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Intuit, Inc. (NASDAQ:INTU)

F1Q08 Earnings Call

November 15, 2007 4:30 pm ET

Executives

Bob Lawson – VP Investor Relations and Financial Planning and Analysis

Stephen M. Bennett – President, CEO, Director

Kiran M. Patel – CFO, SVP and General Manager Consumer Tax Group

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

Brad D. Smith – SVP, General Manager Small Business Division

Analysts

Adam Holt - JP Morgan

Heather Bellini - UBS

Brent Steele - Citibank

Ross McMillan - Jefferies

Michael Millman - Soleil Securities

Scott Seiberger - CIBC World Markets

David Joseph - Morgan Stanley

Greg Smith - Merrill Lynch

Vick Touramani - Lehman Brothers

Terry Babe - ThinkEquity

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 the Intuit© First Quarter 2008 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© First Quarter Fiscal 2008 conference call. I am here with Steve Bennett, Intuit’s President and CEO, Kiran Patel, our CFO, and Scott Cook, our founder. As you know, in January Brad Smith will become CEO and Neil Williams will become CFO and both are also here today. 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 or form 10K for fiscal 2007 under other SEC files. 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 statement.

Some of the numbers in this presentation will be presented on a non-gap basis. The most directly comparable gap financial measures and the reconciliation of the non-gap financial measures to gap 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.

Steve Bennett

Thanks, Bob, and thanks to everyone for joining us. If you read in our press release, Intuit just delivered a very solid Q1 with revenue and non-gap earnings per share slightly above the top end of our guidance.

I am pleased with our position as we move into the next two quarters, traditionally our busiest. We’re seeing positive early results in small business from QuickBooks 2008 and continued strong growth in Payroll and Payments. We expect another strong year in consumer tax. Our great lineup of TurboTax products will be available in retail stores starting November 23 and online December 3.

Financial Institutions continues to add new internet banking and online bill pay and users at an impressive rate. I’ll provide a bit more perspective later in the call, but first Kiran will take you through the financial details.

Kiran M. Patel

Thanks, Steve. Let me start with a summary of the first quarter’s results. Revenue of $445 million was up 27% year-over-year and we had a non-gap loss of $.10 per share. These results include the impact of the acquisition of Digital Insight© in February, 2007, and the sale of certain payroll assets to ADP in Q3 ’07. Without those items, revenue growth would have been 12% in the first quarter and the loss per share would have been $.08.

Now let me review the results of our business segments. Our QuickBooks segment had first quarter revenue of $147 million, up 9% from the year ago quarter and on track with our expectations at this point in the season. QuickBooks software units for the first quarter were 298,000, up 6% year-over-year. Note that QuickBooks units are reported on a sell-through basis and revenue includes sales into the retail channel that haven’t yet sold through to end customers.

Our Payroll and Payments segment have revenue of $131 million in the first quarter, up 5% year-over-year. Excluding the impact of the sale of certain assets to ADP, growth would have been 18%. Growth in this segment was driven by a 22% increase in payments customers and a 3% growth in transactions per payment customer.

Total small business which combines our QuickBooks and Payroll and Payments segments showed revenue growth of 7% for the first quarter. Growth would have been 13% without the sale to ADP.

Consumer tax revenue for the first quarter was $13.3 million driven by late filers from tax year 2006. This is in line with our expectations and up 18% year-over-year.

Protax revenue was $11 million for the first quarter, up 13% over last year. In September, we combined our professional tax division and professional accountant channel under a single leadership team. These teams have worked closely together in the past. Now there will be an even better position to execute a comprehensive company-wide strategy for accounting professionals.

Financial institutions revenue was $72 million for the first quarter. This segment includes the results of Digital Insight© which was acquired in February and the financial institutions business previously reported in our other business segment.

Internet banking and end user acquisition continues to show good momentum with 13% growth in the quarter compared to Q1 ’07 and a base of 8.1 million end users.

Bill pay end users also continue to grow impressively with 23% growth in the first quarter compared with Q1 ’07 and a base of more than 2.2 million end users. Growth would have been higher, but one of our larger accounts was acquired through moving about 73,000 internet banking end users and 18,000 bill pay end users from our customer base. This movement was anticipated and does not impact our financial plan for fiscal ’08.

The other business segments had revenues of $70 million for the first quarter, up 11%.

Moving to the balance sheet, Intuit ended the first quarter with approximately $1 billion in cash and short term investments. Cash used in operating activities was $161 million. Capital expenditures was $65 million in the first quarter, up $36 million versus last year as we build our new data center and expand office capacity to support our growth.

We used $215 million to purchase 8.1 million shares of Intuit’s stock in the quarter. As of November 1, we have $550 million in authority for future share repurchases and we have a 10b5-1 plan in place to allow us to consistently repurchase stock through the year.

We are reaffirming our previous revenue and earnings per share guidance and providing initial operating income guidance for fiscal second quarter which ends January 31, 2008. For the second quarter, we expect the following:

  • Revenue up $833 million to $848 million, up 11-13% versus the year ago quarter
  • Non-gap operating income of $185 million to $195 million, down from $237 million in the year ago quarter
  • Gap operating income of $136 million to $146 million, down from $215 million in the year ago quarter
  • Non-gap diluted earnings per share of $.34 to $.36, down from $.44 in the year ago quarter
  • Gap diluted earnings per share of $.28 to $.30, down from $.40 in the year ago quarter

This guidance reflects a number of items that are different from the second quarter of last year. Q2 ’08 revenue will include results from Digital Insight©, but won’t have revenue from the outsourced payroll customer sold to ADP or revenue from the discontinued Pro Series express products.

In addition, approximately $23 million of Protax revenue will shift from Q2 to Q3 because delivery of electronic filing services component of our bundled tax software offering will not occur until Q3.

Excluding the impact of these items, we would have had expected Q2 revenue growth of 8% to 10% and Q2 non-gap diluted EPS of $.40 to $.42.

We are reaffirming our guidance for the fiscal third, fourth quarter and the full year which you can find on our facts sheet. We will provide TurboTax unit sales updates on our similar schedule to last year with the first update in February to coincide with our second quarter earnings, followed by an update in mid-March and a final update at the end of the tax season in April.

The other item to note is that our guidance assumes that the alternative minimum tax legislation will be enacted in time for the IRS to complete forms by January 31. If there is a delay beyond January 31, we will see consumer and ProTax revenue shift from the second quarter to the third quarter beyond what we have guided.

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

Steve Bennett

Thanks, Kiran. This is Kiran’s last earnings call as our CFO and I would like to thank him for this excellent contributions. You will continue to hear from Kiran as he leaves our TurboTax business, Neil Williams will be in place for next quarter’s call.

Before we get to your questions I would like to provide my perspective.

We continue to execute on our gross strategy of being in good businesses and attracting new markets that have large, unmet or underserved needs that we can solve well. We then apply customer-driven innovation to develop solutions that are easier and a better value than other alternatives. As a result, we grow our existing categories and create new categories for Intuit. This is the strategy we have been executing for the last several years and we continue to learn and get better. That is why we believe we are positioned for another strong year.

In small business we released QuickBooks 2008 in September to enthusiastic reviews with CNET giving it an excellent 8 out of 10 rating. We are optimistic about the momentum of free simple start combos with the opportunity to attach Intuit online payroll and payments to those simple start units. It also gives us the potential to reach 5.5 million small businesses that have payroll needs that don’t use QuickBooks.

We continue to see strong growth in our payments business with plenty of potential in our QuickBooks base to continue to grow penetration. We continue to look for areas where we can expand the value we provide for small businesses via partnerships or acquisitions.

In consumer tax, we have our strongest combination of products and marketing programs ever and are looking forward to a successful season. We expect to continue to enjoy the tailwind of software being the fastest growing tax preparation method. We believe our offerings, especially free TurboTax online, will generate category growth and unit and revenue growth for the company.

Our financial institutions business continues to show progress. Internet banking and online bill pay and [inaudible] is up nicely again this quarter. You may have seen the recent announcement about new financial institution customers. We have had the largest new bookings quarter in the history of DI and we continue to be enthusiastic about this business and the ability it gives us to capitalize on internet banking growth and the new customers in that channel.

I’ve never felt better about the future of Intuit, our prospects for continued growth, the strength of our leadership team and the opportunities in front of us. As you know this is my last earnings announcement as the CEO of Intuit. I’m proud of the results we have delivered my in eight seasons and I am confident handing the reins of this vibrant and healthy company to Brad I am looking forward to continuing to serve on it to its board and helping the team continue this company’s excellent run.

Now I would like to turn a call over to Brad who will lend his perspective.

Brad D. Smith

Thank you Steve and thanks for a great season as the CEO of Intuit. The progress this company has made under your leadership is something you should be extremely proud of. Since we made the CEO transition announcement in August I have been asked many times that I’m going to make any immediate changes to the Intuit strategy. My answer is quite simple. I’ve had the opportunity to be a part of building a strategy along with the rest of the Intuit leadership team. Of course we are going to make adjustments as the environment changes and new opportunities are uncovered, but in the near term you should expect us to continue focusing on customer needs and solid execution to draw the steady double-digit revenue growth that you have seen from into it for the past several seasons.

I couldn’t be more excited about taking the helm of this great company and building on the strength that we have to make us even better. I’m also excited to welcome Neil Williams to the Intuit leadership team as the next chief financial officer for the company.

Neil is a great fit for Intuit. His deep and accomplished experiences with Visa USA and in the banking industry overall gives him great insight and experience into two of our most important growth areas. Now I am looking forward to working closely with him for many years to come.

With that let’s get to your questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen if you would like to ask a question please press the number one on your telephone keypad. If you would like to withdraw your question press the pound key.

Our first question comes from Adam Holt at JP Morgan.

Question-And-Answer Session

Adam Holt - JP Morgan

Good afternoon. My first question has to do with the QuickBooks business. You saw 6% growth in units, 9% growth in revenue, and you mentioned the comments that some of that may have to do with the timing of ship in versus sell through. I was hoping maybe you could talk a little bit about what you think the impact of the average selling prices moving up has been on that business and what’s the early data you can get from some of the new lower end products as well.

Steve Bennett

Yes this is Steve. I think it’s really early to make those kind of calls. Look this is traditionally our slowest quarter and so I think it’s really hard to project the future based on what we’ve seen. I think we’re off to a great start. We have some great momentum on the simple start downloads, our attach rates to payments and payroll are higher than what we had thought about it, but it’s still just really early in the game. I just see where one of our competitors raise the price 50 bucks on their core offering so we think there are a lot of positive signs for us. We’ve remixed the product offering line in terms of raising the price on Premier and so there are a lot of moving parts. Let’s wait until we get a little farther end of the season to give you more details on some of that.

Brad, would you add anything to that? Do you see anything different?

Brad D. Smith

No, no actually I don’t. I think the headline here also because we have an opportunity as we begin to get simple start downloads and the ability to attach them further in the season to actually see what the impact would be, but overall everything is performing as we expected.

Adam Holt - JP Morgan

If I could just shift gears here for just a minute to the financial institutions business? If I heard you correctly Steve, you said you had a record bookings quarter for the Digital Insight business. Would you be willing to share what that means in terms of either new signings or how you look in bookings and obviously there’s been some volatility in financial services understanding DI has focused on smaller institutions, is there any trickle-down affect or how would you anticipate the Digital Insight business being resilient live in a sort of volatile environment?

Steve Bennett

Yet we’ve got that question a few times and I think the key thing is despite the sub prime challenges the financial institutions are under they need to be competitive in the online banking field. It’s really an apples and oranges thing. And what they’ve learned is that customers that do online banking are more profitable because they have higher balances higher retention. I could even argue the other side that online banking will become more important for financial institutions as they are under profitability squeeze and so I think it good news for our business that we are right on track to where we thought it was going to be. I don’t have the magnitude-I don’t think we’ve released kind of the records on bookings because that kind of our backlog now to get people up and install. I think there’s a lot of positive momentum in the marketplace and people are excited about finance works and what we are going to do to make it easier for small businesses and consumers using our online banking solutions to manage their financials. The business is on track. We are performing well. I don’t see much if any correlation between this and some of the current short term sub prime mess and write off that we are seeing.

Adam Holt - JP Morgan

Terrific. . Thank you.

Operator

Our next question comes from Heather Bellini of UBS

Heather Bellini - UBS

Hi, thank you. Steve, I was just wondering you guys have done a great job in the past of expanding the category as other firms at other companies have tried to enter the business. I was just wondering if you could comment a little bit (and I apologize if I missed this) regarding what Peachtree announced the other day with how they are trying to go after the QuickBooks installed base?

Steve Bennett

I actually am not even aware of that. That is pretty standard fare. We have had, two or three years ago we actually built a conversion kit for Peachtree customers. We have never had any conversion kit because everybody was trying to steal customers away. We were not this aggressive trying to steal the errors. We actually built that about three years ago and were surprised you got about five times as many converters as we thought we were going to get, so this may just be some sort of retaliation. At the end of today I don’t see a lot of QuickBooks customers going to leave us to go to Peachtree no matter whether they have the conversion kit or not.

You want to add something to this either Scott or Brad?

Brad D. Smith

Yes. Actually I would just echo what he said. We have today a pretty good feel for what types of decisions are being made in the market and where customers are going if they do end up moving off of QuickBooks.

What we’ve seen going on with Peachtree right now is that there is a lot of change within (inaudible) in North America. I believe they are looking for opportunities obviously in the market to capitalize on things that others have done in the market for several years. So net-net is I don’t see that creating any different trajectory and our business and I wouldn’t at this point see any different changes from our side on the path that we would use to respond.

Heather Bellini - UBS

Okay and then just one follow up if I may on the payroll side of the business and also payment. People think of those at a little more idea not as immune as the rest of your business is to the economic environment. Can you talk a little bit about payroll and payments and I am not sure if you were that big in these businesses during the time we went through the last recession?

Steve Bennett

Actually I would take a little point of contention on and we don’t think our business is that cyclical depending on the economy either positively or negatively because in a time of more challenging employment most people go out and start a small business which creates all sorts of opportunities for us. People have to do their taxes irrespective of the economy, so I think payroll and payments are recurring revenue businesses and so in theory that may mean that there are less. I actually think that is a red herring argument. I think our whole business motors along pretty consistently irrespective of the economy and there is all sorts of movement in and out.

Heather Bellini - UBS

Well yes, I know. I was just wondering QuickBooks and consumer tax I agree with you. I was just wondering if payroll and payments are counterbalances to the growth you get maybe in people starting their own businesses plus people starting to file their taxes on their own?

Stephen Bennett

I would like to tell you yes but I do not think it’s true. I do not think the answer to…(inaudible)

Heather Bellini - UBS

Ok.

Brad D. Smith

Heather, let me just add one perspective. Our payroll business, unlike some of the others, we don’t get paid in general per head / per employee. We get paid per company so we are not at subject to changes in employment levels or float. Because that is not a big thing for us.

In fact if there are large companies who are laying people off in recession many of those people will go start small businesses and that is good overall news for us.

Heather Bellini - UBS

Thank you very much.

Operator

Our next question comes from Brent Steele - Citibank

Brent Steele - Citibank

Thanks, good afternoon. Kiran, if you could just provide us with an update on the consumer tax business. You had mentioned that the analysts say that last year you got off a little slower start than you would have liked to out of the gate. Can you give us an update of where you stand now headed into the two most important quarters for the consumer tax business and perhaps some of the highlights of what you are changing around?

Kiran M. Patel

Yes, Brad. Let me start by saying I am very excited about the upcoming tax season. As I shared with you on investor day, we had tremendous earnings in the second half of last year’s season, we rolled out free for every body the second half of the season. We improved our conversion rates on the website significantly. We continue to make a product easier and easier to use, so having pursued on all of those fronts, I feel very good about going into the season and anxious to get the game going here in January.

Brad D. Smith

Let me just add one point, I think this is really an important thing. Backspace that I believe investors have possibly overlooked to this point. It is pretty hard when you are the leader with a kind of share and presidents we have in the consumer tax business – the software consumer tax business – the performance we had the second half of last year if you remember investor day was quite positive. The thing I am so bullish this season about is because that is a very hard message for our competitors to compete with. Up to that point we left a vulnerability at the low end to other people that were free and we close that gap last year and proved that we could grow the category and grow the share in that market. We are quite excited about the impact that could have on this entire tax season. We also saw that one of our major competitors of retail raised their prices this year which we held to share last year despite the big price gap. Now with them raising their prices we think that is only going to help us also. We see a lot of positive (inaudible) signs based on the execution the team has made from the moves competitors have made and some of the improvements we have made between now and last season. Brent, we are looking forward to a really strong tax season.

Brent Steele - Citibank

Just a quick follow-up on the cap-ex that obviously jumped up and you have been guiding to that. Where do you expect that it’s going to level out?

Brad D. Smith

I think we will see at least that this will be the big year for cap-ex. We will see some trading FX into the next fiscal year and beyond that we expect cap-ex to return in line with the depreciation shield.

Brent Steele - Citibank

Thank you.

Kiran M. Patel

No change from what we said at investor day. I think it is tracking pretty much that way.

Operator

Our next question comes from Ross McMillan - Jefferies & Co.

Ross McMillan - Jefferies

Yes thank you. Forward looking into the consumer tax business, we notice that this year you seem to have kept the (inaudible) for PC-based product price is relatively similar to last year, but you have increased some filing prices. Can you help me understand as you think about that the rationale for that? I had one very specific question: could you help me understand the relationship between the numbers of self-prep software consumer tax users that file federal on e-file and also file state on e-file? Is it a similar number or is there a disparity between the two? Thanks.

Kiran M. Patel

On the second part of your question Ross, we have not shared the mix of our business and the attach rates so I won’t go into that. In terms of pricing, you are right. The products available for downloading today on the desktop we have not changed prices year-over-year. After we took a price increase last year, as Steve mentioned, and still make share in our retail channel the e-filing fee was increased during last season and we simply carried that increase over from the second half of last year into this season.

Brad D. Smith

That is just for the desktop product. I think it is important to realize again free e-filing is included in our web offering so we are really talking about e-filing just for the desktop. The growing business is really the web. It is free e-filing onto the Web product. The paragraph

Ross McMillan - Jefferies

That is fair. Maybe just one quick quote on Digital Insight. You mentioned that one larger customer has been acquired. This is a more general question. Obviously a lot of your customers are at the lower end of the spectrum of financial services institutions. How do you think about consolidation or the potential for more consolidation there that ultimately impact your business? How do you prepare or think about that? Thanks.

Brad D. Smith

That is a good question and it is one we got frequently on the road trip. We studied this over the last five years and acquisition is actually about a neutral for us. That neutral in this one case it was a net loss. However, net-net it is about a balance which is that people that use our software (use Digital Insight) are acquiring others. It is probably not safe to say we are at the smaller end of the food chain. What we are seeing is more and more of the larger banks (banks with assets up to $100 billion) are starting to think about outsourcing versus building their own.

So, we are continually moving up and some of the new companies that we have recently won (some of the new FI’s) are in the larger asset size as opposed to the local and regional and community banks.

I think that trend will continue. I do not think we will get to the money-center banks (the top 10), but I think we will continue to make progress in the next 100 banks as the world evolves here. The better we make our solution by integrating our proprietary content like QuickBooks and payroll and online payroll into online banking, I think the more lucrative it will be to the larger financial institutions and the more difficult it is going to be for them to compete on their own.

Ross McMillan - Jefferies

Great. Thank you.

Operator

Our next question comes from Jim McDonald - First Analysis.

Jim McDonald - First Analysis

Two questions on Digital Insight: Now that you have owned it for a while, have you seen any competitive response to the fact that you purchased Digital Insight?

Steve Bennett

I think the answer is the big new thing is no surprise is that Fiserv bought CheckFree. I think we started the turmoil by buying Digital Insight. That has been a terrific acquisition for us. We are pleased with the progress as I talked about earlier. I know there is a lot of noise in the marketplace right now from some of the competitors. I think at the end of the day, we think (as we said at investor day) that the Fiserv acquisition of CheckFree creates some risk, but also lots of opportunity for us as we are Checkfree’s third largest customer. So, there is a balance of trade between the companies. At the end of the day, our focus is as it has always been since Scott founded the company: to focus on doing what’s best for the end customers, the financial institutions, and we are having all sorts of discussions with Fiserv and it is my hope as the outgoing CEO and a continuing board member that we will find a way to work with Fiserv to provide a better value proposition to financial institutions. We will grow the category and that will result in both companies being more successful.

Jim McDonald - First Analysis

My follow up is related to that: Personal and business finance works products. Can you just give us an update on introduction timing and how the introduction has gone so far with the personal version?

Steve Bennett

Well, we have rolled out the initial launch of consumer finance works to three different financial institutions, so we are launching, learning and remember, we roll out each financial institution one at a time. We are rolling out with the first three. We are learning a lot. We are pleased with the response. I think there is a lot of interest. There is a lot of people that are signed up to take it and so we are now into a – before we step on the gas – we are into fine tuning – but there is a lot of demand and it is going to take us quite a while to get all the people that are interested up and running. So, we are quite excited about that.

Then, small business will follow at some point in the future after we get the learning on the consumer finance works.

Jim McDonald - First Analysis

Thanks.

Operator

Our next question comes from Michael Millman of Soleil Securities.

Michael Millman - Soleil Securities

Thank you. Couple of questions on the tax last year. You gave up a path at least on a large bulk deal. Can you talk about your strategy given what you have been doing in the free market? Are you going to get the profitability of the free product? Are you at the point you are either offering the product free for these bulk deals and/or are you actually paying to get them into the distributors?

Steve Bennett

That’s an easy one. We are not paying anybody to sell TurboTax. The bulk deal still exists. There are different opportunities that are pure consumer play, Michael, so we will still see what happens. Competition is always tough and we will see if we prevail and it is too early to comment on that. Let’s see how it plays out. We will have more information on that as we go forward.

Michael Millman - Soleil Securities

Talk also on tax – differentiate between the “free” and the “ffa” and maybe in regard to state attachments, RT, and e-file?

Steve Bennett

I think that is a really good point because “free” in the commercial free is not completely free. Free in free file is completely free. It is free state, free federal, free e-filing. That is eligible for our free offering target is 50% of the population. That’s no different than it has been the last 5-6 years. So what is new is the free federal (free 10-40) within charges for state and for RT’s and things like that. I think the bottom line here is that as we saw in the second half of the last year, those two could co-exist and we grew the category by attracting new customers. 80% of which were new to the TurboTax franchise because we offered a free commercial product. So, when we say “free commercial” we need to be careful about that, Neil. You can keep your eye on that, too, and Brad. It’s really free federal, but then we do monetize those customers in a different way. And we make money on every free commercial customer.

Michael Millman - Soleil Securities

And FFA doesn’t take RT?

Steve Bennett

No. FFA is free. No RT’s in the FFA program. We work with the IRS to clean up all of the add-ons. There is no RAL in FFA, there is no RT. It is completely no add-on products. That was part of the negotiations.

Michael Millman - Soleil Securities

Can you give us an idea of the calculated lifetime value is of a web-based tax customer versus desktop tax customer.

Steve Bennett

They are both very, very high.

Michael Millman - Soleil Securities

Can you quantify that slightly?

Steve Bennett

No.

Michael Millman - Soleil Securities

Ok. Thank you.

Operator

Our next question comes from Scott Seiberger - CIBC World Markets.

Scott Seiberger - CIBC World Markets

Hey, good afternoon. After that last response I think I know the answer to this one, but you guys had mentioned looking for some legislation to be done in time for the start of the tax season on AMT. Any quantification on that? If you can’t answer that, can you give us a feel on modeling? We’ve seen the trend of fiscal 2Q getting pushed back into 3Q and consumer tax over the years. Just a feel for those two quarters this year at all? That would help. Thanks.

Steve Bennett

Yes, Scott. I should joke with everybody that was listening. The reason, obviously, we don’t want to share the lifetime value is because there is a lot of proprietary information in there that we just wouldn’t want to expose. However, we talked before that people that buy TurboTax and you see the retention – if they are happy and we deliver a good experience, they buy for a lot of years to come. More than ten. So, it is a very high lifetime value.

With respect to the shift from Q2 to Q3, I think you heard Karin and Bob and I talk about this continuously. At the end of the day, what we know is that there is going to be about 125 million people who file their tax returns this year. This quarter two – quarter three split is kind of an arbitrary split and there’s always big things moving back and forth and so we don’t get as focused on that as you guys do – trying to look at how the tech scene is going. Because of that we started giving you these updates which we do during the season. You saw that we had a $23 million move from Q2 to Q3 for protax for the same reason we had it in consumer tax in the past. I would tell you that every year there is more noise about AMT, but every year we have these same things waiting for the government to get forms out and they come in at the last second. There is just more noise about it this year.

This is something we deal with every year and at the end of the day if we know something specific - as soon as we know it we will let you know it, but if it does push from Q2 to Q3, we know the revenue is going to be there in Q3, so it’s just the trend you said you’ve seen. I have seen it for eight seasons in a row. I just think there is more noise and I don’t think there is a lot more rift this year to more revenue moving up than we thought, but we will see.

Scott Seiberger - CIBC World Markets

Sure. Fair enough. Thanks. And a question about your marketing margin line and your R & D margin line? Can you just talk a little bit about how you see those trending over the year? I know you started some TV ads with QuickBooks as well last year. Could you work that in a little bit on how that is helping or hurting or what you are going to do there? Thanks.

Steve Bennett

Yes. I think, like we’ve talked about over the last few years, we expect to continue to invest and see our R & D as a percentage of sales grow, speaking a little bit for Brad here. I think our marketing – we are spending more, but getting more efficient, so I think marketing might grow about in line with revenue. R & D should grow higher. As you have seen, G & A will grow slower and our support costs as we eliminate the reasons customers have to call by making the product easier should go down over time. We have been on this path for the last 4-5 years to reallocate money to development (R & D) for products that are going to drive long term growth. I would be surprised if that didn’t continue under Brad’s leadership. That’s the right path for the company and that’s the path that we have been on.

Scott Seiberger - CIBC World Markets

Thanks. Comments on TV advertising for QuickBooks and TurboTax?

Steve Bennett

I think QuickBooks – our advertising last year was accretive, but not as accretive as we thought. TurboTax continued to be accretive, so we keep raising the level a little bit on QuickBooks until we find that sweet spot. Every year we have raised it it has still been current period-positive ROI. QuickBooks I think we did some things and I think we thought there may be better ways to spend our advertising for our marketing funds for QuickBooks going forward. We did the test last year. We didn’t get the same kind of positive uplift that we do in TurboTax, so would you add anything to that, Brad?

Brad D. Smith

Yes. Scott, this is Brad. I think in QuickBooks, what we learned last year is that unlike in TurboTax, heavy up on TV didn’t get the results as much as we would have liked. What we have done this year is to shift the investment to a mix of radio with some TV and some local print. So you are going to see more of a media mix coming out of QuickBooks continuing to focus on growing the category and growing the category and growing the new users inside the QuickBooks franchise. It will be more of a mix and less on TV than it was last year.

Steve Bennett

There is more and more online, too.

Brad D. Smith

Yes.

Scott Seiberger - CIBC World Markets

Ok. Thanks that’s helpful. Congrats on a good start to the year.

Steve Bennett

Thank you.

Scott Seiberger - CIBC World Markets

Thanks.

Operator

Our next question comes from David Joseph - Morgan Stanley.

David Joseph - Morgan Stanley

Hi, guys. A quick question related to the prior question? I am looking at your gross margin and it seems like it was relatively stable this quarter versus the year ago period after being down a little bit last quarter. I know that there is a little bit of a mix issue going on there, especially with the recent acquisition of Digital Insight. Wondering if you can give us an idea of where that goes in the future? Then also, related to the margin, is really you have mentioned in the past that you expect the operating margin to improve to the mid-thirty percent range. Roughly, are we still heading in that direction longer term?

Steve Bennett

Yes. I think that as our business mix continues to shift to more and more service businesses, you are not going to see software like gross margins in service businesses. At the same time, the service businesses for all sorts of reasons, have great operating margins. Our focus is more on operating margin and as we have talked about and would have in this year, we continue to get volume leverage and we expect roughly operating profit leverage every year and had been running about 10-0 basis points plus the last seven or eight years. This year it’s not because of a bunch of one time events that we shared to sell the outsource payroll business, so we feel we are not solving profiting margin percent, we are solving for revenue and EPS growth, but as a result of our business models with high fixed low variable costs, as long as we continue to drive unit growth we get volume and profit leverage. I would then, and I know Brad talked about this, we still expect double-digit revenue growth with operating profit leverage. That is still the financial guidance we are using to run the company.

David Joseph - Morgan Stanley

Great. Thank you.

Operator

Our next question comes from Vick Touramani - Lehman Brothers.

Vick Touramani - Lehman Brothers

Hi, guys. Just a question on the vision inside business. On the finance books portfolio, you mentioned the consumer finance books product is with three institutions. When do you expect that to go to the mass market – with everyone? Then, on the S & B finance books portfolio, when do you expect that to be launched? You had mentioned maybe early next year when we spoke to you guys last. And then, just switching over to the healthcare side, Microsoft has made some noise recently with their acquisition of Global Care Solutions and also introduced Health Walls. Do you see any overlap in terms of functionality or is that just a different segment of the market they are addressing?

Steve Bennett

Let’s stick with the last one. We don’t see any overlap with what Microsoft is doing with Health Walls at all, so set that aside because that is completely different than what we are focused on. With regard to Finance Works Consumer, as I said we roll out one financial institution at a time so it will be a consistent kind of “get it right – roll it out” over then next, my guess would be, a year or year and a half. Because we will learn as we go and there is a lot of demand. It is not like shipping TurboTax on release so all of a sudden we let it go and a thousand financial institutions are signed up in a week. It will be more like we have to get them all set up. So, it will be a consistent, steady roll out which I think is good for everybody. That will be a lower risk and a much more smooth, better experience for financial institutions and we will be able to better execute with that plan.

Finance Works Small Business we are saying some time in calendar year ’08. That is about how we want to bound it at this point. We are quite excited about the need and the opportunity, but there is a lot of execution we have to do to deliver the kind of quantum change in customer experience for small businesses that is going to really “wow” them. So, that is the current view of what that is going to take.

Scott D. Cook

Yes, Vick, this is Scott. Let me add one more dimension to the question that you asked. It is entirely right what Steve said that we will be rolling out Finance Works over the period of a year or two to financial institutions. However, the revenue upside happens before that because financial institutions, when they make their decision on who their online banking vendor is, they look at the product roadmap. They look at their futures in deciding who to cast their future with. The presence of Finance Works in the queue and Business Finance Works in the queue provides something that our sales team uses very effectively to help financial institutions make the decisions to go with us and stay with us. The revenue benefits, as you said, unlike Tax where suddenly you are in every store in a week, but you get no revenue the week before, here we get benefit from Finance Works even before financial institutions take advantage of it.

Steve Bennett

It is more like an enterprise-like scale.

Vick Touramani - Lehman Brothers

Just to follow up on that…any thoughts or comments on pricing as to how you guys are pricing the portfolio?

Steve Bennett

No.

Vick Touramani - Lehman Brothers

Ok. Then, this last question – a follow up to a question earlier. On DI you guys had mentioned that you don’t see any impact given the volatility in the finance services market. Do you expect any of DI’s customer base or banks to essentially go out of business? Do you see any risk like that an ending up losing customers? What is your assumption there in terms of exposure to that segment of the market?

Steve Bennett

I think the simple answer to that is that we see that online banking penetration is so low an growing so rapidly that there is a long term opportunity there and if a bank/individual financial institution – I think we just had the first failure in 10 years of a financial institution. If that happens a little bit more, those customers still have to go somewhere and they are going to use online banking. I think that is not material at all to the performance and/or the opportunity for the future for online banking.

Vick Touramani - Lehman Brothers

That is a key point. In other words they will still end up in the same bucket, just in a different bank?

Steve Bennett

Yes, they are going to go to online banking through some place and at the end of the day there is still such a large amount of non-consumption that this is a double-digit growth industry in my view for 5-10 plus years. It is kind of like the ATM penetration when we first launched ATM’s. It took ATM’s 25 years to get to 95% participation or something like that. I think we are at a relatively early phase of adoption of online banking. I can’t imagine in 10 years that people are going to still be writing paper checks, but you know we will see if I am right or wrong.

Vick Touramani - Lehman Brothers

Great, congratulations on a good quarter.

Steve Bennett

Thank you.

Operator

Our next question comes from Greg Smith - Merrill Lynch.

Greg Smith - Merrill Lynch

Yes, hi guys. Just looking at QuickBooks Enterprise and Online edition. Both were flat in the quarter year-over-year and actually flat with those six as well. I know it is early in the season. Is that basically the answer and we shouldn’t read too much into it until we see more progress in the year or is there anything we should read into those numbers?

Steve Bennett

Well, online banking shouldn’t be – or QuickBooks Online Edition – shouldn’t be – isn’t flat year-over-year, is it?

Unidentified Corporate Participant

No. No. No.

Steve Bennett

Online Edition is up dramatically as you can see in the numbers.

Unidentified Corporate Participant

Yes. Yes. Yes.

Steve Bennett

Gross approaching 50%.

Greg Smith - Merrill Lynch

Ok, yes, I see, but I am just looking at the wrong number. But then Enterprise is flattish?

Steve Bennett

Yes. And I think, Brad, what would you say about that? QuickBooks Online Edition is growing really, really rapidly to capitalize on the great work the team has done there. Adding payroll really accelerated that growth rate. What would you say about Enterprise?

Brad D. Smith

Yes, I think on Enterprise the short answer is that it is rounding. We are getting increased customers using that. In fact, we are also getting higher numbers of seats. We introduced 15 and 20 seat licenses and we are seeing that mix move up. Really, there is no material change in terms of the trajectory and growth rate of that business. It’s simply a rounding situation now on what you have got.

Steve Bennett

But I think what Brad just said is important for investors. So this is units and you’ve got rounding on small numbers. Revenue continues to grow nicely in that business because we are charging a much higher price for 15 and 20 seat licenses. This is a business where we would expect revenue to continue to grow faster than units. Most of the other ones, units and revenue are probably more akin, but this one it may not be as accurate, so we should think about that over time.

Greg Smith - Merrill Lynch

Ok. Maybe add a decimal.

Steve Bennett

Yes, I think that is good input – or switch the focus there to revenue?

Greg Smith - Merrill Lynch

Yes. One real quick question on Digital Insight. The bank that went away, was there any kind of material termination fee that impacted the results in any material way?

Steve Bennett

No it is something we planned for and we filtered it in over time and that has always just been part of the projection.

Greg Smith - Merrill Lynch

Ok. Perfect. Thanks a lot. I appreciate it.

Steve Bennett

Thanks, Greg.

Operator

Our final question comes from Terri Babe - ThinkEquity.

Terri Babe - ThinkEquity

Thanks, good afternoon. On Digital Insight, the revenues kind of declined sequentially a little bit and user ads were up I guess a couple of points sequentially. Could you talk about that? Also, within that an update on the lending business and maybe if that explained part of it and I guess what your expectation is for the lending piece or thoughts or an update around strategic alternatives for that business?

Steve Bennett

You know, I think that is a good point. As we have talked about before, there are a couple of businesses that are not core to Digital Insight that when you take them out the growth is more in the mid-to-high teens and plus we added (remember) these numbers that you see which are broader than just Digital Insight. It is also our financial institutions business where we charged financial institutions money to download and connect with Quicken and QuickBooks and things like that. That business isn’t growing like it once was, not surprisingly, many of the FI’s didn’t like that. We are looking at how to deliver a better value proposition, especially to the Digital Insight customers with respect to their account activity fees for Quicken and Quick Books. The Digital Insights business is growing nicely and we do have some businesses that are not part of the core that we are evaluating our strategic options on what the right way to approach those are.

Terri Babe - ThinkEquity

Ok, so no specifics on the Lennon business in terms of an update on or expectation for that business?

Steve Bennett

When we know the specifics we will tell you guys the specifics.

Terri Babe - ThinkEquity

Ok. Thanks.

Steve Bennett

Thanks.

Operator

Gentlemen I am not showing any further questions. Would you like to proceed with any additional remarks?

Steve Bennett

I would just like to thank everyone for their support over the last eight years. It’s been a nice run and we have built a really, really strong foundation and I am pleased with where we are. I think this is going to be a really good season as we saw in consumer tax. I think the (inaudible) is, we hear about consumer tax and Digital Insight. I feel really good about and we are on track for another good season. So I am pleased to turn the reigns over to somebody as capable and talented as Brad Smith and I am looking forward to working with him to ensure success for the company for the next ten years. I am really glad Williams is here and Karin is especially happy about that since he doesn’t have to wear two hats so he can focus on consumer tax. Thanks for your support.

Scott Cook

This is Scott Cook. I would like to lead us all in a great round of applause for Steve Bennett’s years of growth and success at Intuit. What a foundation and what a growth platform you have built and what results you had too.

Steve Bennett

Thanks everybody. Goodbye.

Operator

Ladies and gentlemen, thank you for participating in today’s conference call. This concludes the call. You may all disconnect. Have a great day.

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