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Intuit Inc. (INTU)

F3Q07 Earnings Call

May 17, 2007 4:30 pm ET

Executives

Bob Lawson - Investor Relations

Stephen M. Bennett - President, Chief Executive Officer, Director

Kiran M. Patel - Chief Financial Officer, Senior Vice President

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

Analysts

Adam Holt - J.P. Morgan

Heather Bellini - UBS

Brent Thill - Citigroup

Laura Lederman - William Blair

Scott Schneeberger - CIBC World Markets

Daniel Cummins - Banc of America

Carlos Morano - Fidelity

Vic Churamani - Lehman Brothers

Jim Macdonald - First Analysis

Presentation

Operator

Good afternoon. My name is Patty and I will be your conference facilitator today. At this time, I would like to welcome everyone to Intuit third quarter 2007 conference call. (Operator Instructions) With that, I will now turn the call over to Bob Lawson, Intuit's Vice President of Investor Relations and Financial Planning and Analysis. Mr. Lawson.

Bob Lawson

Thank you. Good afternoon and welcome to the Intuit third quarter 2007 conference call. I’m here with Steve Bennett, Intuit's President and CEO; Kiran Patel, our CFO; and Scott Cook, our Founder.

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 2006 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 presentation will be presented on a non-GAAP basis. The most directly comparable GAAP financial measures and the reconciliation of the non-GAAP financial measures to GAAP are provided in today’s press release.

After this call concludes, a copy of our prepared remarks and supplemental financial information will be available on our website. With that, I will turn the call over to Steve Bennett.

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Stephen M. Bennett

Thanks, Bob, and thanks to everyone for joining us. I am thrilled to be sharing Intuit's record results for our third and most important quarter of the year. All of our businesses performed well, resulting in third quarter revenue growth of 21%. This strong revenue growth drove profit leverage, with non-GAAP EPS growth of 27% to $1.13 a share.

I’ll share more thoughts later in the call but I’ve never felt better about a quarter or year, and more importantly what it bodes for the future.

Our strategies in Small Business, Tax and Financial Institutions are working. Our “Right for Me” strategy in QuickBooks continues to pay off. Total QuickBooks units were up 20% for the quarter, led by QuickBooks Premier, Enterprise and Online Edition, which were up 27%.

Payments customers grew 23% with continued growth in charge volume per customer. With the transition of our “can’t be bothered” payroll customers to ADP, we are now focused completely on the growth area of the business, Do It Yourself and Assisted Payroll, that matches our strengths.

In Consumer Tax we won again against low-priced competitors, offering TurboTax for free to be competitive at the low end while growing revenue in total faster than units, and holding share on the Web with 17% unit growth in the fastest-growing segment.

Our Pro Tax business had its best season in years, and Digital Insight delivered great results even before synergies with Intuit. With that, I’ll turn the call over to Kiran to walk us through the financial details.

Kiran M. Patel

Thanks, Steve. Let me start with a summary of the third-quarter’s results. Revenue of $1.15 billion was up 21% year-over-year. Non-GAAP earnings were $1.13 per share, 4 cents above the high end of our guidance. On a year-over-year basis, non-GAAP EPS was up 27%.

These results include the impact of the acquisition of Digital Insight and the sale of certain payroll assets to ADP. Without those items, revenue growth would have been 14% for the third-quarter, 11% year-to-date.

Now the results of our business segments.

Third-quarter Consumer Tax revenue of $567 million was up 14% over the year-ago period. Season-to-date, Consumer Tax revenue is up 15%. Year-to-date, TurboTax federal units are up 17% on the Web and 6% overall despite passing on some low-priced bulk deals early in the season which would have added about 2 points of growth to our non-Free File Alliance unit numbers. We now expect Consumer Tax revenue to grow 14% to 15% for the full year.

Professional Tax revenue is up 6% year to date. Revenue for the third quarter was $138 million, up 32% over the third quarter of 2006. Recall that the third quarter revenue includes approximately $25 million that shifted from the second quarter to the third quarter, compared to last year. We now expect Pro Tax revenue to grow 4% to 5% for the full year.

QuickBooks had an excellent quarter. Revenue was $155 million, up 22% year-over-year. Software units grew 20%, with particular strength in the Premier edition and in Simple Start, which is targeted for new small businesses. Year-to-date, QuickBooks revenue is up 10% and software units are up 8%.

Our Payroll and Payments business had revenue of $125 million, up 7% year-over-year. The Payments revenue growth was driven by 23% growth in customers and 8% growth in transaction volume per customer. Segment results reflect the transition of our fully outsourced payroll customers to ADP. Without that one-time event, Payroll and Payments revenue would have been up 13% this quarter.

Total Small Business, which combines our QuickBooks and Payroll and Payments segments, showed revenue growth of 15% for the quarter and 12% year-to-date.

Financial Institutions revenue of $65 million includes the results of Digital Insight, which was acquired on Feb. 6th and the financial institutions business previously reported in our Other segment. Since this is the first quarter that we’re including DI’s results, the revenue growth percentages aren’t meaningful. On a standalone basis, DI’s core Internet banking revenue grew about 14% and total revenue grew 11%. These results are consistent with the trends and guidance DI had given prior to the acquisition.

You should note that our fact sheet now includes two customer metrics for this segment: the number of Internet banking end users, and the number of bill pay end users. In the third quarter, Internet banking end users grew 17% and bill pay end users grew 26% over the same period a year ago.

Our Other Businesses segment revenue was $104 million, up 6%, led by Intuit Real Estate Solutions, which grew revenue 26%.

Moving to the balance sheet, Intuit ended the third quarter with $1.4 billion in cash and investments.

We used $301 million to buy back 10.4 million shares of Intuit stock during the quarter, completing our previous authorization. Today we announced an additional $800 million for future share repurchases.

During the quarter we replaced the bridge financing put in place for the acquisition of Digital Insight with long-term financing. We issued $500 million of five-year notes and $500 million of 10-year notes. We also secured a $500 million revolving credit facility.

I will now review our updated guidance for the year. Revenue guidance has increased. Our previous guidance, which included the impact of the DI acquisition and the sale of payroll assets to ADP, was for annual revenue growth of 12% to 14%. We now expect annual revenue growth of approximately 15% and expect full-year revenue to be in the range of $2.685 billion to $2.7 billion.

Non-GAAP diluted earnings per share guidance has also increased. We previously projected a range of $1.33 to $1.37. We now expect to be between $1.38 and $1.40. This new guidance represents year-over-year non-GAAP EPS growth of 14% to 16%.

Finally, GAAP diluted earnings per share guidance has also been raised. We previously projected a range of $1.10 to $1.14. We now expect between $1.15 and $1.17.

Fourth-quarter guidance is unchanged.

With that, I will turn the call back over to Steve.

Stephen M. Bennett

Thanks, Kiran. As mentioned earlier, it was a great quarter. All of our businesses delivered strong results and we’re on track to deliver another great year, with revenue growth of 15% and EPS growth of 14% to 16%.

While we’ve consistently grown revenue at double-digit rates, the question investors always ask is: “You have such high share, how will you continue to grow?”

Let me share the most critical thing that drives our sustained growth: We grow revenue by growing our existing categories and by creating brand new categories for Intuit.

We grow our existing categories by making customer experiences better on existing offerings and creating positive word-of-mouth from our large customer base that translates into customers buying more and telling their friends. And Intuit products become the de facto standard.

We create new categories by solving additional important customer problems with innovative products and services that convert non-consumption or disrupt higher-priced alternatives.

Our customers derive benefit from our products and services over an extended period of time so we benefit from recurring service revenue, repeat purchases, upgrades and sales of additional services to our customer base.

That’s the simple formula. So now let’s look at the proof points, starting with Consumer Tax. The compound annual revenue growth rate for Consumer Tax during the last five years has been 19%. And revenue this year will be more than $800 million -- all from growing the category.

Looking more recently, Consumer Tax was coming off enormous growth last year and we grew revenue strongly again this year. Why?

First, we continue to benefit from positive market trends. About 5 million new filers enter the market each year and three-and-a-half million depart. Software gets a disproportionate share of these new users because software offers the best value and highest Net Promoter score of any tax prep method.

Second, we continue to innovate and learn. So while our strategy was unchanged, there were two things we needed to test this year, both to get market learning as well as have another strong season. We needed to be more competitive at the low-end on the Web for people with simple tax returns, while capturing more value from those with more complex returns, and we needed to test price elasticity at retail, where unit growth has slowed the last few years

The result: we executed well and got great insight that will help us next season and beyond.

On the Web, we offered “free” TurboTax to be more competitive at the low-end and expand our served market, while raising prices and improving functionality at the high-end. The result: we grew units without cannibalizing our paid offerings and held share on the Web, showing again we can win with and against “free.”

At retail, we strengthened our product line up and raised prices. The outcome: we grew margin dollars while holding unit share roughly flat -- a big win.

We didn’t get everything right. We passed on some low-priced bulk deals early in the year that we had won the previous year and that would have added an additional two points to our non-FFA unit growth for the season. This had a big impact on some of the unfavorable comparisons with competitors earlier in the year. And while we held unit share, we were disappointed in the category growth at retail.

But overall it was another great year for Consumer Tax. With the results we saw and what we learned, we’re more confident than ever in our ability to grow long-term.

Let’s switch to Small Business. Revenue this year will be more than $1.1 billion, with a five-year compound annual revenue growth rate of 17% as a result of growing the category and creating new categories.

Our two-prong game plan is working. We keep improving our existing products and growing the category while creating new offerings to solve additional customer pain points and create new categories for Intuit.

Many people thought QuickBooks was out of gas after Y2K, when we sold a little over 900,000 units. This year we’ll sell more than 1.6 million.

Of the roughly 700,000 additional units, 300,000 have come from growing the core QuickBooks category and 400,000 are the result of creating new categories, with products launched since Y2K.

Examples are QuickBooks Enterprise Edition, which is now about a $50 million business and QuickBooks Online Edition, which has more than 100,000 subscribers. And revenue per customer grows as we solve more of their needs. This year we’ll sell more than 300,000 Premier units at double the price of QuickBooks Pro.

Small business offerings beyond QuickBooks have grown dramatically faster. We’ve grown the payroll category dramatically. In 2000 we had 566,000 Do-It-Yourself payroll customers paying us $69 a year. Today we have nearly 1 million paying us more than three times that per year.

The payments business, a new category, will be more than $160 million this year. Our payments business has allowed many QuickBooks customers to accept electronic payments for the first time, converting non-consumption into growth for Intuit and the banking category.

The long-term trends continued this quarter, with payments customers growing 23% and charge volume per customer up 8%. Payroll also grew nicely and the transition of our “can’t be bothered” customers to ADP positions us for accelerated future growth.

Despite years of success, we’ve got plenty of room for growth in the small business market. Sixty percent of small businesses still use manual methods -- pencil and paper or spreadsheets to keep their books. That’s a lot of non-consumption. Our payroll penetration of the QuickBooks base alone is only 40% and for payments it’s only 10%, with additional potential beyond QuickBooks users.

In addition to our existing offerings, we’re actively looking for opportunities to buy and partner so we can move faster to solve additional small business customer needs.

Just like in Consumer Tax, in Small Business we continue to execute our two-prong game plan and produce solid, consistent results.

Our third and newest growth engine is Financial Institutions, and we’re thrilled with the Digital Insight business performance so far. We had 26% growth in bill-pay customers and 17% growth in online banking customers this quarter -- very solid performance even before we’ve seen many synergies from the combined companies.

We announced two new offerings, Personal and Small Business FinanceWorks, at the annual DI financial institution customer conference in March. FIs were very enthusiastic and we continue to be excited about the opportunity to grow and expand this category. Similar to our other growth engines, our Financial Institutions segment benefits from favorable market trends as more consumers and small businesses use online banking. It’s another market that is growing with lots of non-consumption and many unmet, underserved needs that we can solve well.

Another potential growth opportunity is Quicken Health, which is on track to pilot later this summer and, if we get it right, could be another catalyst for Intuit’s long-term growth.

Tying it all together, we like the businesses we’re in, we like the strong performance this year and even more importantly, we like the long-term growth prospect and opportunities for Intuit.

But every year there are things that cause worry and concern among investors about Intuit’s ability to grow. In 1999, Microsoft entered the tax business and exited in less than a year. Four or five years ago the big question was the Free File Alliance and how that would negatively impact TurboTax growth.

Two years ago the worry was Microsoft’s new accounting offering, their third or fourth attempt to challenge QuickBooks. For the record, the Microsoft stand-alone unit share at retail over the last 12 months has been less than 2% and QuickBooks has actually gained unit share at retail since Microsoft launched its new product.

This year the big concern was low-priced TurboTax Web competitors, and we won again. Next year and the year after there will be something else, some other challenge to overcome.

Yet by getting better at executing our strategy of being in good businesses with strategies to win, talented and engaged employees delighting customers so we deliver sustained revenue and profit growth, Intuit continues to thrive. And maybe even more important than that, as you can see from today’s results, gain momentum.

We have the best talent throughout the organization that we’ve ever had and our strongest leadership team ever. The opportunities in front of us have never been greater. That’s why I feel so great about this quarter, this year and more importantly, the years ahead.

Thanks to all of you for your support and to all the Intuit employees that stay so focused on delivering for our customers. Now let’s get to your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Adam Holt of J.P. Morgan.

Adam Holt - J.P. Morgan

Hi, guys. Congratulations on the quarter. My first questions are actually on the tax season. As you think about the market this year, it looks like the IRS is suggesting the category grew about 11%. As you look into next year, do you think this is the right sort of sustainable growth rate for the market and how do you think about your ability to grow with respect to that broader market growth?

Stephen M. Bennett

I think that the data we’ve shared has been consistent that self-prep software has grown about 10% on a compounded annual rate for the last six or seven years, so this is continued growth, right in line with what the market has been doing the last six years.

If you take the bulk price deals that we walked away from earlier in the year that drove a bunch of one of our competitor’s growth, and added that together our units would have been closer to 7% or 8%, so we would have lost a tiny bit of share but we would have more importantly held or grown share on the web.

I think that the category -- the best way to predict the future is look at the past and I still see roughly 9% to 8% to 12% category growth for self-prep software going forward.

Adam Holt - J.P. Morgan

Is it too early to talk about retention this season and what the impact of some of the price increases might have been on customer retention?

Stephen M. Bennett

It is too early. We are still tabulating all that data. We will obviously share that as we always do at investor day in September.

Adam Holt - J.P. Morgan

If I could just turn for one question to QuickBooks, obviously good numbers there on the revenue side where you had a pretty easy comparison but the acceleration in units, would you tie that to some of the new marketing programs that you went forward with in the spring, or how would you talk about qualitatively some of the drivers behind the unit acceleration?

Stephen M. Bennett

I think you hit -- the biggest single new thing we had was the advertising that we attempted for three or four years on TurboTax that had grown the category and helped us, for the first time ever we did in QuickBooks and the same thing happened. We grew the category faster and benefited from that. I think that was the single biggest thing, other than I think it’s just continued great execution by the QuickBooks team and our retail team, better performance on the web. We’ve continued to get better at our execution on our web as a channel, so I think it’s no single catalyst other than the new advertising. Just fundamental, continued strengthening our blocking and tackling execution.

Adam Holt - J.P. Morgan

Thanks for your help.

Operator

Our next question comes from Heather Bellini of UBS.

Heather Bellini - UBS

I just had a question as, I know it’s early but as you look out to next tax season, what type of strategies do you think you would employ in order to get the unit growth to bump back up to be a little bit more in line with what the overall market unit growth is? Thank you.

Stephen M. Bennett

Talking to Brad and the team about this, we did not come out of the gate as fast this year as we could have in the past. I think there are lots of reasons for that, that Brad and his team are on. They’ve learned a lot. We’ve got a great, strong team in San Diego. They learn quickly and they’ve become very good at rapid testing and iteration.

I think we learned a lot of things this year that I would not want to share with you at this point that are very fundamental, tangible things about consumer behavior early in the tax season that if we adapt, we think we’ll get off to a faster start next year. So stay tuned for that. I’m not sure we are going to preannounce that, but next year at this time we might share the secrets of some of the things that help us get off to a faster start.

Heather Bellini - UBS

Great. Thank you.

Operator

Our next question comes from Brent Thill from Citigroup.

Brent Thill - Citigroup

Thanks. Steve, you mentioned you were somewhat disappointed at retail with the consumer tax side. How much of that was related to pricing and a shift to the web? How do you balance those two counterpoints out to what happened at retail?

Stephen M. Bennett

A couple of thoughts. Number one, it’s really retail category growth. You saw some data. We basically held unit share at retail and grew slightly dollar share against a competitor that was pretty aggressive and in general during the season was $15 cheaper than us, $5 cheaper on a relative basis than they had been in the last couple of seasons. Despite all that, we held unit share at retail.

So the issue was not share at all and the decision we made to actually raise price turned out to be a good one. The challenge is the category is just not growing, so that’s why we’ve focused more and more about growth on the web and we are pleased with 17% unit growth on the web. As I said, Kiran and Bob and I said before the season, our strategy was to manage retail more for margin dollars and take some of that margin, invest it in growing share on the web and we were pleased with how that all turned out.

Brent Thill - Citigroup

And as it relates to your market share on the web, it is clearly not as high as it is on the retail side. Can you just talk through your incentives to increase that over the next year? What steps you are putting in to improve the effectiveness?

Stephen M. Bennett

Well, I think the competitive dynamics are a lot different on the web. I’m thrilled with the progress we made this year with the new lineup. We were more competitive at the low end. We won with a free federal TurboTax offering where we were able to get money from state and other things, so I think we will continue to evolve our thinking. I think this was a huge breakthrough this year to offer TurboTax free on the web and have minimal cannibalization. That was something that the first time, and I give Brad Henske and Dan Mauer all the credit in the world for that. They did a bunch of tests and found that the cannibalization, even when it was on TurboTax.com with all the offerings, we had limited cannibalization. So it really paid off, but I think it’s the single most significant learning we’ve had in consumer tax in the last 10 years, that we could offer a free product and it didn’t really cannibalize our full-price offerings and actually helped us hold share and grow the category. So I think that was a big learning and you’ll see some new things from us like that in the future.

Brent Thill - Citigroup

Thanks.

Operator

Our next question comes from Laura Lederman of William Blair.

Laura Lederman - William Blair

Thank you. A few quick questions. Any thoughts on plans to move the free TurboTax customers on the web to paid and how you will do that? Also, could you talk a little bit about the ad plans for QuickBooks 4 ’08 since they were so successful in ’07? Any quick thoughts on the price elasticity of demand at retail and your sense of whether or not you can increase prices going forward. Thank you.

Stephen M. Bennett

Too early, Laura, to on the QuickBooks advertising. I think we are going to take a look and do a post-mortem about the ROI on that versus other ways to grow the category or invest to drive growth, but we were happy with how it resulted this year. So stay tuned on that one. There’s a lot of things that Brad Smith and the team are going to have to sort through on that one.

With respect to price elasticity on retail, I don’t think we have a huge amount of upward price opportunity in TurboTax. A $15 difference is pretty big and I am pleased that we were able to hold share, but I don’t think the answer is continue to raise price every year, so I think that’s one of the things we’ll have to sort out.

What was the first question again?

Bob Lawson

Converting free to paid.

Stephen M. Bennett

You know, our strategy on this is to be ubiquitous to customers and offer them different value propositions and price points that meet their needs and let them choose what’s best for them, so at least at this point, I wouldn’t tell you how nice it is to take people that were free this year and try to convert them. Their tax situation may change. They may require more complicated returns over their lifetime, which would allow them to move up to fully paid products but we want to acquire customers, do a great job servicing them and have them be customers for life and buy again and tell their friends. That’s why we were so pleased with this tax season, because we tried some new stuff that really paid off and will help us in the long-term be even more successful.

Laura Lederman - William Blair

Thank you.

Operator

Our next question comes from Scott Schneeberger of CIBC.

Scott Schneeberger - CIBC World Markets

Good afternoon. I was looking, I was pretty impressed with your marketing and sales margin relative to my expectation. I was a little concerned going into the final push of the year. As we know, the tax season has been moving later. Could you just speak to how you had such strength at the end? Do you think it was just your brand that carried you through the surge at the end? It doesn’t look like you spent much more incrementally on television or what have you on advertising. A little more color there, please.

Stephen M. Bennett

The only thing I would -- Scott may have a thought on this but the only thought that I have, which is unproven by data at this point so I hesitate a little bit to throw it out but I will anyway, is that I believe that in the end, people with more complex tax returns wait more towards the last second, in many cases, and I think TurboTax seems to benefit more from the people who have more complex returns and are more popular. My guess is our share is higher with people with complicated returns than it is with people that have -- now that’s a hypothesis. I don’t know, Scott, if you would want to add or if you disagree, you should dispute this in the public domain.

Scott D. Cook

No, I think that’s a very good hypothesis. I would add another hypothesis, which is this is a category that responds to word-of-mouth. Doing taxes is a somewhat scary thing. People don’t always believe a corporate or an advertiser but they believe their friend, so getting friends to tell their friends is one of our highest missions. It is why we work so hard on the product and the customer experience.

As we go through a season, as we deliver the goods and delight customers, the word-of-mouth effect happens and we know it drives tax purchase and tax share.

Stephen M. Bennett

I think that’s a really thoughtful add. I think that’s -- we won’t -- we’ll get more diagnostics of the season as we go forward and share that at investor day as we decompress all the data and all the learning. I think that is one of the things that we will be looking at. Thanks for putting that on the table.

Scott Schneeberger - CIBC World Markets

Thanks, one more if I could; we are aware you had some technical difficulty in the final days this year in the U.S. I’m not fully clear on what happened in Canada but can you tell us what occurred there and how you are looking with your technology issues for next year? Thanks.

Stephen M. Bennett

The issue was a database problem in our e-filing system. It was not a problem with the application. I think that’s important to realize. So obviously, this was a big disappointment for us. I’m pleased with our response and how we worked with the IRS and our customers to do right by customers, not charging anybody that had the experience at the end of the year that we weren’t proud of.

We’ve gone back in to the root cause of this and rest assured, we have all our best folks working on this to ensure that we won’t have the same problem next year. Our Pro Tax business, for instance, we are going to give pros guarantees of our e-filing capability. Our business leader has already set that up and communicated that, so we are responding in the right way.

The Canada challenge is a different system so there are unrelated challenges in Canada. I’m not as close to what the root cause of the challenge was up there. It is interesting to know that the system -- in Canada, they have a government-sponsored web portal that receives the returns. It is interesting to know that was down for six weeks during the season last year, so something that had a big impact on the customer experience in Canada. That would be a good thing, Bob, for us to follow-up on and figure out how to communicate what happened in Canada. I wasn’t as close to that.

Operator

Our next question comes from Daniel Cummins of Banc of America.

Daniel Cummins - Banc of America

Thanks. I wanted to see if we could talk about the sales dialog with the mid-tier and small banks. I was curious if you’ve seen any significant change regarding their disposition towards subsidizing electronic bill pay. If you could just refresh us how many of the customers in your customer base do and don’t charge for it? Just curious about progress you are making in terms of getting the dialog to be more about a deep relationship with a company like Intuit rather than the more narrow offerings of Digital Insight.

Stephen M. Bennett

I think you highlight the opportunity well in online banking for both consumers and small businesses. It’s the risk of price compression versus the opportunity for more units and so far, we’re quite comfortable with how those trade-offs have been playing out and our goal on that, by the way, is to continue to prove the value to online banking through integrating our content applications into the Digital Insight online banking offering, so that we provide enough value to more than offset the price pressures, and potentially even turn that around. But we still have to prove that and when we get our new Finance Work for Consumers product in the market, we will get our first test of that when we get our Finance Work for Small Business in the market.

I think you ask a very important question. It is something that is clearly on our radar screen. So far, all the signs are positive but it is something that we are focusing on adding more value so that we change the dynamics of the price negotiation.

I don’t have the data. Bob or Kiran, I don’t know if you do, about what our -- and to be honest, I think that’s between them and their customers, and so that’s not the data that I’d spend a lot of time trying to understand. At the end of the day, what we want to do is give them a great online banking offering for consumers and small business, and then they’ll strategically price that to their customers in a way that helps them achieve their objectives.

Daniel Cummins - Banc of America

Do you expect to be trying to segment that market? Have you begun that process or are you still in the information data gathering mode?

Stephen M. Bennett

We are starting a -- the first period, Jeff Stiefler and the team, we are just thrilled with how well it has gone so far, but we have been focused on not disrupting a very successful business was our number one priority. So we are now just starting, Jeff and I are just starting to think about what kinds of things we are doing. We are going to undertake a strategy project like we did in small business and consumer tax, and that will start in the near-future and I think that will get us at some of the things you’re focused on, Daniel, because it is a changing environment and we expect this to be a real long-term winner for us, so we want to take a fresh look at it with fresh eyes.

Scott, did you have something you wanted to add?

Scott D. Cook

Yes, the thing I would add, Daniel, our learnings about the financial institution customers -- a learning that comes through clearly is what their number one priorities are. The financial institutions top priorities are grow customers, retain customers and to grow balances. They are trying to grow the revenue side of their business. That’s where the Finance Works offerings that DI and the Intuit/DI combination is allowing us to build and distribute. It’s so popular and so much in demand because they see these as tools to delight customers, thus retain them and attract more balances from the customers they have.

When you do more and solve more of the customer’s problems, which is what our tools enable, they get more, keep more, and profit more.

Stephen M. Bennett

And as just a small proof point for investors on this, and I’ll be relatively close on this. In talking to Jeff, Scott Cook and I both spent a day-and-a-half at this annual user conference for DI in March, I think it was. I think enrolment was at an all-time high. It was about 40% or 50% higher than they have ever had before and there was a lot of excitement about the combinations. So our job now is to convert all that enthusiasm into a great offering, solving important problems. But I feel that we are off to a good start, but this will be a long -- this is a marathon, not a sprint and I am pleased with the first three months.

Daniel Cummins - Banc of America

Thank you.

Operator

Our next question comes from Carlos [Morano] of Fidelity.

Carlos Morano - Fidelity

I have a slightly bigger question. I’m based in Europe. I’m thinking about the global consolidation of the space. We see SAP increasingly talking to get any traction in the small business space, beginning to really think about the channel. You’ve got Sage, which is a bit of a global plan, maybe a little bitsy, a little bit unfocused. We’ve got Microsoft -- might be thinking about exiting those software businesses they acquired only a few years ago. And we’ve got you, obviously very U.S.-focused and connected to using your cash freely, a very strong balance sheet in terms of buy-backs -- do you see yourself part of this global consolidation? How do you think it will play out?

Stephen M. Bennett

Number one, I would agree with everything you said in terms of the observations you see about the industry on a global basis.

We believe and are in the process of starting to think about the right way for us to play globally, and rather than speculate at this time, I will give you a teaser that we don’t expect to play in any kind of big consolidation. We would expect to serve our customers today, 37% of which require global capability, things like multi-currency and Brad Smith and the team are working on that.

I think the next generation for us will be to think about are there some small business offerings that are more global in nature versus local, and I think that’s the path you will see us go down.

I don’t -- most of the companies you talk about are in the middle market and not, other than Sage, and so I think all small businesses are not created equal. We tend to be focused much more on the lower end of that spectrum than SAP. What we found is that the small companies have much more probability of success moving up than the big companies moving down, so we like our position and we are starting to think more about how to play globally now that we continue to grow so well in North America in all of our businesses, and we will talk more about that. Brad Smith and his team I think will talk more about that at investor day, so stay tuned on that one.

Carlos Morano - Fidelity

Thank you.

Operator

Our next question comes from Vic [Churamani] with Lehman Brothers.

Vic Churamani - Lehman Brothers

Congratulations on a good quarter. Just a quick question on the consumer tax. When you look at the web category, what do you think that grew? I know you guys grew units 16% but how do you think the entire category grew? And then, in your assumption for about I guess 8% to 12% self-prep unit growth or category growth, how much do you think -- what sort of growth would be on the web part of the industry? And then I have one follow-up.

Stephen M. Bennett

One thing I have to -- we actually finished even stronger than we said, so we didn’t get 17% growth on the web.

We think that the web grew in the neighborhood of 14% or 15% for the year and again, with the two early year transactions that we passed on were both web-based transactions that would have added a couple more points of growth to our web. So if we would have made different decisions on those potentially we would have done very well on the web.

I think that the web is going to continue to power the growth. I think the software or desktop product to me is going to be flat to slight growth for a while. I think most of the growth is going to happen on the web as we go forward for a lot of reasons, and that’s why we focused so much and are so pleased we made such progress and got such great learning this year. I think that all portends well for the future for us, because to win in this business long-term, we’ve got to win in the web and we clearly did this year and we are thrilled with the output.

Vic Churamani - Lehman Brothers

So you are saying that you grew faster than the industry on the web this year?

Stephen M. Bennett

Yes, that’s based on the data that we see. We think we had slight share gain on the web.

Vic Churamani - Lehman Brothers

Okay, and then on the amount of the refund you guys had to give because of the technical problem, how much did that total up to be?

Kiran M. Patel

We had estimated that it would have been up to $15 million, but in the end it was closer to $10 million.

Vic Churamani - Lehman Brothers

Okay, and then Steve, one other question; when you look out for next year’s tax season, would you consider having the free offering, which you guys introduced later in the period, to be on permanently? Is that something that you guys have under consideration?

Stephen M. Bennett

Yes, that is something that we are going to think long and hard about.

Vic Churamani - Lehman Brothers

Splendid. Thank you very much.

Operator

Our final question comes from Jim Macdonald of First Analysis.

Jim Macdonald - First Analysis

Great quarter, guys. On pro tax, it was a much better year than usual. Can you give us some color, especially on the revenue side. Maybe some color there?

Stephen M. Bennett

I need to give credit to the leader -- we made a leadership change in small business a year-and-a-half, or in pro tax a year-and-a-half ago and that’s the single thing that has driven. The team has obviously done a lot of hard work and executed well but from strategy to leadership to execution, our leader in pro tax has just done a wonderful job.

The market hasn’t changed that much. Characteristics haven’t changed but we’ve driven tighter strategy, better execution, improved the morale and we just executed better. The only thing that’s really new there is not much in the market -- it was proper leadership and that’s why we had the best season in a long time with 6% growth so far this year.

Jim Macdonald - First Analysis

As a follow-up on TurboTax, could you give us some color on some of the ancillary offerings, like personal pro or any thoughts on some of the newer offerings?

Stephen M. Bennett

I think those are still early versions to get learning on and -- let’s save that for -- none of which are material, you know, gift card or other stuff we’ve tried, none of which are material on the numbers and so let us capture our thoughts on that, Jim, and share the insight and learning on that at investor day.

Jim Macdonald - First Analysis

Thank you.

Operator

Gentlemen, I’m not showing any further questions. Would you like to proceed with any further remarks?

Stephen M. Bennett

I’d just like to thank everybody for their support and take a hard look at the script that we wrote up on the fact that we continue to execute this two-pronged game plan, we grow our existing categories and we create new growth categories for Intuit. That’s a big, single fundamental foundation of why our company is different and why sometimes it is hard for us to message because that is what drives our growth. But our teams continue to get better at executing and learning by doing and creating happy customers with positive word of mouth that Scott talked about.

Thanks for your support. We are thrilled with the year and we expect another great year next year and the year after. See you soon.

Operator

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

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Source: Intuit F3Q07 (Qtr End 4/30/07) Earnings Call Transcript
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