBooks customers in a common app center. So that’s another way we are working with third parties to expand and develop new adjacent solutions for our business customers.

Brendan Barnicle - Pacific Crest Securities

And as you make this transition, do you start to think differently about lifetime value of customers versus how you monetize that or model that maybe more likely in the past?

Scott Cook

I think it just gives more opportunity to monetize the relationship and to deepen the relationship going forward. The more products they use and the more delighted they are, clearly the longer they are going to stick with us.

Operator

Our next question comes from Michael Millman of Millman Research.

Michael Millman - Millman Research

I have a couple of questions. First, this year’s guidance on revenue up 4% to 8%, how much of that is organic?

Jerry Natoli

So PayCycle we said was about $30 million last year, so if you back that out, that’s roughly a point.

Michael Millman - Millman Research

And Mint?

Jerry Natoli

We’ve said that that’s not material to revenue.

Michael Millman - Millman Research

Second question -- how much do you typically get from RT payments from Santa Barbara?

Brad Smith

We don’t break out that revenue number at that detail.

Michael Millman - Millman Research

The reason I ask is because, as you well know, they are reducing their rebates. Are they going to reduce their rebates to you as well?

Brad Smith

I’m not sure I understood the question, Michael.

Neil Williams

Michael, I think the guidance that we have issued for this year includes the relationship that we have with Santa Barbara Bank & Trust and I can tell you that we are very much looking forward jointly to a great tax season.

Michael Millman - Millman Research

But do you expect RT to generate the same amount this year as last year, [inaudible] amount?

Neil Williams

You know, we haven’t talked about the mix, the revenue for the tax business for 2010. What I can just tell you is that all the changes or any changes we may have anticipated are baked into the guidance that we gave for the category.

Michael Millman - Millman Research

Okay, and does Batchelder come with any suggestions or maybe even demands that you can give us some clues about?

Brad Smith

No, I would say that what David Batchelder and [relational] investors come with is a big belief in Intuit, a belief that led to a pretty meaningful position in our company over the summer and as we continued to have meetings with them, they expressed an interest in joining our board and we took a lot of thoughtful consideration and quite frankly spoke to others where they sit on their boards and based upon that input, we felt that his breadth of experience and their institutional shareholder perspective would be positive.

What we have heard repeatedly from David and others out there is that the way we communicate our capital allocation philosophy and the things that we are solving for as a company are in alignment philosophically with the things they believe in and so I think it will be another strong voice at the table.

Michael Millman - Millman Research

So in other words, he hasn’t come in with any specifics but generally you expect him to be, as you say, another strong voice?

Brad Smith

That is correct.

Operator

Our next question comes from Sasa Zorovic of Janney.

Sasa Zorovic - Janney Montgomery Scott

My first question would be, you have given us a good explanation on the earnings but looking at the overall year, you have reiterated the guidance on the top line, you’ve said even in the title of the press release that you have beaten on revenue, so if you beat the revenue in the first quarter and you are keeping the guidance for the full year, then obviously you are taking a little bit down out of the second, third, and fourth quarter. Could you explain that a little bit, just kind of in addition of just being a little bit kind of conservative in the light of that you are saying that the worst is in the rear view mirror?

Brad Smith

I guess it’s a matter of perspective. I would actually say that we have raised guidance in that we have absorbed the dilution from Mint that we had originally announced and said that we would be, you know, once we got the acquisition done we’d be talking about that. I think some people out there actually factored that into their models already. So the way we look at it is we had a good solid first quarter. Some of that will shift between quarters and some of it was a beat and in that beat we were able to offset something that otherwise would have been a dilution and continue to maintain our guidance for the year.

You know, I’d like to say this is -- if I have to use a sports metaphor here, we are probably a few games into the season. We are 3-0 so far but we haven’t played any conference games yet, we haven’t had any real stiff competition. There’s a lot of season left and while we are feeling pretty good and I think we’ve got our mojo and our momentum, I want to wait until we get a little further in the year before we know whether or not we are going to continue this progress. But right now, I feel good with our outlook for the year and I think that given what we did in the first quarter, we’ve been able to offset the dilution of Mint and I think we are well-positioned of a strong fiscal year.

Sasa Zorovic - Janney Montgomery Scott

My second question would be regarding Microsoft specifically and sort of their abandoning Money and also their accounting product -- are you anticipating impact from that or really for that to be minimal?

Brad Smith

I think it is going to be minimal. We’ve been working closely with the customers of money and the customers of small business accounting. We’ve built free conversion tools that will help them convert their data over from the Microsoft product into our own. And I think over time, we will see how successful we are and how interested they are of moving over. We certainly are out there to help them and would love to get them into the Intuit franchise. But I don’t see any material change one way or another based upon those announcements that Microsoft has put out in the market.

Sasa Zorovic - Janney Montgomery Scott

And then finally I would like to get a little bit more of an update on your sort of international strategy and if you could sort of give us really more details specifically what is going on in India, any kind of timelines, products that you could share with us would be great.

Brad Smith

You know, we’ve been over there for some time doing follow me homes with roughly 1,000 small businesses and consumers. We’ve narrowed down on a handful of experiments that we think have some early promise but we are going to have to get them into market and get them in a more scalable fashion to see if we are going to turn into big businesses.

One is something called Intuit Money Manager, which helps the consumer or a small business aggregate their financials from multiple banks and have one view of all their money. We are going to be moving into market with that over the next three to four months and we have a couple of key partners that we are working with -- ICICI, which is one of the largest private banks over there, as well as a company called Money Control, which is an online financial portal.

Another product we have put into the market and we will continue to move forward in beta and hopefully get it into general release is a product we have code-named Jasmine, which is a mobile CRM app. We talked a little bit about that at investor day. Now I want to caveat these -- these are two of multiple experiments we are going to continue to put into the market and hopefully they are going to be something that turn out to be a success for the customer and a commercial success for us. We are committed to continued to experiment in the market and hopefully we are doing to find a winner and these happen to be the first two and we’ll be getting into market in the next three to four months.

Operator

The final question comes from Ross Macmillan of Jefferies & Company.

Ross Macmillan - Jefferies & Company

A couple of questions on TurboTax, if I could -- the first is I noticed you had a new business product for $110 on the retail side. Could you just remind me, is that a brand new product and should we expect to see a similar launch on the online at that price point?

Brad Smith

It’s not a new product. We had a version of this product last year at roughly the same price point in retail, basically targeted at small business owners, schedule C filers, and it’s not new and we do have it in retail. I don’t know -- we have the same thing on the web as well.

Ross Macmillan - Jefferies & Company

Okay, thanks for the clarification. And then maybe just another one on TurboTax -- I think in your PR release you talked about how a lot of customers could get access to TurboTax from certain financial institutions this year. Could you give us any sense of how that has expanded relative to last year? And is it all just in the digital insight base or is it moving beyond that?

Brad Smith

It’s both, actually, so one piece of it is tied to the ability to integrate TurboTax online with our digital insight platform and that is enabling consumers to download information from their online banking account plus import their W2 and get a lot of that data entry done for them.

With this integration, we now have this successfully integrated and we will be working with over 1,200 financial institutions this tax season. And based upon our results, we have seen that this creates incremental sales so these will be incremental to TurboTax and incremental to Intuit.

The other thing I will tell you is we’ve gotten more aggressive through our alliance channel in selling TurboTax to banks that aren’t using digital insight and so we will continue to go after those opportunities as well.

Ross Macmillan - Jefferies & Company

And that 1,200 this year, was that fully addressed last year or was that -- is that net new?

Brad Smith

No, that is net new -- that works from basically a standing start.

Operator

Gentlemen, that is all we have time for today. I will turn it back over to you for any final comments.

Brad Smith

Great. Listen, I want to thank everybody for your participation today and for your great questions as always. Obviously we feel good about our first quarter. We realize there is a lot of season left but we think we are well-positioned to finish up strong. We are continuing to build momentum and grow our customer bases and we are making wise investments internally as well as bringing some exciting acquisitions on board, like Mint and PayCycle and we are looking forward to another strong fiscal year.

I also want to thank the Intuit employees for their hard work. I think all of you know that this tough macroeconomic environment can be somewhat distracting but our team has remained focused, they are executing well and I am looking forward to another good quarter. So we will speak with you next time.

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Source: Intuit F1Q10 (Quarter End 10/31/2009) Earnings Call Transcript
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