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Intuit Inc. (NASDAQ:INTU)

F4Q08 Earnings Call

August 21, 2008 4:30 pm ET

Executives

Jerry Natoli - Vice President, Investor Relations, Treasurer

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

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

Analysts

Adam Holt - Morgan Stanley

Bryan Keane - Credit Suisse

Terry Wong - UBS

Jim Macdonald - First Analysis

Sasa Zorovic - Goldman Sachs

Scott Schneeberger - Oppenheimer

Laura Lederman - William Blair

Brent Thill - Citigroup

Gil Luria - Wedbush Morgan

Michael Millman - Soleil Securities

Greg Smith - Merrill Lynch

Operator

Good afternoon. My name is Patty and I will be your conference facilitator. At this time, I would like to welcome everyone to the Intuit fourth quarter and fiscal year 2008 conference call. (Operator Instructions) With that, I will now turn the call over to Jerry Natoli, Intuit's Vice President of Investor Relations and Treasurer. Mr. Natoli.

Jerry Natoli

Thank you, Patty. Good afternoon and welcome to Intuit’s fourth-quarter 2008 conference call. I’m here with Brad Smith, Intuit’s president and CEO, and Neil Williams, our CFO.

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 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-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, Jerry, and congratulations on landing a speaking part in our conference calls. For those of you who have not heard, Jerry is now taking over the lead Investor Relations role from Bob Lawson. Bob is now leading the finance team in our Consumer Tax business. I’d like to thank Bob for all his good work in Investor Relations and officially welcome Jerry to the hot seat. I also want to thank all of you for joining us.

We announced our fourth quarter and fiscal year 2008 results a few minutes ago. We had a good year in a tough environment and I’m proud of the hard work our teams put in to deliver the results we reported today.

Total revenue grew 15% in fiscal year 2008. Excluding mergers and acquisitions activity, revenue growth was 11%. We had an outstanding consumer tax season, with 14% revenue growth and 17% unit growth. We had a solid finish to a challenging year in small business. We drove continued organic growth in QuickBooks and had another year of double-digit organic growth in the payroll and payments segment.

In addition, our two most recent acquisitions, Homestead and ECHO, are already making a contribution to our top line performance. We’re pleased with the progress we’ve made bringing these two new businesses on stream. And we’re pleased with the response our small business customers are having to the web hosting and ACH services we now offer.

As I said, I’m proud of our team’s performance. But we are not satisfied. We can do better.

What better means for us is faster growth in new customers, driven by the continuous improvement of our existing products and services and the introduction of new products and services that address important customer problems. Success in these areas leads to accelerated growth in revenue and operating profit dollars. This is going to be a multi-year journey. We won’t get all the way there in one year. But we’re building momentum and will make a lot of progress in fiscal year ‘09.

One way we’re doing this is by taking a fresh look at how and where we invest our resources. We define our resources as our time, our people and our dollars. We looked hard at this last year and made some changes that resulted in a charge in the fourth quarter. The changes we made freed up resources that we are now reinvesting in higher yield opportunities. Some are going towards R&D and new product initiatives that will move the needle longer term. Others are going toward short-term initiatives, like increased demand generation focused on acquiring new customers, which we expect to contribute to our success in the coming year.

We also believe we can improve our performance and grow in any macroeconomic environment. We have a strong and balanced portfolio that has proven to be remarkably resilient to economic fluctuations over the past 25 years.

We remain focused on continuing to deliver easy-to-use products and services that our customers love because they help them be more successful and are a better value than any competitive alternatives. This value proposition resonates in any macroeconomic situation.

And finally, we’ll be more focused on delivering the kind of connected services that have been driving our growth for the past few years. Connected services now represent over half of the company’s revenue and will be even more critical to driving growth as we look ahead. For example, in fiscal year ‘09 we expect to see: TurboTax Online continue to be the key growth driver in Consumer Tax; in Small Business, Homestead’s Web hosting services, QuickBooks Online, and the support and new connected services associated with the QuickBooks product lineup will drive increased growth in the QuickBooks segment; our Assisted Payroll Service and new standalone Online Payroll offering, coupled with our expanding Payments services, including check verification and ACH, will drive accelerated growth in the Payroll and Payments segment; and our Financial Institutions online banking platform get a boost from the FinanceWorks offering coming in the fall and the small business services due in December.

I will share a few more thoughts at the end of the call but first I’ll turn it over to Neil to walk us through the segments and financial details.

R. Neil Williams

Thanks, Brad. Let me start with a high-level summary of the results. Revenue for the year was $3.1 billion, up 15% year-over-year. Full-year non-GAAP operating income and non-GAAP diluted earnings per share both increased 12% year-over-year. Full-year GAAP earnings per share increased 14% year-over-year. Revenue for the fourth quarter was $478 million, 11% higher than the same period last year.

Both the GAAP and non-GAAP results include the charge we took in the fourth quarter for severance and facilities closures. That charge was originally estimated at $22 million and came in at $23 million.

Turning to segment results, total Small Business revenue grew 12% in the fourth quarter. Excluding the effect of Homestead and ECHO, the growth was about 6%. For the full year, Small Business grew 7%. Excluding the impact of the sale of payroll customers to ADP in FY07 and the acquisition of Homestead and ECHO in FY08, Small Business grew 8% for the year.

QuickBooks finished the year with a solid fourth quarter that showed growth over a strong Q407. The year was more challenging than we expected for QuickBooks, but there are a number of positives I’d like to highlight.

QuickBooks units in the second half and full year matched a very strong FY07 in a tough spending environment. QuickBooks Online revenue continued to grow at a 50% rate. And we’ve got Homestead providing a new fast-growing web hosting business with services like website design and e-commerce we can offer to our 4 million QuickBooks installed base.

We’ve said we feel we could have done more this year to drive growth in the financial management software category. In FY09, we’ll start with a more compelling QuickBooks offering. We’ll provide more details at Investor Day in September but you can expect new features and more connected services designed to help small business owners and their accountants succeed. We’ll also be more aggressive with our use of free and we’ll step up demand generation to bring more new users into the category.

Our Payroll and Payments segment had a solid year. Growth in the fourth-quarter was 16%. Excluding the impact of ECHO, growth was 9%. The Payroll customer base is up 4% for the year, a little slower than we’ve historically reported. While some of the downturn in the customer base is attributable to weaker QuickBooks unit growth, we also implemented a modest price increase that contributed to a small decrease in customer retention. But we would note that our Payroll customer retention is still in the high 80s, which we believe is best in class. Payments customer growth was 18% for the year and total transaction volume grew 23% for the year.

We expect growth in FY09 in this segment to be driven by continued Payments customer growth and a mix shift in Payroll to our higher value Payroll products. In addition, having ECHO in the segment for the full year is expected to add approximately 5 points of growth.

Before I move on, I want to talk about some changes we’ve made to our segment definitions that better align our product groups with the customers they serve.

QuickBase has moved from the Other Businesses segment to the QuickBooks segment.

QuickBooks Accountant Edition and the ProAdvisor Program for accountants have moved out of the QuickBooks segment and into the Professional Tax segment. With this move, the Professional Tax segment is being renamed the Accounting Professionals segment.

The segment revenue presented here and on the fact sheet reflects these changes for all periods presented. QuickBase revenue was $10.5 million in FY07 and $15.6 million in FY08. Accountant Edition and ProAdvisor revenue was $22.5 million in FY07 and $31.5 million in FY08.

In our tax business, consumer tax finished the year with 14% revenue growth and 17% units growth. It was an excellent year and as we’ve said, we won in tax because it was our best offering ever and the team executed extremely well. We expect next year to be strong as well and we’ll continue to focus on growing the category and our share using our free offer. We’ll also focus on continuing to improve ease-of-use in the product, optimizing our demand generation programs and improving our conversion rates.

As we do every year, we’re reviewing what worked well and what we feel we could have done better as we develop our strategy for the coming tax season. We’ll share more details on our product lineup and pricing for FY09 at Investor Day in September.

Our accounting professionals segment also had a nice finish and delivered a solid year. Growth was 4%, including QuickBooks Accountant Edition and ProAdvisor revenue. Adjusting for the discontinuation of ProSeries Express in FY07, growth would have been 9%.

Financial Institutions revenue for the fourth quarter was $78 million. This reflects 10% growth in Internet banking users and 16% growth in bill pay users for the full year. We are making progress, but we have work to do before this unit achieves the growth rates we believe it’s capable of delivering. We are taking a number of important steps in FY09, including improving the ease-of-use in the core Digital Insight platform. And we expect the first version of FinanceWorks to be available in October followed by the first small business services in December.

Our other businesses segment grew 17% for the quarter. For the full year, other businesses grew 14%. The growth was driven by strong results in our Canada/U.K. and real estate solutions businesses. The weaker dollar contributed to the Canadian business growth and currency gains account for about 3 points of the segment growth rate for the quarter, 5 points for the year.

Moving to the balance sheet, Intuit ended the year with $828 million in cash and short-term investments. We also have $285 million of auction rate securities that are classified as long-term investments and valued at par.

Cash flow from operations was $830 million for the year. Capital expenditures were $89 million in the fourth quarter, $306 million for the full year. As we discussed on prior calls, the increase in capital expense in FY08 was driven by investments in our new data center and expansion of office capacity to support our growth. We expect capital expenditures to drop to about $200 million in FY09, so those of you looking at operating cash flow minus CapEx should see a nice jump in that metric.

We did not repurchase stock in the fourth quarter because the action that resulted in the fourth-quarter charge was not announced until late June. As of August 1, we still had the full $600 million of stock repurchase authority approved by the board.

We did not have any M&A activity in the fourth quarter. As Brad mentioned, our two most recent acquisitions are performing well and as we did last quarter, we’ve summarized the M&A impact on fourth-quarter and year-to-date growth rates in a table that is included in our posted conference call materials.

Now let me share our guidance for fiscal 2009.

We expect revenue of $3.35 billion to $3.43 billion, or growth of 9% to 12%.

We expect the following revenue growth by segment: QuickBooks, 8% to 12%; Payroll and Payments, 14% to 18%; Consumer Tax, 8% to 12%; Accounting Professionals, 5% to 9%; Financial Institutions, 5% to 9%; and Other Businesses, 6% to 10%.

We expect non-GAAP operating income of $970 million to $990 million, or year-over-year growth rates of 13% to 16%. That translates into a margin rate of 29%.

We expect non-GAAP diluted earnings per share of $1.86 to $1.90, or year-over-year growth of 16% to 19%.

As I mentioned, we expect capital expenditures of approximately $200 million in fiscal 2009.

For the first quarter of fiscal 2009, we expect: revenue of $480 million to $492 million, up 8% to 11% versus the year-ago quarter; a non-GAAP operating loss of $65 million to $50 million versus a loss of $56 million in the year-ago quarter; and a non-GAAP loss per share of $0.14 to $0.11, versus a loss of $0.10 per share in the year-ago quarter.

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

Brad D. Smith

Thanks, Neil. Before we get to your questions, I’d like to share some closing thoughts about our business. We’ve talked about the fact that our growth for the past few years has been driven by the performance of the connected services in our three biggest businesses, and that as we look ahead, we see an increasing emphasis on these connected services to serve our customers and accelerate our growth rates over time.

As a reminder, we think of connected services as including three types, the first is SaaS, or software as a service, where our solution is a connected service that delivers revolutionary benefits or a cost advantage, like TurboTax Online, Online Banking and QuickBooks Online Edition.

The second is what we call software advantaged services, where connecting the service we deliver to our desktop software makes the solution clearly superior for what matters most to customers. Examples include our Payroll and Payments offerings and the way they connect to QuickBooks.

And the third is where our ecosystem serves as a platform that connects people to other people, like the TurboTax Live Community and QuickBooks Pro Advisors Community.

One of the key points I’d like to emphasize is the advantage that we gain when we have a blend of software and connected services. For example, we had a great year in consumer tax in FY08, driven by 37% growth in online units. We helped grow the tax category and we grew share online. But we also grew share in retail. It’s that combination that sets us apart.

In small business, our connected services portfolio continues to deliver strong results:

payroll and payments revenue grew double-digits and QuickBooks Online revenue grew 50%; Payments customers grew 18% and the SaaS customer base, which includes QuickBooks Online, QuickBooks Enterprise, and Homestead, grew 22%.

Those are great numbers. But we also added to a large installed base of QuickBooks desktop users who we can offer additional services to. With 1.7 million units of QuickBooks sold in fiscal year ‘08, we have an active QuickBooks customer base of about 4 million users who are prime candidates for Homestead’s Web hosting services, for our new ECHO ACH and check verification services, our existing debit and credit card services, and our payroll services.

Again, it’s the combination of services and desktop software that sets us apart.

In our financial institutions business, the entire business model is a connected service that delivers critical online banking solutions to 8.7 million banking customers. To accelerate growth for this business in the near term, we need to drive adoption of our online banking and bill pay services within the financial institutions who are our customers today and in the new financial institutions we sign up tomorrow.

The game here is ease. No one has solved it as well as we believe we can and it remains a key barrier in end-user adoption. So to win, we’re improving the ease-of-use of our existing platform and releasing our first version of FinanceWorks in October. Longer term, we’ll focus on driving growth by continuing to improve our solutions and by rolling out small business services to the installed base. And our first small business services will be available in December of this year.

In addition to these three big businesses, we also have two longer-term growth initiatives that are both rooted in hosted technology: healthcare and global. We’ll begin rolling out our Quicken Health Expense Tracker solution to Medical Mutual of Ohio and CIGNA customers later this calendar year.

On the global front, we plan to begin in-market testing of several new product experiments in Southern Asia in calendar year 2009 to solicit customer feedback and refine our go-to-market strategy and offerings.

And as I mentioned, accelerating growth is our primary focus. As I look around the company, I am very optimistic about our prospects for doing that. We have lots of opportunities.

And as I share my optimism with investors, who tend to be a little more of a realistic group, I sometimes get asked -- okay, Brad. That’s all good. But what is keeping you awake at night? Well quite frankly, I’m sleeping pretty well and I do so because we are staying laser focused on delivering for customers and winning with ease, both within our core products and services, as well as with new offerings. This should enable us to continue to succeed regardless of the macro environment.

But that’s not enough. We’re revving up our innovation engine that has driven this company’s success for 25 years. This includes sustaining innovation to strengthen our existing brands, such as live communities in our flagship products, and introducing new disruptive offerings like free offerings that will redefine the market.

I am pleased to say we’ve got our entire company involved and contributing with the introduction of unstructured time, as well as an entire end-user community with the announcement of Intuit Labs earlier this week. Plus, we are engaging the third party developer community with new tools and services such as our recently announced QuickBase Developer Platform with Adobe Flex.

Finally, we’re making certain that we have a healthy partnership with government agencies, which means working with the IRS and state governments to ensure both our business objectives and their goals for providing services to citizens are met.

Now this is all possible because we maintain strong operating discipline. We’ve talked about our financial operating principles for how we run the business. First, our objective is to grow organic revenue double digits supplemented by strategic acquisitions. You can see this principle at work in our FY08 performance, where we grew revenue 11% organically and 15% overall when including acquisitions.

In general, we expect to manage the company so we grow expenses slower than revenue, which will result in margin expansion. While our recent M&A activity and the charge in the fourth quarter kept us from delivering margin leverage in FY08, our guidance for next year shows we expect to grow operating income faster than revenue in FY09.

We use the cash we generate to fund growth initiatives and make strategic acquisitions. We’ll pursue inorganic growth opportunities when they make sense. Our M&A strategy is to acquire technologies and capabilities that will enable faster growth. We also work to build alliances and partnerships that add to the value we can provide customers or provide access to customers we can’t otherwise reach.

And finally, we return excess cash to shareholders in the form of share buybacks. We’ve repurchased almost $5 billion of stock in the last five years and have authority from the board to repurchase an additional $600 million.

So to summarize, we have a strong and growing franchise that is increasingly being fueled by a healthy portfolio of connected services. We have exciting new growth initiatives like health care and global, as well as a robust pipeline of early innovative ideas pumping through the company. And we remain grounded in a set of disciplined operating principles to translate that activity into strong operating performance regardless of the macroeconomic environment. All in all, we have pretty exciting growth opportunities for FY09 and beyond.

I’d like to thank Intuit’s employees for another great year. We look forward to seeing all of you at Investor Day on September 24th and with that, we will turn it over to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Adam Holt of Morgan Stanley.

Adam Holt - Morgan Stanley

I have a couple of questions about the QuickBooks business. It looked like you saw a reacceleration in the fourth quarter. I was wondering if you could start with what was behind I guess the reacceleration there. And then, as you look into next year, obviously even if you strip out the acquisitions, it looks like you are guiding to an acceleration in organic growth in QuickBooks. Maybe just walk us through some of the key variables there in terms of market growth expectations, share gains, and pricing. Thanks.

Brad D. Smith

Let me start with Q4 -- so what you saw was execution against our adjusted game plan when we came out of Q2 and we noticed the market was shifting, we increased our demand generation, we got a lot sharper on the marketing messages, we got more aggressive with free and we just executed better. So we saw a better run-rate coming into Q4 as we hoped we would when we raised that guidance.

As you look at fiscal year ’09, there’s really a couple of things that we are really banking on. The first is we have a compelling FY09 QuickBooks version coming out. We’ve had it in alpha. We’ve gotten really good feedback from the alpha users and we are excited about this year’s release. It will include new features as well as additional connected services that will help small businesses succeed.

The second thing you will see is increased demand generation. We learned a lot this year about what it takes to make sure that small businesses are aware of the types of opportunities that we have to offer them, regardless of any sort of economic situation. And the third thing you are going to see us do is continue to double down on free. Just like in TurboTax, free works in QuickBooks and that will be another part of our game plan for next year.

So that’s pretty much it for the Q4 and QuickBooks, as well as what we are looking at for ’09.

Adam Holt - Morgan Stanley

Terrific, and if I could just ask a quick follow-up on FinanceWorks, obviously coming out this fall, what should we expect to see in terms of the impact of that product? Would you expect to be able to actually raise prices for customers that moved to the FinanceWorks product? Or should we just expect to see an acceleration of end users?

R. Neil Williams

The primary game on FinanceWorks is to get more end users, either in online bill payment and online banking in general. We are still finalizing our pricing approach for access to the FinanceWorks functionality but the main game is getting more active users into the franchise and not on an initial fee.

Adam Holt - Morgan Stanley

Terrific. Thank you.

Operator

Your next question comes from the line of Bryan Keane of Credit Suisse.

Bryan Keane - Credit Suisse

You know, guidance looks real strong, especially small business. I guess, Brad, what makes you confident that double-digit revenue growth in small business is possible, considering obviously it’s a tough economic climate?

Brad D. Smith

Bryan, it kind of goes back to the earlier answer with a couple of additional comments, so one is we are very excited about the ’09 release, and we are also excited about the game plan we have for demand generation in free. But the other key element here is opening new front doors to the franchise. So with the acquisition of Homestead, we now have an opportunity to get to a small business owner earlier in their life stage where they are thinking about getting up online and getting a website before they even think about accounting. So that’s a great way for us to get new customers into the franchise.

We also have the [inaudible] of new front doors being opened up in other parts of the ecosystem, like online payroll. So we can get somebody to come in and start using online payroll services and then if they want to have that work with financial software, they will buy QuickBooks.

So when you put it all together, it’s the stronger ’09 release, it’s increased demand generation and free with Simple Start, and it’s new hosted services like Homestead as well as online payroll, and a set of other connected services you’ll hear more about at investor day.

Bryan Keane - Credit Suisse

Okay, and payroll and payment, it doesn’t look like that gets much -- or really isn't affected much by the economy?

Brad D. Smith

No. The great news about the businesses there is they continue to grow strongly. You saw the payments customer growth and I think revenue speaks for itself and we are excited about the future of that segment.

Bryan Keane - Credit Suisse

Okay, and then Brad, consumer tax, 8% to 12% growth, I think that was similar to where it was last year. I guess just some quick comments in general how you feel about consumer tax going into fiscal year ’09?

Brad D. Smith

We think we’ve got momentum coming out of this year. We had a really good release this year, which usually bodes well for retention the following year, and we like our game plan on free. We know the category has grown for about the past six years about 10% and we historically want to continue to perform better than the category, which is why we set our guidance at 8% to 12%. And I feel good about our prospects as we head into the year with that guidance.

Bryan Keane - Credit Suisse

Okay and then just finally two quick ones for Neil -- CapEx dropped significantly to $200 million. Is that a more normal CapEx number for the company?

R. Neil Williams

You know, Bryan, it is definitely on the right glide path. You know, we’ve gotten most of the investment in our op center and [inaudible] base behind us. This year, some remaining [inaudible] in 2009 but we are on the right glide path.

Bryan Keane - Credit Suisse

Okay, and then last one for Neil -- share count guidance of 328 to 331 for fiscal year ’09 -- does that include some of the stock buy-backs in it, or at least how much?

R. Neil Williams

Yes, it does have stock buy-backs in there. Bryan, I don’t think we’ve talked about exactly the timing or when but it does include, assume that we use a big part of the $600 million.

Bryan Keane - Credit Suisse

Okay, great. Congratulations.

Operator

Your next question comes from the line of Heather Bellini of UBS.

Terry Wong - UBS

This is Terry Wong for Heather. Just a question on the quarter’s results for small business. Could you talk about the impact of M&A in the quarter for QuickBooks and payroll and payments? Thank you.

R. Neil Williams

Sure. We have a summary table in the materials we posted but the revenue from Homestead and Echo in the fourth quarter was about $15 million and about $30 million for the full year for both of those, so you can see that broken out there but that’s kind of the way it came out for the fourth quarter and for the full year.

Terry Wong - UBS

Okay. Thank you.

Operator

Your next question comes from the line of Jim Macdonald of First Analysis.

Jim Macdonald - First Analysis

[inaudible] the impact seems a little bit less than I would have thought. Is there some company [inaudible] eliminations or something there?

Brad D. Smith

I’m sorry, Jim. You were cutting out. The impact of?

Jim Macdonald - First Analysis

The impact of Echo seems to be less than I would have thought. Is there some accounting issue there?

R. Neil Williams

Not really, Jim. It’s actually performing better than we had expected.

Jim Macdonald - First Analysis

Okay, so --

R. Neil Williams

Full year revenue this year is about $15.8 million, about $9.2 million in the quarter, which we are really pleased with.

Jim Macdonald - First Analysis

Okay, and could you talk about the magnitude of the price increase in payroll and your thoughts around that?

Brad D. Smith

Jim, actually what we did with the payroll increase is we had a product line positioning and a pricing action which lowered it on the low-end of the business to get more new customers into the franchise, and on the higher end where we offer more value, we took a modest price increase, keeping in mind that the next nearest competitor on the high-end tend to be ADP and Paychex, who are in that $1500 to $1800 average price range, when we’re in a much lower price range.

So net net, it was an overall impact. Given our current installed base, it was a modest price increase but it also has new entry level pricing on the low end that will help us grow customers as we head into FY09.

Jim Macdonald - First Analysis

And do you think the attrition is done and you are going to be back to growth there now, or is there more attrition in next quarter?

Brad D. Smith

You know, our belief right now is that we’ve got the right positioning in the market and we feel good about the customers coming in, as well as the current installed base accepting the price. We’ve had very little noise from customers. We see this actually as an acceptable attrition rate right now and it still keeps us in what we consider to be best-in-class retention levels relative to others in the industry. So I think it’s a way of saying that I think we are pretty much stabilized and heading on the up-trend here.

Jim Macdonald - First Analysis

Okay, thanks very much.

Operator

Your next question comes from the line of Sasa Zorovic of Goldman Sachs.

Sasa Zorovic - Goldman Sachs

Thank you very much. Could you tell us what kind of changes competitively are you seeing, or you are really more relevantly preparing for as we go into ’09, specifically in tax, and also QuickBooks?

Brad D. Smith

Let me start with tax -- we don’t see anything that is materially different from prior years. In the tax business, we historically have a competitor who is head to head with H&R Block with tax software in retail, and then on the web, you have a whole host of players that have come in with online tax services, and we like our position there because we continue to pick up share, both online and in retail and we think by continuing to offer easy products, being aggressive with free, and continuing our demand generation program will only strengthen our position it the market.

And QuickBooks, no news is good news. The basic program out there, QuickBooks has a very strong share in retail. We are up in the 90%-some range. I think it’s on our facts sheet. There hasn’t been a lot of change-out there from either Sage and Peachtree or Microsoft, and when you go on the web, it’s a similar story to the TurboTax story and we have the leading solution on the web today, with QuickBooks Online Edition, which grew about 50% in revenue this year. And even though we don’t report it, customers grew over 30% as well.

So really, there’s nothing meaningful or material in terms of known competitors. I will tell you the thing that I keep my eye on and the team keeps their eye on are competitors that aren’t out there today that could be starting with four or five people in a garage because those are the ones that bring disruptive business models, so we have to stay on our toes and make sure we continue to innovate.

Sasa Zorovic - Goldman Sachs

Thank you, and my second question would be regarding the recent [rift] that you have had -- do you believe at this point you will right-size for the year coming up?

Brad D. Smith

I would say what we did is we took a hard look at where we were allocating our resources and quite frankly, a lot of the focus was in general and administration. We realized that we had an opportunity to put more resources against some of the engineering, product management, and sales and marketing areas, and so we took an action to get those resources put in against areas that would drive growth.

Are we right-sized? We feel good going into fiscal ’09 but resource allocation is an ongoing process. As we continue to see more opportunities, we’ll continue to allocate our resources accordingly. But I don’t anticipate, we don’t have anything planned right now that would represent what we just did this past spring.

Sasa Zorovic - Goldman Sachs

Thank you.

Operator

Your next question comes from the line of Scott Schneeberger of Oppenheimer.

Scott Schneeberger - Oppenheimer

I’m going to start off with the consumer tax area -- could you speak a little bit about retention? And then Brad, you mentioned something about working [on] conversion rates and I’m just curious if you could follow-up on those comments. Thanks.

Brad D. Smith

Actually, we haven’t yet revealed our retention numbers. We’ll be talking more about those, as well as conversion rates, as we go into investor day on September 24th. I would tell you a good indication is how the net promoter scores were the prior year as a pretty good predictor of what retention will look like, and we like what happened this year. We also like the net promoter increases [inaudible], that’s on desktop and our web offering, as we head into next year.

On the conversion side, our team has continued to execute. We had great online marketing this year, in addition to TV advertising and it showed up in the unit growth, as you saw 37% unit growth in the TurboTax online, so our conversion continues to improve. And we will share more of the specific details and exactly how much and what we are doing to improve again next year on investor day.

Scott Schneeberger - Oppenheimer

Okay. I’m sure on this next question too you’ll move to investor day but any initial thoughts on price volume within TurboTax going into the next year? And then some time into that but also TurboTax and QuickBooks, you made a lot of commentary on your free strategy. If you could elaborate on both fronts, thanks.

Brad D. Smith

Yeah, I think, Scott, your lead-in was correct. We are planning to share, as we typically do every year, more detail on our products and pricing approach at investor day, and so you will hear more about that in TurboTax.

In terms of free, what you are hearing us talk about today, and you’ll see more when we get together on September 24th, is both tax and small business are going to continue to double down on free. It’s a model that works. It brings new customers into the franchise. We have found ways to monetize those relationships. We like the impact on our position, both short and long, and we are going to continue to push hard against both of those opportunities.

Scott Schneeberger - Oppenheimer

Okay, thanks. And then finally on international, it sounds like you are doing some things in Asia there. It sounds very preliminary, and then of course with the healthcare area, within the guidance you provided, should we assume that there’s very little material impact from both of those? And then just -- that’s the financial question, and then the follow-up is just a little bit more color on international and what is happening there.

Brad D. Smith

Okay. So Scott, first of all, you are correct -- I wouldn’t think about anything in the next couple of years that would be material for either healthcare or global. The reason why we talk about it is we know we’ve been talking about it for some time. We’ve been talking about healthcare for a couple of years and we are excited to be moving into market officially with that product this calendar year.

We’ll obviously learn a lot when we get out into market and on the global front, even though we’ve only been talking about it since fall of last year, I’m excited to show that we are moving into end product or end market experiments in Southern Asia, and so we’ll learn a lot there. But nothing meaningful or material in terms of revenues being built into our guidance at this point.

You had a follow-up question on international?

Scott Schneeberger - Oppenheimer

Just curious what -- you are just doing some beta testing and looking around, or are you organically building something to generate revenues now, or maybe looking for acquisitions? Just a little more elaboration. Thanks.

Brad D. Smith

Okay. So we’ve been working since we announced global back in the fall when we announced a President for global, Alex [Lentner], who sits on my staff. We completed strategy work, we’ve done over 200 follow me homes, which is where Intuit goes out and actually spends time with local consumers in those markets, and we’ve got a half a dozen what we think are potentially promising ideas.

If you look for where will we be focused, it will be primarily in small business. Obviously tax is not something we can get other countries to be willing to import the U.S. tax system, so it’s primarily a small business focus, and it will also be predominantly hosted or online offerings versus desktop. Think of them being more localized products built for the market need and not something that you would recognize in the U.S. today, and we’ll talk a little more about that on investor day on September 24th.

Scott Schneeberger - Oppenheimer

Sounds good. Thanks a lot.

Operator

Your next question comes from the line of Laura Lederman of William Blair.

Laura Lederman - William Blair

One is, and I realize you might be giving more detail on this at analyst day, can you give us just a bit of a preview on some of the new features that might in QuickBooks ’09, given that you are expecting that to help the growth of QuickBooks in ’09? And separately, can you talk a little bit about the competitive environment in Homestead? Obviously you see that as a new logical entry for customers to go from Homestead to QuickBooks -- talk a little bit about who you see competitively, how fragmented is the market, what are your advantages in that market versus a web.com or something like that? And final QuickBooks question -- category growth you are assuming for QuickBooks next year. Thanks.

Brad D. Smith

Okay, so let me start with the first one, Laura. First of all, it’s good to hear from you. QuickBooks ’09, you’re right, we won’t at this point want to pre-announce our features but I will give you a couple of headlines -- we are working hard to include some features that we know are critical to the accountants and the small business owners, that it improves their ability to interact. We are also going to be adding some connected services around the QuickBooks product and you will hear more about those, but we’re excited about them.

We’ve talked about what kinds of phases we might focus on and one of the things we’ve said is moving out of the back office and into the front office, helping small businesses get online an get customers. So you will hear more about that on September 24th.

Specifically around Homestead and the competition, when we made the acquisition, we did a pretty strong assessment of the marketplace, both the free offerings, paid offerings, and even local agencies that will build these on a consulting fee for small business owners.

And what we discovered is Homestead has the highest net promoter score, actually about two times higher than the next nearest competitor in the market, which means that the ease of use and the word of mouth of this product is very strong competitively.

The other thing that I would tell you that makes it unique for us is Homestead is a great example of a connected service, which means it gets a competitive advantage because it has the ability to tap into the 4 million installed QuickBooks users, just like payroll and payment is another razor blade that connects to the QuickBooks razor. And so when someone is in using QuickBooks, they will be able to actually go out and get a website using a lot of the data in QuickBooks relatively pain free.

So I think net net on a competitive front, we like Homestead as a standalone offering because its net promoter score already head to head with these competitors, and then when you add the power of integrating with QuickBooks, we like our position in the market.

The last question you had, I’m sorry, was around?

Laura Lederman - William Blair

The category growth for small business accounting that you are kind of basing your growth rates at [inaudible] around.

Brad D. Smith

That’s actually a difficult question to answer because we really are the category. When we have a 92, 93 share, we take full responsibility whether the category is growing or not. And so I think it comes down to how much [shoes] we put into the ’09 product offering, as well as our demand generation and my hope is that it is going to reflect the kinds of guidance numbers that we shared with you today for ’09.

Laura Lederman - William Blair

Thanks so much. So in other words, you don’t expect anything coming out of Peachtree or Sage that would change the shift in terms of market shares at all?

Brad D. Smith

I haven’t seen anything yet. What I would welcome is a whole bunch of other players coming into the market and stirring up the dust, just like they did a few years ago because the more people who come out with compelling offers, the more small business owners who are in a shoebox raise their head and think about looking for a option and we like our odds when that happens. So the more people we can get coming out into the market the better off the category is.

Laura Lederman - William Blair

Thank you.

Operator

Your next question comes from the line of Brent Thill of Citi.

Brent Thill - Citigroup

Just over the last three years, your operating margins have been hovering close to 28%. Your guidance implies modest operating margin improvement. Can you walk through how you are thinking about this trade-off of your comments about accelerating growth as the number one focus and how you look at the margin expansion near-term and then how much do you think there is long-term left in the model?

R. Neil Williams

I’ll talk to you about the math and then Brad can add some comments later about the longer term, how it fits in with the accelerated revenue strategy. As we said all along, our first focus is on growing revenue and that’s still the case. We’ve made some big investments, starting out in ’09 with some reallocation of resources to get those revenue products growing and we think as Brad mentioned in the call, we’ve made a great start on that but it is a multi-year effort.

You are seeing some margin improvement in ’09 because the second principle we have is that we will grow expenses slower than revenue, and ’08 was a unique year with some acquisitions and some investment situations there, so we think we are getting back more to normal in ’09, and certainly getting back to our operating principles for goal number one and goal number two.

You will see our G&A expenses are actually down year to year and going in the right direction as a percent of revenue. So I think we’ve got the right momentum there and our plan is to keep pushing those but in the order that we talked about them. Revenue growth is first and we want to be sure we are investing for sustained revenue growth in new products and offerings. And if we do that well and we focus on revenue dollars and we focus on expense dollars and those growing slower than revenue, I think we’ll be fine.

[Brad, as for the other things --]

Brad D. Smith

I would just put a bow around what Neil said by simply saying our number one focus is new customers and revenue dollars, and we also focused on profit, operating income dollars and not percent. But the good news is getting the scale and nature of our business as we accelerate the top line and we have good fiscal management on the bottom line, we can make that happen.

And I think over the long-term, we’ve talked at times that we will continue to see operating leverage expansion and I think you will see us move into the 30s.

Brent Thill - Citigroup

Okay, and just a quick follow-up on the technical side -- if you look at some of the build-out of some of these online services, there is certainly a bigger community that is coming into play that is building new applications that are creating faster [inaudible] of innovation for your customers. How do you view this next year in terms of opening up your platform to creating a broader online connected services community to build some of these new applications for you?

Brad D. Smith

Thank you for the question because we just announced a couple -- probably six weeks ago Quickbase with Adobe Flex. It’s a new developer platform that enables third-party software developers, in addition to our normal SDK that works with QuickBooks to be able to build hosted applications that work very well with QuickBooks, and we are embracing open. We are encouraging third-party developers to come in and build product, even products that compete directly with ours, and we’ll let the market choose.

So I think the short answer to your question is you see us moving more aggressively into that kind of space. We also have QuickBooks enterprise that works on Linux, and so we know that the world going forward is going to be much more of an open world and we have a large ecosystem that people can tap into and we are welcoming that.

Brent Thill - Citigroup

Thanks.

Operator

Your next question comes from the line of Gil Luria of Wedbush.

Gil Luria - Wedbush Morgan

How much of the QuickBooks little bit of acceleration is going to come from the lifecycle and then just people that bought in 2006 attached and needing to upgrade in 2009? 2006 I think was a particularly good year. Those people, you’ve probably gotten at least some of them to attach the payroll and payment and they would need a new QuickBooks platform. How much of that is the acceleration of QuickBooks?

Brad D. Smith

I think you called it -- the average cycle is every two to three years but it’s also hard to predict, and we’ve been pretty aggressive in the market as to how many of those have we already gotten to move in to a current version of QuickBooks. So we don’t see anything materially different in this coming year than we’ve seen in the past. I think it’s sort of the normal cycle we’ve gone through and what we are really banking on is a pretty compelling ’09 offering and the free and the demand generation things I talked about earlier, plus the fact that we are going to be adding some more connected services in addition to Homestead. I think those will be the real catalysts and not necessarily the upgrade cycle.

Gil Luria - Wedbush Morgan

Got it. And then as the transition from retail to online in a few of your product categories happens, it seems that you are getting some of your competitors to abandon the retail channel. I think Microsoft recently announced that it’s taking money off the shelves in the retail channel. Is there an incremental opportunity there, at the least within Quicken to gain a couple of points, even from your very high market share?

Brad D. Smith

You know, for Quicken and Money in retail, I think that we will get some opportunity but Quicken is a small piece of our overall company’s revenue. It’s our most recognized brand but it’s been reported in the all other category for years because it’s relatively small overall.

I like the bigger game in Quicken being some of the stuff we announced this past week with Intuit Labs, where we have Quicken Online and now we have Quicken Beam, which is currently in beta version but it’s a mobile application that taps into the power of Quicken.

I think it’s going to be much more of those opportunities going forward but we are certainly going to take advantage of anyone who still prefers software. We’re going to like the fact that Microsoft is not in retail anymore and we’ll capitalize on that to the extent that it drives some upside.

Gil Luria - Wedbush Morgan

Great. Thank you.

Operator

Your next question comes from the line of Michael Millman of Soleil Securities.

Michael Millman - Soleil Securities

Thank you. I guess a couple, or several questions -- on your tax guidance, what is your assumption on Block’s activity and free? Could you also talk about what you expect growth to be in selling and marketing? It looks like this year about doubled revenue. Maybe you can split out how much of that is marketing and if you will continue it. And you also had the 28% probably applies to R&D, and if you continue to do that.

And then maybe you can give us some idea of what in fact the economic model looks like in healthcare and whether the economic model in the international product is the same as in the U.S. Thank you.

Brad D. Smith

Okay, Michael, a couple of questions there, obviously, so I’ll to take them one at a time and answer them to the best of our ability today.

It’s hard to tell what Block is going to do. We’ve been in the market with them for years and I think we come up with multiple scenarios of what we think they might do but our number one driver is what we think is the most important for customers and what will give us the best position in the market. They’ve had a couple of statements in the market around the review of free and whether they thought it was a profitable strategy or not. We clearly have our point of view, so I don’t know if they will be free or not. But what I do know is the more people who get out there with aggressive offers, the more people we get to convert out of a tax store, and I think that’s going to be the challenge that Block is up against, because they have their tax stores and their software at times can compete with the [stores].

So at this point, we haven’t put a whole lot more into it than that. We’ve got a game plan we’re feeling pretty good about as we head into the next tax season.

The second question you had was around growth in sales and marketing and we haven’t at this point -- I’m not sure if that was regarding tax specifically, Michael. Let me ask you, was that regarding tax or was that regarding the company overall?

Michael Millman - Soleil Securities

That was regarding the total, and just on the Block, if you knew that Block was going to be aggressive this year in free, they were basically not in the market for free last year, would that change your outlook for your tax guidance and your tax spending?

R. Neil Williams

I think I can say that we assume that all of our competitors are going to be aggressive. I wouldn’t call out anyone specifically but I think in putting our plan together for ’09, we assume we are going to get good competition and aggressive competition. So I don’t know that your scenario would necessarily change our outlook.

If you look at the way we’ve allocated our resources for 2008 versus 2007, you can see a pretty nice shift from G&A up into research and development and selling and marketing. We have been cautious with the demand generation. We’ve kind of launched and learned and we’ve taken that in incremental steps, and I think that’s more of what you will see in 2009.

We don’t solve for percentages necessarily in categories. We focus on what works and try it and see what happens, the same way with R&D.

We have invested more in 2008 than in 2007 but there are a lot of other initiatives going on right now and that kind of ebbs and flows. So I think we are going to focus on things that generate revenue. That’s what we’ve talked about a lot. So to the extent that we prove demand generation works and does that, to the extent that we can have more compelling offerings through engineering and through R&D, we’ll do that but we’re not solving for a number or for percentage at the end of the day, other than to be sure that we get a good return for the dollars we invest. And as we mentioned earlier, you can see the dollars coming out of the general administrative category. So we kind of let the percentages solve for themselves and I’ll tell you on healthcare, your last question, I suppose, we are still very much in an experimental stage on that. We are still experimenting with pricing structures and different ways to monetize the offering. As Brad mentioned, we don’t have anything in our outlook that is material from revenue from the healthcare products yet and I think we’ll be working out monetization priorities as we go through the test and learning in 2009.

Brad D. Smith

And you also asked about global, and global is just simply premature at this point. We are going to be in market with some product experiments and we’ll learn more about what the right value [inaudible] is, and once what we know that, we’ll share that with you.

But I think [Neil mentioned] on the healthcare, as well as the questions around Block and others and what they may or may not have an impact on as we think about our own plans.

Michael Millman - Soleil Securities

Thank you.

Operator

Your final question comes from the line of Greg Smith of Merrill Lynch.

Greg Smith - Merrill Lynch

I don’t believe this has been asked but the 9% to 12% revenue growth guidance for FY09, what is that on purely an organic basis?

R. Neil Williams

It’s about 10%, Greg. It’s about two points coming from Homestead and Echo.

Greg Smith - Merrill Lynch

Okay, that makes sense. And then the financial institution segment guidance of 5% to 9% growth, having followed Digital Insight for a number of years, that seems pretty low. Is there anything unusual going on there -- the growth in bill payment users and just banking end users seemed okay. I’m just surprise the revenue growth is so low there.

Brad D. Smith

Actually, there’s not anything that’s materially different. What we are focused on is getting the ease of use of the existing platform to drive more people adopting online banking and bill pay. We are also looking and seeing what the impact will be of releasing FinanceWorks in October and I think right now, just given our current trajectory coming out of Q4, we feel pretty good and we are actually anticipating exiting at a very healthy double-digit rate coming out of Q4 fiscal year ’09. But right now, I think what we have in the plan is our best guidance for next year.

Greg Smith - Merrill Lynch

Okay, but is the underlying core business there? How is it performing relative to your expectations when you did that acquisition?

Brad D. Smith

Well, it’s performing better every day. It’s certainly not up to the standards that we would expect of ourselves. The sales pipeline remains very healthy. Retention rates are in the zip code of where they have been and we are clearly just focusing on execution and getting the FinanceWorks offering out and continuing to improve the ease of use of the existing product.

So there is nothing fundamentally broken in the Digital Insight business. This is just about building up momentum as we head into fiscal ’09 and then fiscal year ’10, we continue to increase the trajectory.

Greg Smith - Merrill Lynch

Okay, great. Thank you.

Operator

Gentlemen, would you like to proceed with any additional remarks?

Brad D. Smith

I just want to thank everybody again for joining us. We hope to see many of you at investor day on September 24th and with that, I want to wish everybody a great afternoon or great evening, depending upon your time zone.

Operator

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

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