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Intuit Inc. (NASDAQ:INTU)

Q4 2010 Earnings Call

August 19, 2010 4:30 pm ET

Executives

Matt Rhodes - Director, IR

Brad Smith - President and CEO

Neil Williams - SVP and CFO

Jerry Natoli - VP, Finance

Analysts

Brian Bedell - ISI Group

Adam Holt - Morgan Stanley

Brent Thill - UBS

Sarah Friar - Goldman Sachs

Scott Schneeberger - Oppenheimer

Gil Luria - Wedbush

Jeff Houston - William Blair

Bryan Keane - Crédit Suisse

Philip Rueppel - Wells Fargo Securities

Peter Goldmacher - Cowen & Company

Jim Macdonald - First Analysis

Michael Millman - Millman Research

Ross MacMillan - Jefferies

Brad Sills - Barclays Capital

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 fourth quarter and fiscal year 2010 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'll now turn the call over to Matt Rhodes, Intuit's Director of Investor Relations. Mr. Rodes.

Matt Rhodes

Thanks Patty. Good afternoon and welcome to Intuit's fourth quarter and fiscal year 2010 conference call. I am here with Brad Smith, our President and CEO; Neil Williams, our CFO; Scott Cook, our Founder; and Jerry Natoli, our VP of Finance. Before we get started, I would like to remind everyone that our remarks will include forward-looking statements.

There are a number of factors that could cause Intuit's results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2009 and our other SEC filings. All of those documents are available on the Investor Relations page of Intuit's website at intuit.com. We assume no obligation to update any forward-looking 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.

Note also that our Real Estate Solutions business which we sold in January 2010 is accounted for as a discontinued operation. The net operating results of this business appear on the discontinued operations line. These results are excluded from the operational results, operational guidance figures and non-GAAP EPS for all periods presented. GAAP EPS includes the gain on the sale of our Real Estate Solutions business. 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 Matt. Welcome to the speaking team. I want to thank all of you for joining us this afternoon as well. We just completed another strong quarter and it capped off a great fiscal year. Our results continue to demonstrate that our strategy is working and our execution is on track. In fiscal 2010, we delivered 11% revenue growth and 15% non-GAAP EPS growth in what remains a challenging macro environment.

We expanded our non-GAAP operating margin by 190 basis points and for the first time generated more than $1 billion in annual non-GAAP operating income. We are pleased with our financial performance and we build positive momentum as we are heading into fiscal 2011.

Let me begin by sharing my perspective on the fourth quarter and the fiscal year. Over the past several years we've been on a journey to become a world class Connected Services Company. We made significant progress in many areas, but there have been some bumps along the way. Some of our customers were affected by datacenter outages in the past two months. These outages are simply not acceptable for a company of our caliber and our ambition. They inconvenienced our customers and frankly they embarrassed Intuit in my leadership team. We take this very seriously and we have taken great strides to support our customers, regain their trust and make them whole for the downtime. While the financial impact to Intuit isn't material, the potential impact on customer confidence is not. We've learned from these outages and the work to the store customer confidence continues. But I don't want us to lose sight of an important fact.

Intuit has been delivering connected services for many, many years and we know what it takes to deliver highly available and robust online solutions. Our online banking business and our tax e-filing capabilities are already highly available and we are working to get all of our applications up to the standard, our customers expect and deserve. We are accelerating investments in areas like product developments and infrastructure to provide the highest quality experience for our customers, and we are consolidating our datacenters to move all of our connecting services into state-of-the-art facilities. Look, we know what to do, we know how to do it, we simply need to get it done and it will.

Now let me turn to our financial performance, as I've said earlier, the results we are sharing today demonstrate excellent execution against our three-point strategy, which is first, driving growth in our core business. Second, building adjacent businesses and entering new geographies and third, accelerating our transition to connect these services and here are some highlights in each of the areas.

First in driving growth in our core business. We had an excellent year in consumer tax. We continue to grow the software and online category and we improved our share for the TurboTax Desktop and TurboTax Online. We are winning by delivering superior ease-of-use at a better value than any other alternative.

Our leadership position and the digital do-it-yourself category is in the sweet spot for future tax preparation growth. Now with that said we have plenty of things we can do to take our gains at the next level. We will provide more insights into what we learned this past tax season and about the specific actions we are putting in place for the upcoming tax year at our Investor Day in September, but let me say this, we expect another strong year in fiscal year '11.

In small business we delivered double-digit revenue growth in the back half of fiscal 2010 and revenue growth of 9% for the full year. New QuickBooks customers grew double digit year-over-year in fiscal 2010 and we continue to acquire new customers through the new front doors like online payroll, payment and website. And we are also growing revenue per customer in QuickBooks.

In our financial services business, we grew our user base and we have continued to build momentum. In the fourth quarter, we completed the conversion of one of the largest financial institutions that we have ever signed and we are pleased with the continued growth of our core business. The second focus area of our strategy building adjacent businesses and entering new geographies is also building up same. The Intuit website's customer base grew 80% in the fourth quarter.

We now have over 320,000 paying subscribers. We are also acquiring new customers at a lower cost than expected. This reflects improved deals from our marketing efforts. And we are doing this while producing great results for the small businesses that we are serving by helping develop a professional and productive online presence.

The integration of Medfusion that's the healthcare communications portal we acquired in May is in full swing and we are adding new providers at a health equip. The Medfusion leadership team is now responsible for our newly formed Intuit health business which is headquartered in the research triangle and Cary North Carolina.

This is a great business and it's already being growing fast due to the increasing adoption of electronic health record. We believe performance will only accelerate as a result of recently finalized federal guidelines. That thought to the fund the qualifications required for meaningful use of electronic health record.

And it actually reinforces the importance of providers offering a patient portal like Medfusion in order to qualify for these stimulus funds. We are really excited about the potential for this business and the potential that has not only expand but also the cross sell opportunities that will offer going forward. But we have work to do to make it reality. And on our global efforts front, we remain on track and we are seeing good growth in Canada and our UK businesses.

We are also continuing to see positive progress with our products and our tests in the emerging markets. Finally, the third part of strategy is accelerating the transition to Connected Services. We continue to benefit from the secular market shift towards the adoption of digital services. Today, Intuit is providing Connected Services to millions of customers. One million of our small business customers use our recurring revenue products. More than 13 million TurboTax Online customers and close to $10 million online banking customers also use our Connected Services.

In fiscal year '10 roughly 60% of our revenue came from Connected Services and that revenue grew 18% versus the prior year. The growth has been driven by outstanding customer acceptance across the board here are the few examples, QuickBooks Online where we now have over 200,000 subscribers is up 37% from last year. TurboTax Online as you know the units increased 19% this year and now represents 70% of our total consumer tax unit and Mint.com more then doubled their user base in fiscal year '10 to over 3 million users and they recently introduced the new exciting feature that will help users achieve their personal savings goals.

As you can tell, I am pretty encouraged for how well we are executing our Connected Services strategy, but I am also proud the way our leaders and our teams have come together to ensure that we are delivering great solutions and value to our customers.

Now let me turn it over to Neil to walk you through our business results and the fiscal 2011 guidance in more detail.

Neil Williams

Thanks Brad. Let's start with total company performance for fiscal year 2010. Our financial results were revenue of $3.5 billion up 11% on a year-over-year basis. On an organic basis our revenue growth was 10%. Non-GAAP operating income of $1.1 billion up 18% and non-GAAP diluted EPS of $2.11 up 16%. GAAP operating income of $863 million, 26% above last year and GAAP diluted earnings per share of $1.77 up 31%.

Growth in our GAAP earnings is higher than non-GAAP because amortization of acquired intangible assets and non-cash stock compensation which were classified as GAAP only are growing slower than revenue.

The net income in EPS also benefited from the $35 million gain on the sale of our real state solutions business in January of 2010. Fourth quarter results were revenue of $537 million of 18% year-over-year. Our non-GAAP operating expenses grew only 7% so we generated significant operating leverage in the quarter, which lead to a non-GAAP operating loss of $9 million versus the loss of $53 million in the prior year, non-GAAP loss of $0.5 per share versus a loss of $0.10 per share in the same quarter last year.

Turning to the business segments, total small business group revenue grew 9% for the year and 16% for the quarter within small business our metro management solutions revenue grew 6% for the year and 18% for the quarter, finishing strong on solid growth in quick books and websites. We continue to see strong demand for quick books online and we grew quick books desktop revenue despite units being down slightly. The employee management solutions revenue growing 15% for the year and 25% for the quarter without pay cycle, the employee management revenue would have grown 6% for the year and 15% for the quarter. Our customer base grew 1% for the year to more than 1.1 million customers. We are pleased with the continued strong performance of this business particularly the online portion.

We are implementing initiatives to grow the total customer base faster in fiscal 2011, and we will talk more about these plans in investor in September. Payment solutions revenue grew 8% for the year and 5% for the quarter. Charge volume for merchant was down 3% this quarter and down 4 points sequentially which explains why growth slowed in the third quarter. We find the charge volume per merchant is highly correlated with GDP growth which has slowed recently as you know. We continue to add merchants at a double-digit rate and grew merchant account customers by 17% in fiscal 2010. We'll be well positioned when charge volume picks up.

Our consumer tax business had an excellent year. We executed well and took share online and from tax stores in a season where filers were down for the second consecutive year. I'd like to point out a change we made that affects our reported results beginning this quarter. In the first three quarters of fiscal 2010 we reported the revenue for TurboTax for online banking and our financial services segment.

We decided this clear to include that revenue with the rest of consumer tax, even though it's enabled by the financial services channel. The fact sheet we published today reflects this change. It shows that we reclassified approximately $2 million of revenue from financial services to consumer tax in the second quarter of fiscal 2010 and $9 million of revenue in the third quarter. As a result, the second and third quarters of FY '10 are different than we originally reported. Including this reclassification, consumer tax revenue grew 15% for the year. Unit growth is not effected by this change and was 11%.

Our accounting professional segment revenue grew 6% for the year, the tax season was in line with our expectations and we are focused on improving [accountants] productivity and growth with our tax and accounting flagship products and our new S.A.S based offerings.

Prior to the reclassification mentioned above, financial services revenue grew 10% for the year. With the reclassification of TurboTax Online Banking financial services grew 7% for the year and 4% for the quarter. The Core Financial Services business is healthy. We grew internet banking users 9% for the year and bill pay users grew 18%, partially offsetting from the pricing pressure we've seen. We continue to deliver for our financial services customers and are focused on helping those who use our solutions improve their profit per customers, we are seeing good adoption of finance works with more than 550 institutions offering our personal and small business financial management offerings.

One final note on this segment, we sold our consumer lending business this quarter, which will take approximately two points to grow that our financial services revenue growth in fiscal 2011. Other businesses revenue grew 22% for the year and 46% for the quarter. Quicken had an excellent year with double-digit revenue growth, and then also continue to grow with customer base rapidly and added innovative new features. We had a good year in Canada and UK and our other businesses revenue growth benefited from favorable currency impacts of nearly 7 points of growth for the year and approximately 4 points for the fourth quarter.

Turning to our balance sheet, sound financial principles support our strategy and objectives enabling disciplined and powerful investment for growth. Over the long term we expect double-digit organic revenue growth and revenue growth that exceed its best growth at the total company level. We generated free cash flow of $868 million in fiscal 2010, up 38% year-over-year. We expect to carry about $500 million of cash in our balance sheet; net of total debt, this cash balance could vary up or down during the year depending on seasonality and expected cash flow needs. We always seek to deploy the cash we generate to the highest yield opportunities and we target risk adjusted returns of 15% to 20%. We evaluate the investment opportunities within our capital allocation framework. We first look internally for growth investments which may include R&D, marketing and infrastructure, we then consider strategic acquisitions and partnerships and beyond that we will return cash to shareholders typically in the form of a share repurchase.

We repurchased a $150 million in shares in the fourth quarter, bringing total repurchases to $900 million for fiscal 2010. Our board approved a new $2 billion stock repurchase program that's valid for three years. As you can see from share count guidance from the fact-sheet, we are planning to use about half of that authorization in fiscal 2011.

Now moving on to our guidance, our projections reflect confidence in our current business trajectory but our ranges acknowledge the ongoing uncertainty in the economy. Our businesses are resilient and finished a mixed economic year on a very high note but like many other companies in the current environment aren't seeing all the indicators flashing green just yet.

Our fiscal 2011 guidance is revenue of $3.74 billion to $3.84 billion which is annual growth of 8% to 11%, GAAP operating income of $980 million to $1.015 billion which is annual growth of 14% to 18%; GAAP diluted EPS of a $1.88 to a $1.95, our growth of 6% to 10%. Note here that the GAAP EPS growth rates are about seven points higher when we gained from the sale of discontinued operations is excluded from the FY '10 GAAP results.

Non-GAAP operating income of $1.215 billion to $1.25 billion which is annual growth of 11% to 14%. Non-GAAP diluted EPS of 236 to $2.43 which is annual growth of 12% to 15% and capital expenditure rose at about $160 million. Our GAAP tax rate for 2011 is forecasting to be 36% versus 34% in fiscal 2010. We expect the following revenue growth in that segment. Small business grew 8% to 12%; consumer tax into 10% to 13%; accounting professionals of 4% to 7%; financial services 4% to 7% and other businesses of 11% to 16%.

For the first fourth quarter of fiscal 2011, we expect revenue of $515 million to $525 million or growth of 9% to 11% versus the year ago quarter. A non-GAAP operating loss of $50 million to $60 million versus the loss of $40 million in the year ago quarter. This translates to a net loss per share per share of $0.11 to $0.13 versus the loss of $0.10 per share a year ago.

A GAAP operating loss of $100 million to $110 million that translates to a net loss per share $0.23 to $0.25 versus the loss of $0.21 per share in the year ago quarter. Note that the increase loss is primarily driven by the inclusion of Medfusion and [Mint] in the expected Q1 2011 results. And with that I will turn the call back over to Brad.

Brad Smith

Yeah, thanks Neil that was a lot to cover and you did a nice job. We are clearly pleased with our financial performance in fiscal year '10 and we remain very confident in our strategy and the momentum we built since we had into fiscal year '11. As we have shown in this past year, we are growing our categories we are increasing our share, we are accelerating our customer growth and we are improving our revenue per customer all while delivering good top line and bottom line performance. We believe we have a clear strategy; we have strong market positions and the right talent to continue to accelerate these results as we look ahead.

While doing this where we are doubling our focus on our Connected Services execution and addressing any process and technology issues with decisive actions and support for our customers. The next phase in growth for Intuit has been driven by this clear market shift to digital or what we call Connected Services. Intuit is perfectly positioned for the shift and as you can see we are making strong progress in building the next phase of this company's growth on our market leading software as a service offering.

The outlook we've provided today represents year one of our three year plan. While we are not getting specific guidance beyond fiscal 2011 today, I will tell you that our three year plan calls for steady acceleration of revenue growth and ongoing margin expansion, and I don't make this statement lightly. My management team and I believe in our three plan, in fact our executive compensation is set to a significant portion of our long-term comp is dependent on us achieving our three year plan.

We believe the goals of Intuit's management and our shareholders have never been better aligned and we look forward to executing against our plan and continuing to create long-term value.

I am also looking forward to seeing everyone at our Investor Day on September 22 here at our Mountain View headquarters, where we will share more details around our businesses.

That's for now Patty; I would like to turn it back over to you to open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Heather Bellini of ISI Group.

Brian Bedell - ISI Group

Hi guys. This is Brian Bedell on for Heather Bellini. Looking at your fiscal '11 guidance for the SMB segment, that's come in a little better than one might have expected given the I guess, certainly it's crept back into that general segment of the economy can you talk about where you are seeing improved market conditions there that gives you confidence in that guidance?

Brad Smith

I would first say that the uncertainty in the market hasn't changed but our ability to execute and the realty that small business need to time the product and service that we provide remains consistent. So, if you saw this year, it was a pretty tough year for small business and yet we were able to grow our small business franchise whether it was the QuickBooks financial management solutions or payroll and payment had a healthy clip. So we think we have a good product and its going to be even better with this years release we are getting favorable improvement in our ASP and our mix and we are also getting wiser about resource allocation, and if you put that together, we think we can execute even in a tough environment to deliver the time this kind of guidance that we put out there.

Operator

Our next question comes from Adam Holt of Morgan Stanley.

Adam Holt - Morgan Stanley

I had two questions about the financial management solutions, as you noted in your comments you had much better revenue growth in the quarter relative to unit growth. Could you talk a little bit about what's happening with ASP and what you think the outlook is there? And then secondly, it sounds like you had double-digit new customer growth in QuickBooks. Do you think that's sustainable into next year what actually be thinking about new customer growth heading into next year.

Brad Smith

Great question, two parts here, I will start with the SMS ASP. What's driving the average selling price shop QuickBooks, as you know we fall for lifetime value, and we are seeing benefits in two areas, we have got much smarter about our discounting in a slow economy and we are now using more of rifle approach than a shotgun approach; we are able to get the kinds of units that we are looking to get, but we are also able to build more value into the product and customers are willing to pay for that value. The other part is, we are getting favorable mix and there are parts of the QuickBooks product line, particularly QuickBooks Online and QuickBooks Enterprise which are growing at very strong double-digit unit growth rate and they carry with them higher ASP's and so that's what driving the overall ASP favorability on QuickBooks and we think that will continue into fiscal year '11.

In terms of the new user growth, as you know we typically get about two thirds of our units from upgraders and one third from new users. Our upraders were pretty much on track as we had planned this year but we've seen double-digit new user growth and it's primarily for two reasons. QuickBooks Online is doing an excellent job at getting new customers into the franchise and so that's driving the user growth. And in the other pieces we are opening new front doors, enter the franchise through our Intuit website and so they are actually coming into Intuit's family through the website and then buying other products and services. So, it's a combination of those two things that are growing the new user growth.

Adam Holt - Morgan Stanley

If I could just ask a quick follow up on the FI business, it look like you had really good sequential improvement in both bill paid and internet banking but revenue was flat sequentially. Another was some puts and takes there on the maybe the restatement but I just want to make sure I understand that you said just a lag effect in terms of how that should pull that through, was there anything else that impacted at sequential revenue in the quarter? Thank you.

Brad Smith

Yes, there were couple of moving parts there and now I feel to jump in on this as well. One as you know, we did reclass some other revenue and so you have got that TurboTax online banking from Q3 to Q4, it gives you the optic of the slowdown. The second thing you have is we have sold our lending business and that equates through couple of points of growth.

The other thing is last year in Q4, we had some one-time good guys and the form of termination fees or some minimum guarantees we have the partners that we have to drill over, so the year-over-year compare looks like it's a little weaker than the actual core businesses. We continue to see strong online banking adoption at 9% and the bill pay user growth at 18%, so overall we think the business is healthy, you just have some optics playing in that compare.

Operator

Our next question comes from Brent Thill of UBS.

Brent Thill - UBS

Brad, just in terms of your guidance for fiscal '11, you obviously have given with pretty respectable growth rates versus with last year you came in a little more cautious, can you just give us a sense, I know you mentioned ASPs in the mix but is there anything else that's giving you the confidence to start out the year at this rate?

Brad Smith

You know I appreciate to the question and I'll tell you what we are confident in. We are confident in three things: one is, there truly is a structural shift in the market. We are seeing customers move away from paper-based and bricks-and-mortar kind of services and the digital services and that plays very nicely to all of our businesses and its fueling growth in all of our categories; and the second is our products are pretty resilient even at the tough time, customers need the kind of products that we offer, it helps them save and make money, so even at the economy continues to be shaky we think we can execute well; and third, we are getting smarter, we haven't got everything right in this downturn but the more time goes by, the better we get a discounting and how to have a promotion and how to get a customer to the franchise.

So that's why I would put around our guidance in terms of why we are confident, its not that we see an economic forecast, its going to get better anytime soon. We still have the same view that many have. It's going to be a slow, sluggish recovery but we think we can execute and deliver the kinds of guidance we have put out there.

Brent Thill - UBS

And just a quick follow-up from your initial comment on the consolidation of your DCs, how long do you expect that's going to take in? Is there any risk as you consolidate these data centers? What is your goal for data centers and how should we think about that transition?

Brad Smith

We came into this past fiscal year with roughly 28, 29 data centers and the reason why I say roughly as anytime we buy new company like Medfusion we typically get another data center. We have managed to shutdown a dozen of those this past 12 months. We are on a path over the next three years to get that down into a handful and these handful of data centers, one of course we have in plenty in Washington, as one we've owned.

We have also co-located with other world-class companies and example of the new site we just moved into in Vegas and so think of it as a 36 month transition but we will continue to do that in a thoughtful way and we will move into fewer data centers over that three year period.

Operator

Our next question will comes from Sarah Friar of Goldman Sachs.

Sarah Friar - Goldman Sachs

Just on the payroll side, can you give us any kind of update as to what percentage of your QuickBooks customer base is now using some of your payments and payroll solutions and then competitively are you starting to see some displacements away from folks like the Paychex or even an ADP or is this still more of a green sale market for you guys?

Brad Smith

The number in terms of QuickBooks is still roughly 1.1 million out of that 2.5 million who have payroll are using our service, so about 40%. We still see that as a tremendous opportunity to continue to grow in the QuickBooks space but we love the introduction of our online payroll product when we bought PayCycle because it open as up to another 7.5 million small businesses who have payroll but don't use QuickBooks.

But right now inside of QuickBooks it's about 40% penetration, in terms of where we are getting growth it's a combination of people who are new to payroll for the first time. That is about half if you would and the other half are actually coming from other alternative solutions like ADP and Paychex.

And the truth is when you got an offer like ours that is out there for about a third to price of what you pay one to these outsource services. Many small businesses especially when times are tough I think its better just to go ahead and take a little bit of the burden on and get an accurate payroll done at the certain price. So we are seeing some disruption from these players.

Sarah Friar - Goldman Sachs

Right, that was with the SaaS offering that's a real differentiator. And then just on the back drop, I think you could ask a little bit in the very beginning of your first question but we only look into it as great kind of view of what is going on for small businesses. Do you think your performance is more competitive displacements the fact that you've got new things in SaaS for example coming. Or does it feel like the environment is getting a little bit better at least for SMD's right now.

Brad Smith

Yes, I think it's more of the execution and better products and that's getting a little wiser in terms of how we go to market. I will give you a couple of indicators as to why I can't point to any real stability in the economic environment. You saw our charge volume from merchants down 3% in the fourth quarter. That's a four point decline sequentially from Q3.

As you know we also publish our own small business employment index using the data we have for small businesses to see if they are hiring. And in the month of July the employment went up about two tenth of percent that annualized out about 2.4% for the year. So there is not a lot of robust hiring going on in the small business sector. With all that being said, they still have to find to a way to save and make money. And so the products and services we have, we have plenty of opportunity to continue to penetrate and grow the business. Unfortunately, not giving a lot of help from the economy right now.

Operator

Our next question comes from Scott Schneeberger of Oppenheimer.

Scott Schneeberger - Oppenheimer

I would like to start off, I am most curious about this three year plan, sounds quite ambitious accelerating growth year-over-year double digits, is that all organic is that going to include acquisitions and some international could you just wait a little more and are we going to hear more about this in Investor Day. Thanks.

Brad Smith

Yes, that's going to be happy too and we are certainly going to go deeper in Investor Day. As a backup and say we have been pretty consistent for the last several years that we have a goal of growing our revenue organically double digit year-over-year and then to grow revenue faster than expense we could get operating leverage and I think what you see in our three plan or what you hear us talking about today is consistent with those principals and we won't be getting three year guidance in that Investor Day but what you will hear us talking about is how many points of growth we think we can get over the next three years out of our core businesses, how many points we expect out of these new adjacent businesses like health care and global, and what we think Connected Services overall is going to kind of drop the juice and all the above.

The net, net is it's consistent with our financial principals and I think this year we are able to demonstrate that it's doable even in tough environment.

Scott Schneeberger - Oppenheimer

Some more if I could on separate topics I ask them upfront one, the debt indicator being removed for the other professional tax repairs I am just curious how you think this may be an opportunity for you and if you give any deeper color on your refund transfer business and then secondly and separately if you just speak about the quick in double digit growth. Thank you.

Brad Smith

Yes, I will be happy to Scott, let me start with the debt indicator in the tax business. There is a reality above and beyond what's happening with refund anticipation loans and if you go back and look at the IRS data or the data we have shared for the last half a dozen years, the software in online category has being growing 6% to 8%, tax stores have been flat and the CPA prepared has been in that 1% to 2% range. Consumers want to do things digitally and that is driving the kind of growth that we're able to see in TurboTax and our online services.

We had alternative products offered by competitors. You know we got out of the Relay business ourselves half a dozen years ago. We're not in that business and so this decision that's been made now, certainly puts a little more headwind out there for some of the pack stores and people who offer these services, but that's just one piece of the equation that I think gives us the competitive advantage. The fact is that consumers want to file their taxes digitally. The second is refund transfer for us is a great alternative to allow and the customers like it. It's a great way for them to make a software purchase and then pay for that purchase out of the refund and then thirdly, as long as we continue to build a better product and execute well, I think you are going to continue to see us grow. So I do think that it's a piece of the pie but it's certainly not the biggest opportunity. I think the big category shift is what's really driving a lot of the opportunity.

On Quicken, two things going on there, one is the Mint and Quicken team has done a wonderful job of integrating those two businesses and we're making our Quicken products better and simpler learning from Mint. But the second is, we did get a tailwind from Microsoft Money making the decision to exit the market and we worked collaborative with them to actually help migrate their customers to Quicken and that gave us a little tailwind in our Quicken business this year. So that's really what's driving the performance in Quicken, overall a better product with good focus and the tailwind of the money customers moving over.

Operator

Our next question comes from Gil Luria of Wedbush.

Gil Luria - Wedbush

Yes thank you for taking my question. First a follow-up on that, you just discussed why a lot of the secular growth is coming from you taking away customers from the paid preparer segment and then again it's well documented that those guys are having issues. I think the IRS today came and went out with an announcement saying they are going to require everybody to register which I would assume would take some bad players out of there, reduce the supply, increase the cost. And so the question is, do you think those things will accelerate that shift from paid preparer to do-it-yourself software. Are you incorporating the fact that those things are happening to that category to your 10% - 13% guidance?

Matt Rhodes

You know Gil, it's going to be hard to tell whether it will accelerate or discontinue to drive the momentum more towards online tax services. I would say that yes, we have reflected all the above in our guidance for the year. We've been aware of the legislation, we've been a part of the conversations and we anticipated this outcome and because we weren't in the Relay business we didn't have a downside effect, we only saw this potential goodness. And so I do think it will factor end of the year but you know really well, this is a competitive environment. We've got competitors out there including some of our own services that are free, but we don't take anything for granted. We're going to have to keep our eye on the ball and execute well, but I do think this is going to be an opportunity for us to continue to take share particularly from the tax stores.

Gil Luria - Wedbush

And then secondly on payroll, the employee management that looks like the revenue went up a lot without being a lot of business formation with you getting a lot of new customers. Is there a particular product where you're successful raising prices? Is this more selling of some the new offerings in this segment? Which one of those was more helpful in getting that incremental increase?

Brad Smith

Yeah, I am glad you asked the question because there is a story behind the story in our fourth quarter payroll performance. We mentioned in the talking points upfront at the 25% growth about 10 points of that was in organic that came from pay cycles, so you are down to about 15. We also had some good news coming from the fact that we made the acquisition of pay cycle, we had some revenue that flows in that basically gives us another five points of compare favorability. So really the core growth in our payroll business is in the high single digits which still compares very good compared to some of the other payroll providers in the market, but it wasn't a 25% growth in the quarter. Where we see opportunities we look to next year is continuing to penetrate the existing QuickBooks space. Also continuing to leverage the asset of pay cycle to go after those non-QuickBooks customers and the fact that we have a disruptive alternative compared to ADP and Paychex that we think just continues to give us an opportunity to grow regardless of the economy.

Operator

Our next question comes from Laura Lederman of William Blair.

Jeff Houston - William Blair

Hi, guys, this is Jeff Houston for Laura Lederman. First question I wanted to talk a bit about Mint, it's clearly has experienced a lot of user adoption I think the base is now about 3 million. Could you talk a little bit about how you are planning to monetize that and what profitability level it could reach over the longer term?

Brad Smith

Yeah, Jeff, we aren't breaking Mint out specifically, it's a part of our personal financial management group which of course is a part of consumer include TurboTax but I'll give you a couple things that we would love to share with you today. First and foremost is, this offering really resonates with a whole new generation of personal financial management customers and so the fact we can double the customer base in 12 months and get the 3 million users and continue to see that grow is a great opportunity for us, not only in the US but potentially outside the US globally. So you are going to hear us talk more about that in investor day but we think Mint has legs beyond the United States.

The second thing it has is that it has the opportunity to work more effectively with some of our own products in the US. We have a light integration this past year with TurboTax, we're also working with our financial services group to try to bring some of this goodness to our banking customers and we are taking those algorithms, those ways to save recommendation from inside of math and we are starting to apply that and other businesses inside of our Intuit franchise as well. If I had to put a ball around it, think about continues growth of the met business, the fact that we can take that also outside the US, we can apply that to other channels, like our banking channel and we will start to take those ways to save recommendations and apply that data engines to other products as well. Those are all the revenue and profitability drivers that we see in the business case through net going forward.

Scott Cook

Let me just pick up on one aspect of your question and add to Brad's answer. The mid business while it's sweet as a consumer, we use monetize. Its monetization systems that you heard Brad mention these ways to save recommendations that met users get from met are (inaudible) for people who are supplying superior financial opportunities and when the mid customers going to buy those superior financial opportunities recommended by net that lead-gen revenue to the company. So it is a revenue generating business and revenue per customer and it's actually quite nice for us.

Operator

Our next question comes from Bryan Keane of Credit Suisse.

Bryan Keane - Crédit Suisse

Just following up on the payroll question, you lost me a little bit there. Payroll clients look like it sell about 12,000 sequentially, so just interested in why that was and then help me again Brad, I got the 15% but why does it go 15 down to high single-digits for organic growth?

Brad Smith

Let me start first with the customer base and I am going to ask Jerry Natoli and Neil to jump in here to help reconcile some this data between what was pay-cycle and some of the other pieces. So what we've been doing inside of pay roll is an addition to acquiring new customers. We shut down our prior platform that we have built our own online pay-roll plat form and we've migrating this customers over to pay cycle. Any time you put customers through a transition you're going to have some attrition.

The good news is it has not been aggressive attrition as slightly actually retain more of the customers. But that's had some impact over the sequential customer base from quarter-to-quarter. In terms of reconciliation I will ask new Neil or Jerry to Jump in and explain the delta between what was pay cycle and then what basically gets us down high single-digits.

Neil Williams

Sure Bryan, this is Neil. And just on the user point, this guy brings up a good point here too is that we have been consolidating some of the old legacy product lines and converting customers over its small numbers. But it might account for some of the movement you see from Q3 to Q4 again the attrition is much less than we had expected than we had planned.

In terms of reconciling the math as Brad mentioned. We start out between 5% if you take out the component related to pay cycle joining and gets us down to 15%. We basically had about if you look at the trailing run rate for pay cycle it is about $25 million bucks roughly prior to they are joining into it. And so you take that into consideration and you also consider a few relatively minor to the company. But a few points of growth to this segment, one-time eventually as last year in the quarter gets you down to the high single-digits in terms of a run rate that you see going to 2011.

Again, the big growth for us has been the online category and we are working on the desktop category frankly.

Bryan Keane - Crédit Suisse

Okay, now that helps, and then on the QuickBooks division, it's obviously benefiting from the shut off Simple Start and then you are getting a mix shift that's driving higher areas pace. So I guess for modeling purposes the 16% and 18% growth rates we have seen in the third and fourth quarter I assume that continues for the first and second quarters as that mix shift continues, but the third and fourth quarter of next fiscal year I assume we should see correlation in those growth rates in QuickBooks, is that right.

Brad Smith

Yeah. You know Bryan, we provide guidance at the segment level for the for the full year so we've given the SMS guidance of 8% to 12%, but I think that its fair to say you are starting to get some stronger compares on the back half of this year and so if you look at how we see Q1 and Q2 coming out, what it equates to for full year and we feel its being between 8% and 12% for the full year. Total SPG. That's right.

Bryan Keane - Crédit Suisse

Yeah, is there any way to think about how much mix that just a mix of shutting off Simple Start is driving that accelerated growth rate?

Jerry Natoli

That's actually less of an impact than the favorable mix from QB Online from enterprise and from the growth casino websites which also shows up on that line.

Bryan Keane - Crédit Suisse

Okay, just last question from me, it looks like probably Medfusion and then med's still in for another quarter my guess is that's probably a point of revenue growth Neil, for next year so, on an organic basis think about may be seven to 10 is that about right.

Neil Williams

Yeah, it's about right.

Operator

Our next question comes from Philip Rueppel of Wells Fargo Securities

Philip Rueppel - Wells Fargo Securities

Just a couple of questions regarding the datacenter consolidation, you mentioned that in conjunction with some of the outages you had recently, is the driver behind continued consolidation to improve quality or is it really to improve margin in cost and then secondarily you mentioned that you had closed 12 or so this year, were any of those closures related to the outages that you mentioned?

Brad Smith

First of all the answer to your first question is both you can imagine when you have a lot of acquisitions of smaller companies over the years and you made decision in local areas you are going to be in some centers that aren't as robust as we want them to be for a highly scalable online application and so it is to improve effectiveness and to take advantage of virtualization of servers as well as having clean energy and all the things that good company should have in their plan. But it is also efficiency I am it is highly inefficient to run 29 centers have been not really be a scale and not have the ability to leverage the volumes we have in tax season spikes but then when it goes down but you got other services you could be leveraging that energy for it helps us with efficiency too.

And the second part is no that was not a part of the power outage challenges we had there was nothing around our consolidating data centers that contributed to that quiet frankly the issue was while we have our online banking and our tax product highly available we haven't battle hard some of our prophecies and some of our technologies in other areas and it was just pure execution something that we know what we need to do we need to fix.

Philip Rueppel - Wells Fargo Securities

And then maybe a more general comment on margins obviously the guidance for fiscal '11 does show for continued expansion in margin is there any particular areas or business where you see that accelerating versus the margin expansion we saw in fiscal '10 or is sort of caution in speed as we move into next year?

Neil Williams

Hey Philip this is Neil. The number one driver of margin expansion is revenue growth so when you look at our large businesses that already enjoy nice margins those also happens to be one that are growing the fastest so they drive along the expansion and you will see if you look at the small business group this past year they have enjoyed a pretty nice improvement in their margin as Brad described earlier, so its mainly our core businesses who are growing who have very aggressive growth plans and who have good execution plans for next year. So, basically as you will see all the business units are projecting better margins for next year but the key drivers who have revenue growth and top line growth that enables that.

Operator

Our next question comes from Peter Goldmacher of Cowen & Company.

Peter Goldmacher - Cowen & Company

I just want to ask you two quick questions. One, Brad, you mentioned in your prepared comments that ASP's had improved and then answer to your question, you said it was a better pricing makes you figure out discounting. Can you give us a little more detail on exactly what you mean by figuring out discounting and then I'd love to hear whether or not your attach rates or ability to sell back into that install base is having any impact on ASP's as well.

And then second question is, if you could talk a little bit about how you are managing business for the QuickBooks and the QuickBooks on-demand. How you manage that growth and how you slot different customers into different products?

Brad Smith

On the first one, talking about ASP. What we saw in the first year the recession here a fiscal year 2009 for as calendar year 2008. As we wanted to continue to model of growing the category, getting customers into the franchise because we know that we actually increase revenue for customers 3X over five year period through upgrade, support plans and additional products and services. So, when the market caught everybody with this steep downturn. We got aggressive and we went out with $49 QuickBooks promotions for a $199 product and we were doing that across the board, we try to continue to have customers coming into the franchise.

It was a right thing to do but as we got further into the recession we learned that we can get the same source of unit lift out of a much slower discount for the $99 to a $149 actually delivered the same kinds of lift at a $49 lift, so now we've got much more target in terms of how deep we need to go and where we need to go to continue to bring customers in and in sell them additional services.

On a tax rate, we are still seeing healthier tax rate across all of our products and what's really new at it used to be QuickBooks was the lead horse and then we would sell payroll in payments, with Connected Services we have new front doors now we can leave with our online payroll products and attached QuickBooks or we can leave with the website and attach payments. So that's what's really helping with our tax rates all-in-all that's what helping drive ASP.

The second question around how we are managing QuickBooks Desktop and QuickBooks Online, the good news is we don't have to make that decision, the customer does. We actually let the customers choose how they feel most comfortable managing their small business accounting, we have them both marketed equally and many more customers are selecting online services that quite frankly just to keep it on perspective move to about 1.5 million boxes of QuickBooks this year and 200,000 online subscribers.

So that's going to be a lot of years before online equips is desktop but if that's the choice of customer wants that's how we let them actually make that decision, we don't force the migration.

Peter Goldmacher - Cowen & Company

Is there any benefit to you as a company to have or is there any benefit or any difference to have a company on the install version versus the on demand version?

Brad Smith

Well, I think at the more taxable level, yes, because as a couple of things, customers can get access to new features throughout the year as oppose to letting once a year for an upgrade and the second thing is today the price value of an online customer is actually higher ASP on a 12 months basis than a desktop customer. A desktop customer pays about 200 bucks and upgrades once every three years and an online customer pays roughly $24.95 a month. So there isn't certainly value to doing that but at the same time we got a great business in QuickBooks desktop when they add payroll and payments and other stuff and so we're not going to make the decision for the customer to move them over but we will certainly benefit as that migration continues and more people choose online.

Operator

Our next question comes from Jim Macdonald of First Analysis.

Jim Macdonald - First Analysis

Can we go back to TurboTax guidance and as you said the category for you guys is growing 6% to 8% and so how are you so comfortable with the 10% to 13% growth and maybe how much of that might be price?

Brad Smith

We will provide more details around the specific drivers at Investor Day and we want to be careful not to get too ahead of our head lives because as you know it's a really competitive space but when we talk about at each year, we say there is four key levers in the tax business. The first is how many tax filers are filing with the IRS and fortunately this experienced the second year, its been down year-over-year 1% to 2% but then beyond that, it gets into our control and that is how quickly can it grow the online category as the category leader, how can we actually take share from tax scores and online players, and then how do we actually improve our revenue per customer within our own franchise. And so what you see in our plan is an expectation the category will continue to grow where people decide to move out of tax scores and select digital or connection services.

We still plan to take share as we did this year but that's often online and we're getting smarter about free-to-pay conversion as well as we're getting favorable mix and so all of those add up to how we have a guidance that we set for next year 10% to 13%.

Jim Macdonald - First Analysis

Thanks and just one quick follow-up. You give a GAAP tax rate of 36% for next year. Can you talk about non-GAAP tax rate and maybe a little bit about why that tax rate is going up?

Neil Williams

Yeah Jim, this is Neil. The non-GAAP break issue I assume is the same as the GAAP rate 36% for 2011. In 2010 we had a tax planning opportunity that we took advantage of that generated a significant benefit for us this year, obviously about 2% on the effected tax rate. But it was a one time event that doesn't reflect our ongoing tax rate. So we are always looking for opportunities to manage as best we can, but for 2011 at this point our guidance would push here for 36% effective rate.

Operator

Our next question comes from Michael Millman - Millman Research.

Michael Millman - Millman Research

Thank you, I guess a couple of sort of at this point follow-up types. On your three year plan, it sounds like the second year is flat to down in terms of growth rate. I would suggest your third gear has got us the kind of a monster year. And I was curious what economic scenario you are assuming that and maybe more importantly after this three year plan, where do you see revenue growth and then I have a tax related question.

Brad Smith

Okay Michael, I'm smiling because I appreciate the follow-up question that I don't want to provide any guidance beyond fiscal year '11, but I will tackle a couple of the key points that you asked about. Our three year plan you talk about our ability to continue to deliver on our long term principal to double digit revenue growth and expanding operating margin and then making a good set of investment decisions around the cash that we generate. So I would not say that it is safe to assume that we're going to have a dividend in a year or two. I think that what you see this year and our 11% performance is one point of that was inorganic in fiscal year '10 and we had another half a percent or so that was favorable FX exchange that call it 9% to 9.5% performance this year and as we look at - we look ahead, we believe that we're going to continue to accelerate our organic revenue performance while make the right inorganic decisions and we'll continue to improve our performance over time.

We assumed no real recovery in the economy. Our outlook is that its going to be a make key swoosh. It's going to be a very modest recovery, very sluggish. I will tell you we're not double dippers, but we certainly don't have a crystal ball, so we can't figure and tell you we're right or not but we didn't assume any goodness. And in terms of long-term beyond three year, our principals aren't changing. We expect ourselves to deliver double digit organic growth, supplement of the acquisitions and continue to get good operating leverage and make a good use of the cash that we create.

Well, I hope that answers your question.

Michael Millman - Millman Research

Without a number on that long-term double digit, due you expect it take to leave of where the third year of this three year plan gets you.

Brad Smith

You know Michael I can't say at this time. We've got a three year plan of record and we haven't really gone beyond that at this point.

Michael Millman - Millman Research

Okay. And regarding the taxes as Scott suggested, the RTs, can you tell us what percentage of RTs, R4 desktop versus online and what the trends have been in that percentage?

Jerry Natoli

Michael this is Jerry so no we actually don't breakout our mix of the various flavors of tax or RT's and we're not going to provide that sorry.

Michael Millman - Millman Research

Can you give us the trends?

Jerry Natoli

No, sorry, although you know we can say as Brad talked about we had a really nice year in terms of generating revenue per customer from favorable mix that includes improved attach.

Operator

Our next question comes from Ross MacMillan of Jefferies.

Ross MacMillan - Jefferies

Thanks a lot and good afternoon, most of mine have been answered but maybe just a couple you talked about double-digit new customer growth in quick books and you really had a break out year in terms of quick books online. Do you feel confident that you're really driving QuickBooks Online growth by net new customer additions and not cannibalization of the call it on premise base could you just talk to that?

Brad Smith

Yeah Ross, we are very comfortable as you might suspect we have an ability to recognize that the customer has actually been using QuickBooks desktop or not because the register their life (inaudible) and our QuickBooks Online product is bringing new customers into the franchise. If they do choose to migrate over from desktop to web for web as there is a lot of goodness in there for the customer and clearly as I shared earlier the ASP were more favorable for us that net net, many of the customer coming in through QuickBooks online in fact a large majority are new to the franchise that's what driving the Intuit growth for the overall quick book segment.

Ross MacMillan - Jefferies

That's clear. Switching to the financial services or financial intuitions business. Neil, I think you mentioned something around that the strong grow and online banking customer and bill pay customer offset some pricing pressures in that business. What sort of pricing pressure are you seeing, is it just a function the health of small regional banks and credit unions or is there something else competitively impacting pricing?

Neil Williams

I would say we are not seeing anything that you need to fiscal year 2010. As you know in that space there is a lot of margin compression and in the bank processing space, pricing has been under pressure for some period of time and so we haven't seen an acceleration of that but as contracts come up for renewal, there is a lot of competition and price is a key factor to a lot of you know to all the banks that we serve. So, it is for us to focus on features and functionality and helping the financial institutions make more money to use our products through customer retention and deeper relationships with our customers.

Scott Cook

And this is Scott, let me add. This is then true that Neil described for every year that we have had the business and for the years before we own it. So, this has been a long-term trend. What we are doing to respond and take advantage of that trend is by adding things like finance works sort of tax on banking. Things where there isn't that kind of pricing curve the new features, new capabilities that adding total value to both the financial institution and the consumer and that's a capability we have in our company because of all the other product lines and services that's not found down in our arrival. They don't have it tax for example. So, I would anticipate to that will help soften that price decline curve overtime time load bond with additional sources of revenue.

Ross MacMillan - Jefferies

And one last one, just on operating margins. You've done a really good job of expanding those over the last two years actually it would be three years but at least two years. And obviously that remains part of this plan. Do you have any target margin in mind, medium term, long term that we should be thinking about to the business?

Neil Williams

You know, Ross, we don't set specific targets, we said a couple of years ago, we want to get in the 30s, we are there now, so we're now we're looking for the mid 30s, but it's just keep us performing in line with our operating principals, keep revenue growing faster than expenses and it's still said fundamental. We don't have a specific number or a specific place that we think is a plateau or some place that as good as we get.

Ross MacMillan - Jefferies

It looks like your QuickBooks business will be one of the fastest growth categories again this year and that those have the higher margin, so I presume that it's a function of what would drive margins, but do you think there are other structural drivers you've obviously taking advantage of something in the last couple of years around headcount and reallocation of resources. I was just curious as to kind of what beyond mix we should be thinking about to drive margins?

Neil Williams

Well, I mean you hit on the key one, tax being at our fastest growing category and also our largest margin, so that helps tremendously small business group will be right behind that and as we've said all long, the best way to grow margins on a sustainable way is to grow the top line, to have a great revenue growth and to keep that coming organically. So that's probably the key focus. Beyond that in terms of expense reallocation, it's really more about making sure that the dollars we're spending are really moving the needle in terms of growing the business, either growing the revenue or adding new customers at the franchise. So it's more about being more precise with our investments, more of a rifle shot approach in testing and being willing to try new things and being willing to stop if we're not getting the right outcome, I'll just mention simple start as one example of a product offering that we tried and started and came up with better alternatives, but that's more of what you would see going forward in terms of reallocation of cost.

Operator

Our final question comes from Brad Sills of Barclays Capital.

Brad Sills - Barclays Capital

Just a follow-up on small business, obviously you guys are seeing strength in new customers for payments despite charge volumes being weak, website as well. Can you comment on what you think is the driver there, is it just the right offering? Are you doing the right things with promotion, is the macro having any impact on that, giving some price advantage, etcetera?

Brad Smith

It's interesting; Brad when you think about the first thing a small business needs to figure out when they are getting started. They need to get customers, they need to get paid and when you have new front doors into the franchise, like our website or the ability to accept an electronic payment, those are natural catalyst for new customers to come into our franchise and so I think what you are seeing now are small businesses after a long period of unemployment and hey, I am going to start something up here and I need to get a website so customers can find me, and I need to make sure I can get paid. I think the economy actually benefits the kinds of products and services we have in that regard and so I think that's really what the key driver is, it's the right value proposition matching the right problem that a small business has and then getting them into the franchise.

Brad Sills - Barclays Capital

You are seeing obviously strength in QuickBooks Enterprise. What do you think is driving the premium mix shift there, you know given obviously the macro, obviously bucking the trend there. What do you think is driving that?

Brad Smith

Yes, there is two things, one is a lot of what QuickBooks Enterprise growth has come from in the past continues and that is our small business customers who reach a point where they need more functionality that have longer lift. They have more suppliers, vendors and employees and they want to move up to more full featured product and that drives somewhere in the neighborhood of 70% of all of our enterprise customers, its just QuickBooks moving up the line. But the other thing that's been happening is about a third of our users now were actually brining from the mid-market players, the names that you might think of as enterprise companies and deciding that our product has the functionality they need at a much lower price. And so we're now disrupting the up market players particularly in this tough economy, it's a great way to get them into our franchise as well.

Brad Sills - Barclays Capital

Great, thanks guys. Congratulations. Thank you.

Brad Smith

Patty is that it?

Operator

Yes that's the last question that we were taking for the day.

Brad Smith

Well I want to thank everybody for dialing in. I know there are a lot of different calls going on today and a lot of earnings reports coming out, so we appreciate you joining us. I just want to wrap up by saying that we feel really good with our performance in fiscal year '10. We're looking forward to a fiscal year '11 that we think will be equally exciting. The reason why we're excited is our connecting services strategy is working. We continue to benefit from this ongoing secular shift than more digital services. Our core businesses are all healthy. You can see that performance across the board. And hopefully you see that in our guidance for fiscal year '11. So I am looking forward to seeing everybody in investor day on September 22, take care.

Operator

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

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