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Intuit Inc. (NASDAQ:INTU)

F3Q08 Earnings Call

May 20, 2008 4:30 pm ET

Executives

Bob Lawson - Vice President, Investor Relations

Brad D. Smith - President, Chief Executive Officer, Director

R. Neil Williams - Chief Financial Officer, Senior Vice President

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

Analysts

Bryan Keane - Credit Suisse

Ross Macmillan - Jefferies & Company

Michael Millman - Soleil Securities

Brent Thill - Citigroup

Heather Bellini - UBS

Jim Macdonald - First Analysis

Vikram Churamani - Lehman Brothers

Laura Lederman - William Blair

Scott Schneeberger - Oppenheimer

Brendan Barnicle - Pacific Crest Securities

Operator

Good afternoon. My name is Matthew and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Intuit third 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

Thanks, Matthew. Good afternoon and welcome to the Intuit third quarter 2008 conference call. I’m here with Brad Smith, Intuit’s president and CEO, Neil Williams, our CFO, and Scott Cook, our founder.

Before we get started, I’d like to remind everyone that our remarks will include forward-looking statements. There are a number of factors that could cause Intuit’s results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2007 and our other SEC filings. All of those documents are available on the Investor Relations page of Intuit’s Web site at intuit.com. We assume no obligation to update any forward-looking statement.

Some of the numbers in this 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 Web site.

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

Brad D. Smith

Thanks, Bob. Good afternoon and thanks to everyone for joining us. As you’ve read in our press release, Intuit had a very strong quarter, driven by an outstanding consumer tax season. Revenue, operating income and earnings per share were all above the high end of our expectations. We now expect the full year to come in better than we had previously guided, so we’re raising our full-year revenue and profit outlook for the company.

I’m pleased with these results and I’m really encouraged by the way the team achieved them.

In Consumer Tax we drove the strong results by creating our best offering ever and executing with excellence throughout the season. Our 17% unit growth reflects market share gains in retail and on the web. We’re winning -- we’re winning because we remain focused on ease-of-use, which leads customers to recommend our solutions to their friends and their colleagues. And I’m happy to say that our systems handled twice as many tax returns as last year on the last two days of the tax season.

In Small Business we continued to deliver solid double-digit revenue growth in Payroll and Payments, and we beat our best third-quarter ever in QuickBooks. These results are in spite of a tough spending environment for small businesses. Our focused actions in the second half of the year mitigated the short-term challenges and we are now well positioned as we head into next year.

Our Financial Institutions business also showed an upward trend in performance. The increase in revenue this quarter is modest, but it indicates we’re on the right track and we have shifted the momentum in the right direction.

All in all, it was an excellent quarter and we’re on track to deliver another year of very strong financial performance.

With that, I’ll turn the call over to Neil to walk us through the financial details.

R. Neil Williams

Thanks, Brad. Let me start with a summary of third-quarter results: revenue of $1.3 billion was up 15% year-over-year; non-GAAP operating income of $728 million was up 17% year-over-year; non-GAAP earnings per share of $1.39 increased 23% year-over-year; and GAAP earnings per share of $1.33 increased 28% year-over-year. We were certainly pleased with the GAAP and non-GAAP operating leverage we generated in the third quarter.

Turning to business segment results, Consumer Tax third-quarter revenue was $657 million, up 16% over the year-ago period. Year to date, revenue is up 15% and units are up 17%. You’ll note units and revenue grew roughly in line, which demonstrates our ability to monetize our free tax offerings. It’s also important to note that none of the growth in units or revenue is due to the federal government’s economic stimulus program. We did not charge customers who filed returns just to receive stimulus checks, and those units were excluded from our statistics.

As Brad mentioned, our strong performance was driven by our continued focus on ease of use, excellent execution of our marketing programs throughout the tax season, and the success of our free federal product. Unit growth started strong and continued to accelerate as the season progressed. Our growth outpaced the category and we gained about 3 points of market share in retail and about 1 point of share online.

Professional Tax revenue of $166 million was up 20%, in line with expectations and reflecting a shift of revenue from the second quarter to the third quarter, as discussed on prior calls. Year-to-date Professional Tax revenue is up 1%.

Total Small Business revenue grew 9% in the third quarter. Within Small Business, QuickBooks revenue of $165 million was up 5% over the year-ago period. Excluding about $6 million of revenue from Homestead, which was acquired in December 2007, QuickBooks revenue was up about 2% from the third quarter of last year.

QuickBooks units, including free SimpleStart activations, were also up slightly in the quarter. If you recall, the third quarter of 2007 was our strongest third-quarter ever for QuickBooks revenue and units, so we feel pretty good about growing over those numbers given how tough a year it has been for small businesses.

The Payroll and Payments segment again delivered solid growth, with revenue of $142 million for the quarter. Adjusted for the impact of the ADP sale and the acquisition of Electronic Clearing House Inc., segment revenue was up 13% for the quarter. This was driven by 20% growth in Payments customers and 1.5% growth in transaction volume per customer.

Growth has slowed slightly from prior quarters due to a reduction in Payroll float revenue and slightly slower growth in charge volume per merchant. Overall, we feel great about the strong customer growth in our payments business, and really like the long-term growth potential of this segment, particularly with the addition of the capabilities we acquired with Echo.

Financial Institutions revenue for the third quarter was $76 million. Adjusting for the timing of the Digital Insight purchase, which closed February 6th of 2007, third-quarter growth would have been 10%. We still have a lot of work to do, but we’re pleased with the progress we’re making in this segment.

Our Other Businesses segment revenue of $107 million was up 20% year over year, driven by strong results in our Canada, U.K., and Real Estate Solutions businesses. I would note that the weaker dollar contributed to the Canadian business growth and currency gains account for about 7 points of the segment growth rate.

Moving to the balance sheet, Intuit ended the third quarter with $897 million in cash and short-term investments. We also have $292 million of auction rate securities that were reclassified from short-term to long-term investments in Q3. We don’t believe the carrying value of those securities is impaired because the assets underlying the securities are generally student loans which are guaranteed by the U.S. Department of Education. We have the ability and intent to hold these securities until liquidity returns to the market, other secondary markets develop, or the securities mature. Because it’s not certain when liquidity will return to the auction rate securities market, the long-term classification makes sense.

Cash flow from operations was $832 million. Capital expenditures were $95 million during the third quarter. This is up from $36 million in the same quarter a year ago. As discussed on prior calls, the increase is driven by investments in our new data center and expansion of office capacity to support our growth.

In the third quarter, we used the remaining $300 million of stock repurchase authorization to repurchase 10.8 million shares. We have requested, and the board has approved, a new authority of an additional $600 million.

Moving to M&A activity, the previously announced acquisition of Echo closed on February 29th. Echo rounds out our complement of payment processing solutions and has been folded into our Payroll and Payments segment. The acquisition is performing better than planned and is expected to be neutral to operating income and EPS in FY08 and slightly accretive in FY09. We’ve summarized the M&A impact on third-quarter and year-to-date growth rates in a table that is included in our posted conference call materials.

Moving to fiscal 2008 guidance, we are raising guidance for 2008 total company revenue, operating income and earnings per share. Fiscal 2008 guidance is now: revenue of $3.05 billion to $3.06 billion, which is annual growth of 14%; non-GAAP operating income of $860 million to $870 million, which is annual growth of 12% to 14%; non-GAAP diluted EPS of $1.61 to $1.63, which is annual growth of 13% to 14%.

We have also raised our Consumer Tax segment revenue guidance to 14% growth to reflect the excellent tax season just completed. Previous guidance was 8% to 12% growth.

And with that, I’ll turn the call back over to Brad.

Brad D. Smith

Thanks, Neil. Good stuff. Before we get to your questions, I’d like to share my perspective on our business now that I’ve been in this job for almost two quarters. One of the first things I wanted to do as CEO was to step back and take a fresh look at our company. So over the last five months, I traveled around the country talking to employees, meeting with board members, engaging with our customers and talking with many of you.

Through that process, a clear picture of Intuit emerged. It is a picture of a vibrant, growing company with strong assets and lots of untapped opportunity. It’s a picture of a company that is embracing the changing world around us in a way that will help us make the next 25 years just as successful as the last 25 have been.

First, we have a foundation of strength upon which to build. We have three growth engines -- tax, small business, and financial institutions that are not only delivering today, as you saw in this quarter’s earnings, but are well-positioned to deliver double-digit growth for the foreseeable future. In addition, we have two longer-term initiatives, health care and global, that could add to that growth down the road.

Each of these growth engines are powered by world-class brands, large user bases and strong customer loyalty that drives word-of-mouth and creates a thriving ecosystem. These strong assets provide Intuit with differentiation in the markets we serve and with a solid foundation for the future. With that foundation, we are actively pursuing strategies to continue to innovate and position these businesses to win in the future.

So let me share a little bit about what the future looks like. Our goal as a company is clear: to be recognized as one of the most innovative and fast-growing companies in the world. While it will take work to get there, I couldn’t be more excited about the innovation that is taking place across our company. Our employees are energized and they’re passionate. They are embracing new technologies, they are inventing new business models, and they are crossing new geographies to help our customers achieve their dreams. And they are doing it with connected services.

At Intuit, connected services take three distinct shapes. The first type of connected services are when the service connects to our software in a way that makes that service superior to any alternatives in the market. Two examples that we have today are Payroll and Payments, both of which are superior to competitive offerings because they integrate into QuickBooks software, which makes them easier to use and at a lower cost than the alternatives.

The second type of connected services are software solutions that are delivered as a service. This type is better known as Software as a Service. Our goal with these connected services is to ensure they deliver revolutionary benefits or cost advantages. Examples of this type include TurboTax Online, QuickBooks Online, our new online payroll product, or our online banking platform offered to financial institutions.

The third and final type of connected services are solutions that leverage our vast ecosystem of end users to connect people to other people. We’re seeing this today when TurboTax customers get their questions answered by other customers in the TurboTax Live online community. And we’re making connections between accountants and their small business clients all the time in our QuickBooks Pro Advisor community.

Now, connected services are by no means new for Intuit. In fact, roughly half of our company’s revenue comes from connected services today and they are growing at strong double-digit rates, and they are nicely profitable.

Our employees are also capitalizing on three key market trends to create and deliver more of these connected services.

First, they are embracing the concepts of social networks and user-generated contributions to create and deliver value through our large and growing user bases. Second, they are creating solutions that will work on any device, including mobile devices. And finally, they are doing this with a more global mindset as we look to better serve U.S.-based companies seeking to do business globally, while also defining new opportunities to serve customers in new markets.

We call this social, mobile and global, and these are new catalysts that will enable us to accelerate our growth over time. And that’s why I’m optimistic about the long-term prospects of this company, but I’m also excited about what we’re doing to get ready for next year in fiscal year ‘09.

We already talked about this season’s great results in Consumer Tax, but we feel really good about next season as well. The success of our free offering, the customer response to our focus on ease, and the continued improvements in net promoter scores for both the online and the desktop products all drive customer retention, more recommendations, and the overall growth of the category. This gives us confidence that this business will continue to perform well into the future.

In Small Business we’ve got a really promising QuickBooks ’09 product in alpha testing. We’re also applying what we’ve learned over the past two years to make our marketing and advertising programs even more effective. And we’re continuing to drive strong growth from connected services like payroll, payments and SaaS offerings in our Small Business ecosystem. And we are learning new ways to expand and grow the category with low-cost or even free offerings.

In Financial Institutions, we’re starting to get real traction. We had a very successful user conference with record attendance and very positive response to our Personal FinanceWorks demonstration at that conference. We now expect to roll out the first version of Personal FinanceWorks this October, and we will follow with an expanded set of small business offerings and capabilities in December.

Now turning to our longer-term initiatives of health care and global, in health care we continue to believe there’s a large, unmet need that will prove an attractive opportunity for us if we can solve it well. This quarter we announced a new Quicken Health partner, Medical Mutual of Ohio. We expect both Cigna and Medical Mutual of Ohio to begin rolling out our solution to their plan members later this calendar year. Now there’s no material revenue impact for the next couple of years but we’re excited about finally getting the much-anticipated product into the market.

And when it comes to global, we see this as a large opportunity for us as well. We continue to make progress around defining the offerings and the geographies we’ll focus on first, and I have little doubt that global will have an impact on Intuit’s business results over time.

In closing, we had a great quarter and expect to deliver another great year in a tough environment. We have a recipe for success and a set of operating principles that have enabled us to deliver year after year. Those principles include growing organic revenue double-digits with operating margin expansion, using the cash we generate to fund growth initiatives, and returning excess cash to shareholders in the form of share buybacks.

We’ve got an excellent foundation to build on, we’re driving innovation throughout the company to accelerate our growth, and our strategy to win is now clearly defined for a connected services world.

Thanks for all of your support and thanks to all the Intuit employees who are so focused on delighting our customers, and with that, we’ll turn to your questions.

Question-and-Answer Session

Operator

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

Bryan Keane - Credit Suisse

A couple of questions on the segments; I guess first on tax, do you guys think you’ll be able to further monetize the free TurboTAX customers next year? And is there any way to quantity how many customers there were that used the free TurboTAX this year?

Brad D. Smith

We do now have 2.5 years of experience of learning what free is about and how best to monetize free. We feel good with the model. We have a pretty good handle for how to get customers who use free to come into the franchise and actually buy additional products and services, so we are confident about the free model as we look to next year. We think that will be one of the growth catalysts.

The second question, which was actually quantifying the number of people who came in free, we have not put those numbers out, Bryan, and we haven’t disclosed those numbers at this time.

Bryan Keane - Credit Suisse

Probably for competitive reasons, I assume.

Brad D. Smith

Yes.

Bryan Keane - Credit Suisse

Just turning to QuickBooks, obviously a dramatic turnaround. Can you talk about what happened there and how you are able to do that?

Brad D. Smith

It really came down to great execution on the part of the team. Regardless of the environment, we believe we have the ability to execute well and be responsible for our own outcomes, so the second half marketing programs we put in place, tightening up our marketing messages, increasing our advertising produced the results in line with the expectations that we hoped, and the team continued to take a page out of TurboTAX. They are learning about focusing on ease, looking at advertising and continuing to test and learn with free, which betters positions us for next year as well.

So I’ll just sum it up by saying really good execution and not letting the economy be a factor in holding back our results.

Bryan Keane - Credit Suisse

This year’s QuickBooks, I think Vista was one of the big bells and whistles. It sounds like ’09, you’ve got some new interesting things that maybe will help drive unit growth next year.

Brad D. Smith

The good news about Vista is once we built it into the product, now our go forward versions will be Vista compatible and what we are looking at is looking at new services and new functionality that will solve important problems for customers as we look at QuickBooks 2009.

Bryan Keane - Credit Suisse

Okay, and then just finally on the financial segment, it looked like that showed a little bit of a rebound. Do you figure that continues, and any worry that you’ll be impacted by an economic slowdown?

Brad D. Smith

We are pleased with the progress in financial institutions. We are not satisfied yet that we are all the way to bright. We have a lot of opportunity still in front of us. The team is executing well. I believe that with the pipeline we have, with the fact we have the personal FinanceWorks coming into the market in October, and small business capabilities coming shortly thereafter, that if we continue to execute we’ll continue to produce the kinds of results that we expected when we brought Digital Insight into the company.

In terms of the economy, we aren’t seeing any real impact on the economy in the financial institutions industry today.

Bryan Keane - Credit Suisse

Okay, great. Super job.

Operator

Thank you. Our next question is from Ross Macmillan of Jefferies & Company.

Ross Macmillan - Jefferies & Company

Thanks. I guess two questions, firstly just on tax; Neil, I heard you comment that you didn’t think the numbers were influenced by the rebates this year but I think e-filing growth was even higher this year than last year, so I’m just wondering how you I guess managed to parse that out and you know, you can be convinced that you didn’t have some unit benefit from the rebate. That’s the first question.

Brad D. Smith

Great question and what we’ve done is two things -- the first is we built into the interview in the product a set of questions that would help identify if you had a filing that was tied to the economic stimulus package. If it was, we routed you to those products, which were free.

And then the second thing we did is we conducted a blind survey of all TurboTAX online users to make sure if anyone else in the product had actually used the product for the economic stimulus package, we removed them from our numbers. So we feel pretty confident that we pulled those numbers out of our reported units and revenue that we’ve provided today.

Ross Macmillan - Jefferies & Company

Okay, great. And then just on the financial institutions, clearly a pick-up in the sequential revenues there but two questions -- I did notice that the Internet banking end user and bill pay end user counts are growing but at a decelerating rate. Could you just talk to that? And then secondly, as FinanceWorks and the related small business one gets released, where should the revenues from those show up, in financial institutions or are those going to be somewhere else? Thanks.

Brad D. Smith

On the first one, I agree with you. Our online banking adoption, the Internet online banking as well as bill pay adoption growth, while it is trending back up in the right direction isn’t where we want it to be. This is an area we think we can have a big impact by applying Intuit's historical focus on ease of use, to help increase ease of use and drive adoption, and our team is really focused on that as we speak.

In terms of where Personal FinanceWorks will show up in the financial reporting, it will impact the adoption hopefully of online banking, as well as the customers’ adoption of other services as we introduce expanded capabilities for small businesses. So it should show up in the core financial institutions reporting that we’ll provide.

Ross Macmillan - Jefferies & Company

Thank you.

Operator

Thank you. Our next question is from Michael Millman from Soleil Securities.

Michael Millman - Soleil Securities

I think I have a couple of questions, or several questions. Regarding the tax growth, can you give us some idea of the source? In other words, did you increase retention and was it a lot of new customers? Was it from some other sources?

Brad D. Smith

Michael, there were three things that we believe fundamentally drove a really good tax season this year and sets us up for next year as well. The first was the team’s continued focus on ease of use, using new methods, things like smaller customer experience teams, building functionality into the products, like life event changes, which historically has been a reason why people would consider going to someone to do their taxes, or even TurboTAX live community. All of those were our continued pursuit of building what we think was the best offering we put in the market in many years.

The second thing is really good execution around customer acquisition. The team came out of the gates day one. We had an aggressive advertising campaign. We had really good online marketing and I believe we continued to learn throughout the season and got better at bringing new customers into the franchise.

And last but not least, it was free. We’ve continued to learn with free, we continue to expand the category by getting new customers into the category and in looking for ways to monetize them. And when you put a bow around those three things, which was a really good offering with a focus on ease, the fact that we had good execution around new customer acquisition and the continued success with free, that delivered the results that we were looking for and helped growth the category.

Michael Millman - Soleil Securities

I was surprised when you said you only increased share 1% because the number two player was actually down and you were up sort of mid-teens. Is there someone else sneaking up, taking share as well? And sort of related to that, Block has said that they think that free tax is not profitable and even though they were down in digital, their profit doubled. Maybe you can give us some color on what you think about those statements vis-à-vis your experience.

Brad D. Smith

Let me start first with share. We felt really good with our market share gains in retail this year, up three points, and on the web actually picking up a point. We also believe that in the online presence, we are growing faster than the category. There are lots of players out there so there’s no sizable player that we see that is picking up share at a faster rate than we are, but there is a lot of other players in the market.

So as we continue to learn about how to get more aggressive on the web and we put our energy there, I only see upside for us.

In terms of the second thing, profitability of free, clearly the best indication I can give you of that is how aggressively we push it. You can see from our own results that we are raising revenue and earnings guidance and free was a big piece of the portfolio in tax this year, and it’s also a best practice we’ve not brought over to our small business franchise. So we think that free is a great way to expand the category and we have found ways to monetize it and make it profitable.

Michael Millman - Soleil Securities

And finally, could you update us on your work with Google, and in particular, now that they just announced their help product, different than yours, but have you been working with them? Did you discuss some collaboration between the two of you regarding some sort of health products?

Brad D. Smith

On the Google relationships, it’s a long-term partnership. We’ve been trying and testing different things and we’ve had success in a lot of areas. We’ve had some learnings in others that we continue to step back and refine, and we’ll continue to have a strong partnership with them into the foreseeable future.

In terms of their healthcare initiative, they are going after a different part of the market than we are. If you think about healthcare, there’s really two types of problems that are being solved in the market. One is healthcare, making your health records portable, and those are the types of things that Google are trying to help solve. And then there’s actually the financial aspect of managing your healthcare -- how much do you owe on your bill, how much will your deductible cover, and that’s the piece that we are focused on.

I do see these being complementary down the road but today there haven’t been any really material meaningful discussions between the two companies, because I think we are both early in the journey. But given our partnership, we’ll see over time if that translates into anything in terms of working together.

Michael Millman - Soleil Securities

Great. Thank you very much.

Operator

Thank you. Our next question is from Brent Thill from Citigroup.

Brent Thill - Citigroup

Thanks. Brad, just on the QuickBooks business, can you just give us a sense of what you’ve seen in the current upgrade cycle? There have been some concerns over the discounting that you guys have given in some of these promotional programs. Can you just address that? Is that something that you think is unusual or is that something that you’ve seen in past discounting promotions?

Brad D. Smith

We aren’t seeing anything right now that’s unusual in the upgrade cycle. Actually, our ASPs are up. We are looking for ways to get customers to remove the consideration, like free SimpleStart, which we know come in but ultimately isn’t free. They end up buying additional products and services, or even upgrading to a paid version. So there’s nothing that we’ve seen that is unnatural in the upgrade cycle that would lead us to have any questions.

Brent Thill - Citigroup

Okay, and just as it relates to the online edition of QuickBooks, you’ve seen a pretty dramatic deceleration in Q2, Q3 towards online. Is there something that in particular standing out why customers are still choosing the traditional method?

Brad D. Smith

Two parts to the question, Brent. First of all, QuickBooks online for us is an exciting franchise. It’s growing customers at 20% year over year and revenue, even though we don’t publish the number, is up over 50%.

There is, when you look at the fact sheet, the numbers don’t tell the whole story. Last year in the second and third quarters, we were testing a new product which was basically a version of SimpleStart built on the QuickBooks online platform. And while it was a good idea, it really didn’t materialize into a product that customers ended up liking or reusing, and so we have a little bit of an apples-and-oranges comparison. But the first thing I would say is it’s a very healthy franchise, it’s a product line we believe in, it’s growing customers 20% and revenue over 50.

The second piece is I think it’s a natural adoption rate of small businesses in the market. We launched QuickBooks online edition the same year we launched TurboTAX online and here we are multiple years later and we see the number of people filing their taxes online is now a higher number than those that are actually doing it on the desktop, but small businesses just haven’t adopted online accounting as rapidly.

The good news is when they are ready to move in that direction, we have the leading product in the market and we will be ready to capture that opportunity.

Brent Thill - Citigroup

Thanks.

Operator

Thank you. Our next question is from Heather Bellini from UBS.

Heather Bellini - UBS

Thanks. Brad, I was wondering if you could help us out -- I believe you said the echo data was available on the website. Could you just walk us through what the echo contribution was in the quarter to payroll and payments and what’s factored into your expectations for the July quarter, please?

Brad D. Smith

I’m going to have Neil actually walk you through that.

R. Neil Williams

As we said, the echo transaction performed better than we expected so far. We expected it to be slightly dilutive.

Heather Bellini - UBS

But can you comment on the revenue line?

R. Neil Williams

Yeah, it added about $7 million, a little less than $7 million, $6.7 million in revenue in the quarter.

Heather Bellini - UBS

And can you comment on your expectations, what it’s adding to payroll and payments for next quarter, please?

R. Neil Williams

We haven’t talked about fourth quarter. We are keeping our guidance for the fourth quarter overall basically where it is, but as we said on the call, we think it will be -- you know, we are looking for it to be neutral this fiscal year.

Heather Bellini - UBS

Okay, but on the revenue line, it should do a little bit more than $6.7 million than in terms of the contribution for July on the top line?

R. Neil Williams

Yes.

Heather Bellini - UBS

Okay, great. Thank you very much.

Operator

Thank you. Our next question is from Jim Macdonald from First Analysis.

Jim Macdonald - First Analysis

Good quarter, guys. On TurboTAX, you’ve been able to keep units and revenue pretty much in line. Can you tell us how you did that and if you expect to keep being able to do that, given the shift to more web tax and free?

Brad D. Smith

I think it comes down to continuing to understand how to bring customers in and then create opportunities that help solve additional problems that they are willing to pay for. And so here we are with a couple of years under our belt and the team has really done a great job of experimentation -- things like AB tests to try to find out what’s the best way to get a customer into the franchise, and then to do that and also provide opportunities for them to solve additional problems that will lead to revenue.

So I think the net net is, it’s just good execution on behalf of the team, creating offerings that are easy to use, creating additional solutions that will solve additional problems and finding ways to monetize those relationships over time.

Jim Macdonald - First Analysis

And just one more, on Homestead, could you articulate kind of -- now you’ve owned it for a little while, kind of what your vision is for Homestead? Thanks.

Brad D. Smith

First of all, the important thing for small businesses when they get started, there’s about 26 million in the U.S., 300 million worldwide, one of the first problems they have is actually getting found. They want to get customers and the first thing they have to do is be found and in the old days, we used to turn to the Yellow Pages. Now if you look at it, consumer behavior is typically to go online to find a plumber or to find a pizza delivery or whatever the particular service is.

And what you find is about 50% of small businesses today don’t even have a website, and of the other half that do, two-thirds of them haven’t really updated the site in the last two years. So they are lost.

And what Homestead does is it provides a very easy-to-use solution to help you get up and running and have a website. You can do it yourself, you can actually work with Homestead’s creative artists to help customize a site for you.

And the strategic value for us is two parts. The first is our own installed user base of small businesses has the same numbers as the rest of the market -- half of them don’t have a website, so think of this as a great attach product to sell into the QuickBooks base, just like payroll and payments.

But the other opportunity for us, this is a brand new front door into the small business franchise. If the first thing they think about is getting customers, we can now lead with a website from Homestead and then as they begin to get a little more mature, they may want to add on other products, like small business accounting with QuickBooks or payroll and payments.

So the value for us is new front doors to the franchise or an additional product to sell into the QuickBooks base.

Jim Macdonald - First Analysis

Thanks very much.

Operator

Thank you. Our next question is from Vikram Churamani from Lehman Brothers.

Vikram Churamani - Lehman Brothers

Brad, just following up to your comment earlier, you talked about double-digit growth I believe it was next year or longer term, and you talked about margins expanding. Could you perhaps help us a little bit in terms of should we -- because this year you guys had about flattish operating margins, looking at your guidance, because some of the acquisitions. Is it fair to say that we should going forward assume margin expansion of at least about 100, 200 basis points, which you’ve been doing historically?

Brad D. Smith

What we haven’t done yet is we haven’t provided guidance for fiscal year ’09 or beyond. We’ll do that in the fourth quarter but what we do, and what I just shared earlier in the conversation is we have a set of operating principals that we run the company by for many years and that as we want to grow revenue organically at double-digit rates, and to expand operating margins and then to use our cash to invest in other ways to accelerate growth, either a long-term initiatives or potentially acquisitions. And then we’ll return the excess cash to shareholders in the form of stock buy-backs.

Our goal around revenue is to grow revenue faster than expenses, and as you know, the best opportunity we have to expand operating margins is to grow the top line, because the marginal profit on the last unit we sell is the most profitable unit we sell. And so if we continue to accelerate our revenue and our unit growth, we’ll continue to get operating margin expansion.

Vikram Churamani - Lehman Brothers

Fair enough. And just a quick follow-up -- could you perhaps help us to some degree if you can, help us understand how big is the QuickBooks online piece relative to revenue, overall revenue for QuickBooks? And then also, if you can give us an update in terms of FinanceWorks, the shipment date and when should we expect the product to be rolled out? Thanks.

Brad D. Smith

So let me start with QuickBooks online edition. It is a relatively small piece of our overall portfolio today. If you look at roughly 4 million customers using desktop and we have about 130,000 using QuickBooks online edition, it’s relatively small. It’s growing quickly but relative to the other software, the service competitors in the market, it is significantly larger than the next nearest player. So small in our portfolio, large in terms of the emerging market of software as a service for online accounting.

On personal FinanceWorks, we’ll be rolling out the consumer version of FinanceWorks in October, which means we’ll make it available to those customers who have signed up for and we’ll begin the implementations in October, and then we’ll be following shortly thereafter with an expanded set of small business capabilities that we’ll also sell to our installed base for those banks that are serving small business customers.

So October for personal FinanceWorks, December for expanded small business capabilities.

Vikram Churamani - Lehman Brothers

And that’s your release date per se but it goes beyond just three beta customers and your sales force, or I guess the channel, everyone is selling it -- the [inaudible] are selling it?

Brad D. Smith

That’s right, yes.

Vikram Churamani - Lehman Brothers

Perfect. Thanks.

Operator

Thank you. Our next question is from Laura Lederman from William Blair.

Laura Lederman - William Blair

Thanks for taking my questions. Just a few -- if you look at the goal for long-term -- your revenue growth, and I realize you are not giving guidance but would you expect long-term for QuickBooks growth to move up from the 5% type of growth we are seeing?

And along those same lines, if you look at QuickBooks, what’s your sense as to how much the economy is impacting QuickBooks and what other impact there could be as well, besides obviously the difficult comparison? And then I’ll follow-up with a few other questions. Thanks.

R. Neil Williams

You know, we definitely think that the QuickBooks ecosystem will definitely have a double-digit growth going forward and we feel very comfortable about that. You’ve seen great performance in our payroll and payments statement already and as you know from prior discussions, we do look at that and manage that as an ecosystem.

I will tell you that our plans right now are not contingent on an economic recovery. We are building our plans to win assuming the economy stays as it is. If things improve, that will just be additional help for us but we are not planning on that and we are not baking that into any of our plans for the QuickBooks franchise going forward.

Laura Lederman - William Blair

If you look at the QuickBooks franchise and just the growth of QuickBooks itself not looking at the whole ecosystem, including payroll and payments, and I realize that’s not how you look at it but if you were to look at it that way, the growth rate we are seeing now, how much of that do you think is due to the economy versus category penetration, if you will?

Brad D. Smith

I think it’s important to point out there’s 26 million businesses out there in the U.S. and we’ve got 4 million using QuickBooks, so it’s not a penetration challenge for us. It’s us continuing to learn about how to drive ease of use and how to look at opportunities to bring new customers out of a shoe box or paper and pencil and into a small business accounting software package. And this is where things like getting smarter about our messaging and our advertising, getting much more astute about how to leverage new offerings and business models like free, and also continuing to get better at ease of use and the core product will help us expand that category.

The other thing is by bringing in tax services that serve as front doors for QuickBooks. Historically we always led with accounting and then attach payroll and payment. But what we discover now is some of the first problems small businesses have is actually getting customers and getting paid, so we can lead with websites now from Homestead or expanded payment options from our payments business and then eventually attach QuickBooks to those customers. So there’s multiple ways for us to accelerate the growth rate of QuickBooks and it’s not a penetration challenge.

Laura Lederman - William Blair

Following up on Homestead, can you talk a little bit about that and how they differ from website pros and the other ones out there, the competitive advantage besides being part of Intuit that Homestead has?

Brad D. Smith

Yes, I sure can. First of all, if you look at the overall market of developing websites, the predominant method today is working with a third-party agency and outsourcing it for several thousand dollars. And the bad news for that is that small businesses then get a website and they have no idea how to keep it relevant and fresh and so it gets stale very quickly and it doesn’t produce the results they are looking for.

What Homestead does is Homestead provides a do-it-yourself solution. It’s template driven so it’s sort of like an interview in TurboTAX. It helps you develop a website, very easy to do and ultimately if you want to get a little bit of help, they actually have consultants or an artist who will work with you and help you add some bells and whistles, whether it’s a shopping cart or just adding some more images like your logo.

What differentiates them in the market is when we were doing our due diligence and looking at acquisition, we went out and did the net promoter scores, the willingness to recommend this product or service to a friend or family member and we did it for all the alternatives in the market that we could find the size and Homestead was significantly above the next nearest alternative in the market in terms of ease of use and willingness to recommend.

So what differentiates them in the market is they have the same focus as Intuit, which is focusing on ease of use, providing a superior solution at the lowest cost possible.

Laura Lederman - William Blair

Thank you.

Operator

Thank you. Our next question is from Scott Schneeberger from Oppenheimer.

Scott Schneeberger - Oppenheimer

Thanks. Congratulations. First question is on TurboTAX, could you discuss a little bit on just kind of following up on the net promoter theme, could you refresh us on net promoter scores across the different channels of tax prep? And then also discuss where will your future growth in TurboTAX come from? Is it getting the incremental new user each year? Is it continuing to take from pencil and paper? How many of those folks are left or are you getting it from somewhere else? Thanks.

Brad D. Smith

Scott, at this point, we haven’t completed all of our analysis for this tax season on the specific net promoter scores for all the alternatives. What I can tell you we know is on our own individual products, we increased our net promoter results for both desktop and online, but the most exciting news for us was our biggest increases were from new users using TurboTAX online, which is where we know the category is going.

If you look back at our prior investor day presentations, which are posted on our website, you will see the data up through this last tax season that will show things like manual prep is down in the minus 70s. You get to things like H&R Block and tax stores, which were in the high-single-digits, or low-double-digits, somewhere in that 8 to 12 range, and then you get into the software category and you get up in the 40%-plus, and that’s all software players, not just Intuit. And we of course believe that we are pushing ease of use even further and so our numbers are higher than that, which we share at the investor day presentation.

So overall net promoter scores, it’s clear and also it’s correlated to category growth. If you look at the software category overall, it’s been growing four times faster than the next nearest alternative, which is the tax returns prepared by a pro. And so net promoter aligns with category growth.

The second part of your question you asked about was source of new users. Our biggest opportunity is not to just fight for share -- our biggest opportunity is to expand the category, to bring new users into the category. And we believe the biggest opportunity there is to continue to help people understand there are easier solutions at a better value than going to a tax store. And so that’s our primary focus.

Scott Schneeberger - Oppenheimer

Okay, so primary focus really more on going for -- you know, taking from a tax store, I assume still from pencil and paper but we are probably getting down in how many more can be converted. But just confirming that it’s more on the tax store.

Brad D. Smith

Yeah, so Scott, there is a residual amount out there on paper and pencil, and when I say residual, out of $140 million, there’s still millions of people doing it that way and so we continue to convert from paper and pencil, about 5 million in total I believe will actually file this year on paper and pencil out of 140.

But ultimately what you have -- is that the wrong number? Did I get the wrong data out? It’s 15 million. I’m sorry, Scott, 15 million on paper and pencil, but what you have is you have about 5 million filers who come into the category each year that are new to filing taxes. They tend to be the next generation of tax filers and they are predominantly going online day one, and so that’s an opportunity for us as well.

But to answer your specific question, converting from tax stores, getting new users to come into the category day one, and continuing to capture those that are still on paper and pencil would be the predominant focus.

Scott Schneeberger - Oppenheimer

Okay, thanks. That’s helpful. Switching gears a little bit, you’ve been playing up global. How rapidly should we expect to see that come through in the revenue lines of the various segments and which segments will we expect to see first there?

Brad D. Smith

Scott, I wouldn’t be building anything into our models or your models anytime in the near future. We know that this is a lot of learning ahead of us. We know that it’s a big opportunity across the world in terms of opportunities to grow the category. We are predominantly focused on small business today but we have a lot of learning ahead of us and we haven’t proven yet that we can do it well, so there’s nothing in the short-term that I would be building into our financials or encouraging you to think about as you look at your models.

Scott Schneeberger - Oppenheimer

Okay, thanks, and one more, if I can sneak it in -- obviously organic growth is strong for the business. Anything -- but some acquisitions still occurring. Can you just give us some thoughts on where future acquisitions may come and how aggressive you will be with future acquisitions? Thanks.

Brad D. Smith

Scott, we always look at opportunities as we try to expand our growth rate and our operating margins to see if there are chances for us to either build, to buy or partner, and so M&A is always one of the alternatives we consider. We just completed a pretty extensive look back at the last 10 years of M&A. We looked at the transactions that we completed over the last 10 years, as well as the divestitures. And we took the opportunity to learn the things that worked well and the things that we weren’t so proud of. And coming out of that it was pretty clear that when we use M&A as an opportunity to either introduce new products or services to market quicker than we can build it ourselves and capitalize on our existing customer base, that’s a win for us.

For example, the innovative merchant solutions, when we bought them or brought them into the franchise, they’ve been a great growth business for us.

The other thing we learned is if we focused on M&A as an opportunity to bring new capabilities in, either talent and skills or technology, like Homestead. Homestead is a great technology. It’s web 2.0. They’ve got great engineers and they are helping us across the company think differently about how to innovate. That’s primarily where we focus our M&A efforts, is products and services that we can sell into the base that we think that we can actually get time to market or a superior alternative in building, and skills or capabilities that will accelerate our growth rate.

Scott Schneeberger - Oppenheimer

Thanks very much.

Operator

Thank you. Our final question comes from Brendan Barnicle from Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

Thanks so much. I wanted to follow-up on the QuickBooks online business and as you take more of a SAAS approach there, have you looked at all at some of the fast platforms, like a salesforce.com or Webex, some of the other vendors that are out there as a way to sort of leverage and enhance distribution on that product?

Brad D. Smith

As we look at the SAAS market, we definitely look at all the alternatives in the market. We try to learn from those and where it makes sense, we look for partnerships or other opportunities to grow. What you will find is many of those players today, the example you gave, salesforce.com or other names that come to mind, historically focus on a different part of the market than we serve. We are the classic long tail, the very small businesses, small and simple. There’s 22 million of them. They have less than five employees. You’ve got another 3 million that are between 5 and 20 employees, and then you’ve got about 600,000 that are above that 20 employee mark.

The salesforce.com and the others tend to be on the higher end of that pyramid, or even further north. And where we are with our particular products, we are kind of down in the sweet spot of the 26 million, so if it makes sense, we work with them. We certainly try to learn from them, because they’ve been out in the market and they are doing things with SAAS, but today we don’t see, for example, with salesforce.com, that with QuickBooks online edition doesn’t meet the same customer set that both of us are trying to serve.

Brendan Barnicle - Pacific Crest Securities

Would your Quick Base product address that market so that you could provide that kind of platform for that, for that customer base?

Brad D. Smith

Yeah, so Quick Base right now is a great business for us in terms of opportunity. Historically we’ve been focusing on Fortune 100 companies, helping them manage the productivity inside of their organizations. But we’ve also seen an opportunity for Quick Base to serve as a platform to have third-party developers or even others help develop solutions for small businesses.

So we have not in the past had that as a big growth opportunity but as you look at some of the recent releases we’ve introduced with Quick Base being a development platform, that can certainly be a catalyst for us in the future.

Brendan Barnicle - Pacific Crest Securities

And then lastly over on the financial institution side of the business, anything changed competitively in that market?

Brad D. Smith

No, the same players are in the market and there are other front-end providers, which Digital Insight has always been in the lead of that pack. You have core processors that are out there who continue to deliver their services and some of whom build front-ends, and it’s always been a market of co-opetition, where some will actually provide their own solution and then carry other alternatives in the bag because at the end of the day, it’s the financial institution who wants to choose the best solution, because it’s their viability that they are trying to manage, which is getting more of their customers to adopt online banking.

And so really nothing has materially changed in terms of the competitive landscape.

Brendan Barnicle - Pacific Crest Securities

Great. Thank you.

Operator

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

Brad D. Smith

Just want to thank everybody again for the questions this afternoon and for the ongoing feedback and support. We are very excited about our third quarter results. We feel good about fiscal year ’08 and we are looking forward to another good year in ’09. Looking forward to speaking with you again soon.

Operator

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

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Source: Intuit F3Q08 (Qtr End 4/30/08) Earnings Call Transcript
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