Intuit Inc (INTU) — Q4 2017 Earnings Call Transcript

Thanks, Latif. Good afternoon and welcome to Intuit's fourth quarter fiscal 2017 conference call. I'm here with Brad Smith, our Chairman and CEO; and Neil Williams, our CFO. Before we start, 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 2016, 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 these remarks are presented on a non-GAAP basis. We've reconciled the comparable GAAP and non-GAAP numbers in today's press release. Unless otherwise noted, all growth rates refer to the current period versus the comparable prior year period and the business metrics and associated growth rates refer to worldwide business metrics. A copy of our prepared remarks and supplemental financial information will be available on our website after this call ends. With that, I'll turn the call over to Brad.

Alright, thanks Jerry and thanks to all of you for joining us. As you read in our press release today, we've announced a CFO succession plan. Neil has served as CFO since January 2008 and plans to step down at the end of January 2018. I'm pleased to share that Michelle Clatterbuck will assume the role of Chief Financial Officer on February 1, 2018. It has been a well-crafted succession plan that we will cover in a few minutes, but let's start with the business. We had an excellent fourth quarter and a strong finish to fiscal year 2017. Fourth quarter revenue grew 12% and full-year revenue grew 10%. We're encouraged by the accelerating momentum in small business, including continued strength in both our QuickBooks Online subscribers and online ecosystem revenue growth. We're also pleased with our results in both consumer and professional tax, which delivered at the high end of our expectations in a complicated tax season. Across the company, we continue to innovate and improve our product experiences to deliver meaningful benefits for our customers. For example, we improved the end-to-end experience for QBO customers, which resulted in a 22-point increase in our Net Promoter Score. We resolved important pain points for self-employed business operators, such as the ability to separate personal and business expenses, send invoices and receive payments, and track their mileage. This led to a quadrupling of our QuickBooks self-employed customer base. We expanded our SmartLook video chat capability to help our TurboTax Online customers answer that one nagging question that could cause them to abandon the product. Customers who use SmartLook rated their care experience nearly 20 points higher than those who did not. Our One Intuit Ecosystem has evolved into an active ecosystem, creating greater value for our customers while building new sources of competitive advantage for Intuit. Let me share just a couple of examples. Our new QBO matchmaking platform is connecting small businesses with the right accountant. We know that 89% of small businesses believe they're more successful when they work with an accountant and this year, 53% of our small business customers are now doing so, a 10-point increase versus last year. This has the potential to be a key driver of small business success and a catalyst for Intuit’s growth over the long term. We're helping accountants grow their practices, delivering three times more client leads than we did just one year ago. Our TurboTax and QuickBooks self-employed bundle is putting more money in our self-employed customers' pockets, eliminating work and making it incredibly simple to track and deduct business expenses. As a result, we're generating more than $4,300 in tax savings for self-employed customers, which is 8% of their income on average. We will share more about our plans to further strengthen and accelerate our One Intuit Ecosystem at our upcoming Investor Day in October. But now let’s talk about our fourth quarter and fiscal year 2017 results and we'll start with small business. We delivered another strong year with subscriber growth continuing at a rapid pace and online ecosystem revenue accelerating. We added over 870,000 QuickBooks Online customers in fiscal 2017, that's twice as many as we added in fiscal 2016. We finished the year with over 2.3 million customers, driving subscriber growth to 58%, up from 41% last year. We continue to deliver strong QBO growth in the U.S. and international markets. Our U.S. subscriber base grew 53% year-over-year to nearly 1.9 million subscribers, up from 40% growth last year. Outside the U.S., our subscriber base grew 75% year-over-year to over 500,000 subscribers, up from 45% growth last year. We've also seen our Net Promoter Scores improve in every country year-over-year, giving us confidence that our international growth formula is working. As a reminder, our playbook when entering a new market is to focus on product-market fit first, then lean heavily into marketing to drive subscriber growth. We continue to feel good about our position in Canada, the UK, and Australia, surpassing the 100,000 subscriber mark in all three countries this year. Our teams in France, Brazil, and India are working hard to reach product-market fit in their respective countries. We will share more on our progress in the coming quarters. Within QuickBooks Online, self-employed subscribers grew to approximately 390,000, up from 360,000 last quarter and 85,000 just one year ago. Our bundled self-employed offering in TurboTax contributed approximately 170,000 subscribers to this total. Summing it up, our momentum in QBO subscriber growth continues to drive top-line revenue, with online ecosystem revenue growth accelerating to 33%, up from 30% last quarter. We expect subscriber growth to continue north of 40% and we now expect online ecosystem revenue to grow more than 30% over the next few years, an increase from our previous guidance of 25% to 30%. Turning to tax, consumer tax revenue finished the year up 9% in a complex season defined by below-normal IRS returns growth and a highly competitive environment in the free category. We performed well with our paid customers driving our revenue growth this season. Our team is already hard at work reimagining our tax business and building the next wave of innovation to better serve our customers in both free and paid segments. There is no question there is still a ton of opportunity in this business, especially as we leverage technology to provide even more value to our customers. We are very excited as we look ahead to next season, and we'll share more with you when we see you at Investor Day. On the ProConnect side, revenue also finished the year at the top end of our guidance range. We continue to focus on multi-service accounting firms that do both books and taxes. This is in service to driving our accountants’ customer success and growing our small business ecosystem. Taking up the nose of the plane, let me share some context for where we're headed as a company. Over the past nine months, our senior leadership team has invested significant time completing an exploration to set the foundation for our next chapter of growth. The end result is the most comprehensive collection of market and customer insights we've ever amassed. This has led to a complete refresh of our company's game plan to win, from the company's mission all the way down to the metrics. Our One Intuit Ecosystem strategy will power the next chapter of growth. It capitalizes on our tens of millions of active customers and a vast amount of data that we steward on their behalf. When you match that data with our leading technology and machine learning capabilities, we can deliver deeply personalized experiences through a trusted open platform and create indispensable connections not only between people but also between products, in a way that is not easily matched by our rivals. As new participants enter this Intuit Ecosystem, the value increases for everyone, unleashing the power of many for the prosperity of one. In support of our refreshed strategy, we have made some deliberate decisions to target investments in several key areas during fiscal 2018. You will hear more about these investments from Neil in a minute. We expect these initiatives to further accelerate our long-term revenue growth. So with that said, let me hand it over to Neil to walk you through the financial details.

Thanks, Brad and good afternoon everyone. In the fourth quarter of fiscal 2017, we delivered revenue of $842 million, up 12% year-over-year. Our GAAP operating loss of $10 million versus a $56 million loss a year ago. Non-GAAP operating income of $78 million versus $36 million last year, GAAP diluted earnings per share of $0.09 versus a loss of $0.16 last year. Non-GAAP diluted earnings per share of $0.20, up from $0.08 last year. You'll note that our GAAP earnings per share includes a tax impact from the early adoption of the accounting standard update for share-based compensation. This added $0.13 to our GAAP earnings for the quarter and $0.28 for the full year. For full fiscal 2017, we delivered revenue of $5.2 billion, up 10% year-over-year, GAAP operating income of $1.4 billion, up 12% versus a year ago, non-GAAP operating income of $1.7 billion, also up 12% versus last year, GAAP diluted earnings per share of $3.72 versus $3.69 last year. As a reminder, our GAAP results in fiscal 2016 included a net gain of $0.65 per share from the sale of discontinued operations, and our non-GAAP diluted earnings per share of $4.41, up from $3.78 last year for an increase of 17%. Turning to the business segments, total small business revenue grew 14% for the quarter and 13% for the year. QuickBooks Online subscriber growth remains strong and we exceeded our guidance for the quarter and the full year, reaching 2,383,000 subscribers, up 58% year-over-year. TurboTax was a significant challenge for QuickBooks self-employed for the year, accounting for 11 points of QBO subscriber growth, a great example of the power of the One Intuit Ecosystem that Brad just mentioned. Small business online ecosystem revenue accelerated to 33% in the fourth quarter and grew 30% for the year. This is above the high end of the 25% to 30% growth range we’ve discussed and is driven by continued growth of online accounting revenue. Our online payroll and payments businesses remain healthy, growing revenue 21% and 12% for the year respectively. As Brad mentioned, our outlook over the next few years calls for over 40% growth in QBO subscribers, we expect online ecosystem revenue to grow better than 30%, and our subscriber growth is on top of the 58% increase we've posted in fiscal 2017, demonstrating the confidence we have in our strategy. Our small business desktop ecosystem total revenue grew 8% for the year despite desktop units being down 8%. For fiscal 2018, we expect QuickBooks desktop units to decline low double-digits and desktop ecosystem revenue to be up mid-single digits. That revenue growth is driven by continued strength in our QuickBooks enterprise business. Consumer tax revenue was up 9% for the year, reflecting two points of unit growth, and ProConnect revenue grew 2% for the year. Turning to our financial principles, we continue to take a disciplined approach to capital management. With approximately $800 million in cash and investments on our balance sheet, our first priority is investing for customer growth. Our goal is to drive double-digit revenue growth and grow operating income faster than revenue. We return cash that we can invest profitably in the business to shareholders via both share repurchases and dividends. We repurchased over $360 million of shares in the fourth quarter and over $830 million for the year. Approximately $1.5 billion remains on our authorization. We returned approximately 85% of our free cash flow to shareholders last year and more than 100% over the last five years. That level is not sustainable, so you'll notice the share count guidance for FY18 reflects a slightly more moderate buyback program than in recent years. We expect to be in the market each quarter and will continue to keep an eye on investment alternatives and overall market conditions as we manage our program. In fiscal 2018, we expect to pay a cash dividend of $1.56 per share with the first dividend of $0.39 per share payable on October 18, 2017. This represents a 15% increase versus last year. As Brad mentioned, we're reallocating over 10% of our annual spend to strengthen our investment in several key priorities over the next three years including increasing our capability in artificial intelligence and machine learning, accelerating our transition to Amazon Web Services, enhancing our brand and marketing effectiveness globally, and enabling our engineering organization to increase effectiveness and efficiency. We expect these initiatives to set us up to deliver strong growth in the coming years. Even with these investments, we expect our operating margin to expand modestly in fiscal 2018. Our full year fiscal 2018 guidance includes QBO subscribers of 3.275 million to 3.375 million, total company revenue growth of 9% to 11%, GAAP earnings per share of $4 to $4.10 per share, and non-GAAP earnings per share of $4.90 to $5. Our Q1 fiscal 2018 guidance includes revenue growth of 8% to 11%, a GAAP loss per share of $0.17 to $0.19, and non-GAAP earnings per share of $0.03 to $0.05. You can find our Q1 and fiscal 2018 guidance details in our press release and on our factsheet. We are making a few changes to our segment reporting in fiscal 2018. Our principle is to align our segments with our core customers and business partners. We're creating a consumer segment by combining our consumer ecosystem offering which includes our Mint business with the Consumer Tax segment. We are renaming the Small Business segment as Small Business & Self-Employed and renaming ProConnect as the Strategic Partner segment. This segment will manage our professional tax offerings while also focusing on partners instrumental to the success of our ecosystem. All these changes are reflected on our factsheet. On a personal note, over the last several years it has been a priority for me and my team to think about our long-term strategy and that includes finding and nurturing awesome talent. As we announced today, I'll be stepping down in January. I'm really confident in Michelle. She thinks and acts like a Chief Operating Officer and demonstrates a unique blend of partnering and influencing skills that are backed by deep domain expertise. She brings credibility as a strategic thinker who connects dots that others often don't see. I look forward to working with her over the next five months to ensure a smooth transition. And with that I'll turn it back to Brad to close.

Thank you, Neil. I know our CFO transition isn’t official until February, but I wanted to take this moment to express my sincere admiration and appreciation for all that you've contributed over the past decade. Our financial foundation has never been stronger. We successfully navigated a business model transition, we're posting double-digit revenue growth, expanding margins, and we have a strong investment grade rating. Your commitment to recruiting and developing top talent has created a deep bench of strong financial leaders, which makes a seamless transition of our leadership team possible. Michelle has risen to every occasion at every step along the journey, consistently delivering outstanding performance across multiple strategic leadership roles and multiple business units over the past 14 years. We're excited to have her succeed you as our next CFO in February. So with that said, let me bring our introductory comments to a close. It's another strong year in the books for Intuit reflecting increasing momentum in our QuickBooks Online ecosystem and strength in our tax businesses. I am proud of the innovations that our team continued to deliver every day. We are looking forward to sharing more with you in October. And with that, we will open it up to you to hear what's on your mind. Latif.

Hey guys, thanks for taking my questions. Congrats on a strong year and nice job on the quarter. And Neil, it has been a pleasure working with you; congrats on the retirement. Brad, if I may, just on the small business side, it looks like the TurboTax SE promotion was highly successful in this tax season and actually last quarter as well. I was wondering if you could maybe tell us about some of the other cross-promotional activity that you plan going forward, and then also if you could maybe tell us if there's any noticeable difference in the retention of the TurboTax SE versus the standalone SE subscribers so far?

Thank you, Michael. Let me start by saying this was an incredibly inspiring year to see the power of our ecosystem. It is not just connecting products like QuickBooks self-employed and TurboTax self-employed but it's connecting people. I gave the example of the power of connecting a small business with an accountant, and now accountants are getting three times as many leads as they did last year and we have small businesses increasing their odds of success by working with accountants more often. So that’s the power of bringing people together. On the self-employed side, we've had a very good year, 170,000 active subscribers. But we know in the TurboTax base there are roughly 3 million of our filers who have Schedule C filing and they are self-employed customers. So we have a lot of upside opportunity there to continue to accelerate that growth. We also had success last year in connecting our credit score in Mint with TurboTax to begin moving beyond just the tax filing needs of a consumer and begin thinking about their entire financial life. That's why we are moving these two businesses together and having one consumer-backed business unit now that Neil just mentioned. This was a great example. We have the matchmaking platform; we basically took QuickBooks Online for accountants, added some practice management capabilities, and enabled the ability for a small business looking for an accountant to connect with one that meets their needs. Those were just a few examples, and we had many more, and we plan to showcase those at our October Investor Day. We're excited to see this ecosystem creating value for multiple parties.

Thanks for taking my questions, appreciate it.

Welcome.

Sure, Neil, are you sure you want to miss the tax rush of April 2017 and not being around for the 11th year to watch the units?

You know Kash, it’s going to be a big miss, but I’ll do my best to get through it.

That was a facetious question. Well, congratulations, it's been great working with you over the past 10 years. Brad, sorry you get the serious question. It's really impressive to see the QBO SE business take a dimension of its own. What's your best guess/prediction as to how this installed base of customers QBO SE behaves differently than the typical QBO customer? In other words, say you've had a legacy set of systems that QBO typical QBO customers desktop customers have been tethered to. Do you think this new customer base has a completely different demographic, different business profile and therefore, are there other ways in which Intuit could monetize this exciting new dimension of the business by adding other value-added services and products that you previously had not envisioned in your typical QBO customer base as far as their behavior is concerned? Thank you so much. My only question.

Thank you, Kash, and I think I'd rather answer Neil’s question. I’ll take that one and by the way it gives me a chance to double back to Michael. What it means to leave off a piece of Michael's question, which was: do we see any sort of behaviors and retention around QuickBooks self-employed and TurboTax self-employed? The answer is we're still in the early phases of that, but it's performing exactly as we had hoped and actually slightly more positively. So we’ll talk more about that at Investor Day. Michael, and I apologize for not closing that out. Kash, to your point, I've got to tell you, the self-employed segment is one of the more exciting things I’ve seen in my 15 years here. We talk about a total addressable market of 800 million small businesses around the world, 750 million of those qualify as self-employed or businesses of one. Today, this is about 34% of the workforce around the globe; it's going to be 43% in the next handful of years, and it's a very real phenomenon. And what makes it exciting in terms of their behaviors and some of the differences that you asked about is not just the numbers, but their needs. When you get underneath what keeps a self-employed business operator awake at night, the first is the fluctuation of income. It is feast or famine. They may have lots of rides in Uber and then a period of time where there are no rides, or if they're working for TaskRabbit or DoorDash, lots of deliveries and then not a lot of deliveries, and they have to find a way to even out that cash flow so that they can cover their necessities and live a daily life. The other thing is finding the next gig. They often work two or three of these different jobs. So, sometimes they drive, and sometimes they deliver, and sometimes they'll actually do tasks. We're bringing a combination of matchmaking capabilities, the ability for you to separate your personal and business expenses, the ability for you to predict your income and what you need to have for a certain bill, and we're trying to help them manage their lives that way. So there are a lot of unique things that we have assets that we can apply in different ways that we think will help solve the most important problems. I love where you finished your question, which is other services we could sell. We got used to the razor and razor blade model in QBO. That model also applies to self-employed but in different products. It's not going to be payroll and payment, but it could be TurboTax, the ability to manage your finances, and then connect to taxes, which is what we proved this year. We have added payments capability, the ability to send an invoice, track it like a Domino's pizza, and then get paid electronically through your mobile phone. So we have additional services, but I would say, ARPC for us isn’t the primary focus in self-employed. It is getting all 750 million, even if it's $10 a month; that is a beautiful business, and we're super excited about the self-employed opportunity. I hope I have covered all your aspects, and Michael, I don’t know if I will get a jail-free card on the one I went back and answered for you.

Great job Brad, congrats Neil, we'll miss you. Thanks so much.

Thanks Kash. Don't make me start missing him right now. He has got five months left.

Thank you. I'm curious about the tax situation. It seems that your growth has focused on unit sales, which were somewhat disappointing in fiscal 2017. However, you've provided a strong tax guidance for fiscal 2018. Could you give us any preliminary insights on how you see the 7% to 9% coming together as we head into 2018?

Sure Walter, let me start first with our guiding principle that remains we want to expand the category, grow the number of people using our services, which are our customers, and then look for ways to translate that into revenue and profit growth. These are our priorities. At the end of the day this year, we didn't see that play out. We saw customer growth being a little more tepid at 2%, but we did get strong monetization and were able to deliver above the guidance we provided. I'm proud of the team. I think we left this year encouraged by two things: the way we were able to achieve our financial results and also some lessons learned in how we can accelerate both category and customer growth as we look ahead. As you know, it's a hyper-competitive tax category, so I don't want to unveil too much now, but I will give you three major buckets, which we discussed last year. One is the ability to continue to accelerate the do-it-yourself category and compete more effectively in the free segment. The second is the opportunity to begin transforming the assisted tax category, bringing the best of technology with human assistance together through our SmartLook capabilities. The third is to begin expanding beyond tax and solving additional financial problems that these consumers are wrestling with, an example this past year was credit score, and now with Mint and other assets combined, we see those as opportunities and catalysts for growth as well. That's what gave us the confidence to be able to give you the outlook of 7% to 9% growth, which is an acceleration from this past season.

And then Neil just on the expense front, it sounds like you were almost calling out some investments that you would make this year that were kind of unusual or ones that you needed to make. Is that the case or how should we think about the level of incremental OPEX that you're guiding for in 2018 versus how you would kind of steady state run the business?

The four areas I mentioned stem from the strategic reassessment that Brad talked about at the start of the call. As we plan for the next few years, we recognize the need to invest more in artificial intelligence, machine learning, and to enhance the effectiveness and efficiency of our engineering investments, which are significant. We're also focusing on accelerating our transition to AWS and improving our marketing effectiveness in the U.S. and globally. These are areas where we believe we may have under-invested in the past, so we're making a concerted effort in 2018 and beyond to enhance our focus in these areas, with clear benefits expected for our products and our customers. This will be a major aspect of our strategy moving forward.

Okay, great. Thank you.

Hi, this is Sanjit Singh for Keith Weiss. I guess first to start off on Neil, sad to see you go. It's been a pleasure working with you, but best of luck in retirement. In terms of questions to start off, I just had a quick clarification on the tax guidance. Embedded in your tax guidance, to what extent are you looking at an improvement in terms of overall filing growth? I understand that it was a little bit of a weird year in terms of overall tax filing growth; are you assuming a sort of return to normalcy going into next year?

Yes, this is Brad. First of all, it was an unusual year this year, and we'll have to wait until October to see where it ultimately finishes up. What we are seeing across the industry is a little bit of an uptick in extension filing, so whether this year ends up being flat or slightly up, it is still more like 2013 and not like a typical cycle. Right now, in our plan to answer your question specifically, we're in that 0% to 1% range, and sometimes the industry is more bullish than that and they'll say it's 1% to 1.5% or 1% to 2%, but we're in the 0% to 1%. That's what we factored in, and that’s the model we’re using for the guidance we just gave.

Got it. I have a follow-up question regarding margins, both for the short term looking into next year and also slightly longer-term. As we anticipate a slight expansion in margins next year, what are the key factors driving this change? What opportunities do you see to enhance margins next year? Additionally, considering the significant potential of QuickBooks self-employed, how does this factor into your long-term margin strategy?

I'll take this one. Just a reminder, our first priority is always to grow our customer base and our top-line revenue. So that's our first financial principle and always the first thing we think about. We're excited and encouraged by the growth we saw in 2017 and some prospects we see going forward. This encouraged us to lean in and invest more to fund and accelerate some of this growth. I think our ability to do that, the ability to put money into the areas I just mentioned in a concentrated way and still deliver some margin expansion for 2018 is just tremendous, and it shows our commitment to our second financial principle of growing our operating income faster than our top-line revenue. How the margins play out in future years will really be determined on the investment opportunities that we see at the time, so I really can't comment on that. But I'm really delighted with where we ended up in the margin guidance for 2018 to drive the type of investment that we're seeing in top-line growth and still deliver some good margin expansion. I think as I’m pleased with that.

Understood, and congrats on a nice fiscal year.

Thank you.

Thank you very much, and my congrats and Neil you’ll be missed, but looking forward to seeing you at the Analyst Day in a month or so.

Thanks.

I have a couple of questions regarding the consumer tax outlook. You mentioned three key factors that you believe will drive growth, and I want to ask about two specific points. First, is SmartLook now increasing the number of users directed to TurboTax, and if so, do these users represent higher value customers compared to the typical 1040 filers that often use assisted services? That's my first question. Secondly, regarding additional services, you noted that 20% of the ARPU growth this year was from offerings like fraud protection and audit insurance. Is this segment of services expanding, and will it continue to contribute to increased growth in consumer tax? Thank you.

Thank you, Ross. I’d like to begin by discussing transform assisted. Currently, around 40% of the market utilizes a DIY service while approximately 60% rely on assisted methods, including stores and CPAs. When considering where customers are spending their money, the majority is directed towards assisted services, indicating a significant value opportunity. Many customers could potentially benefit from a DIY solution, yet they often have lingering questions that SmartLook effectively addresses, helping them transition to DIY. This year, we observed three key trends with SmartLook: first, a greater proportion of new customers came from those who previously used an assisted method. This indicates that we are indeed attracting individuals to the DIY category through SmartLook. Second, customers who utilized SmartLook reported a customer satisfaction rating that was 20 points higher than those who did not engage with it. We anticipate that this will lead to fewer customers feeling the need to switch from a DIY solution to an assisted one in the future, thereby improving retention. While we believe we are in the early stages of transform assisted, we have enough evidence to suggest that this is a direction we will explore aggressively, and we had a successful year with it. Regarding our value-added services, we understand that customers are willing to pay for valuable offerings. Though certain areas of the tax market have been provided for free, we have found that when we address additional customer needs, there is a willingness to pay for those services. You've mentioned a few in your question, and we are investigating more. Merging the Mint and TurboTax businesses allows us to consider the broader financial requirements of consumers. Without going into extensive detail, we do plan to introduce aspects of this value proposition that are free while also identifying opportunities for monetization. This is why we anticipate strong growth in both our customer base and revenue.

That's helpful, thank you. And then one follow-up just quickly on the investments in fiscal 2018; there were four buckets there that Neil mentioned. I just wondered on enhanced branding and marketing, to what extent you're going to lean into acquiring more free users in TurboTax or look to sort of up the ante on absolute zero or whatever marketing plan you have for the forthcoming year?

Yeah, I would say two things: one is that enhanced brand and marketing will be across the ecosystem. So we have services from QuickBooks Online to self-employed to global markets we're opening up to obviously TurboTax. Think about that as an aggregate bucket because we've learned if we get one growing, we can accelerate the growth of the other. I want to hold off if you don't mind on revealing too much about what we plan to do or not do with absolutely zero at this point, given the competitive nature of the market. But suffice it to say that just as we always do, we came out with some lessons learned, and we're excited to get back in the game next year. So we'll share a little bit more closer to the season.

Thanks so much, and congrats again.

Thank you.

Hi, good afternoon. Thanks for taking my question. Neil, congrats on your retirement; I hope to see you next in a few weeks at Analyst Day. Brad, the question on the sustained 40% unit growth for QuickBooks Online, how much growth are you expecting in the self-employed and international as part of the 40%?

Yes, Nandan, that will be essential. We still see significant potential in the U.S. There are many small businesses here that continue to use Excel spreadsheets and shoeboxes, making this a key area for growth in the U.S., whether it's in the self-employed segment or what we used to consider core QuickBooks Online. We now view that as part of the QuickBooks Online lineup similar to TurboTax's basic, deluxe, and premier versions; we intend to implement a similar structure with QuickBooks Online. As we enter new markets, we are experiencing strong growth in the UK, Canada, and Australia. We are still finalizing our approach to achieve product-market fit in India, France, and Brazil, which will contribute to our unit growth over time. However, we have not yet disclosed the percentage of our growth that will come from these individual segments. Instead, we want you to consider our overall subscriber growth exceeding 40% and ecosystem revenue growth above 30%, which is an increase from our previous guidance of 25% to 30%. We will continue to update you at Investor Day regarding customer acquisition profitability, aiming for a lifetime value of over 3, which we are currently exceeding across self-employed, new markets, and core U.S. operations. These three factors should assure you that we are building a healthy and profitable business.

Thank you. And a quick follow-up on QuickBooks Enterprise; you mentioned that you're expecting units to decline but revenue to be up slightly. How much impact are you seeing from consolidation in the market there, specifically with Sage entering the U.S. market with their purchase of Intact? Is there any pressure to move to a cloud-based solution in the enterprise family?

Thank you for the question because it gives us a chance to clarify something that I think we may have created a misperception. When we said that our QuickBooks desktop units will be declining, that includes our core QuickBooks, not just Enterprise. So we have QuickBooks Pro, QuickBooks Premier, and then QuickBooks Enterprise. The Enterprise category actually isn’t declining in units; it continues to grow, and it tends to be the low-end disruptor for that mid-market space where we're about 30% cheaper than the names you just listed, and our product and our Net Promoter Score tend to be better than those alternatives. So what we're saying is even though we have a decline in overall desktop units, as more people now opt for the cloud with QBO or they even migrate over to QBO, we still have a very healthy and growing QuickBooks Enterprise franchise that's growing both customers and market share, and it's growing revenue, and that's what's keeping the total desktop revenue ecosystem slightly positive.

Thank you.

You're welcome. Thank you for the question.

Thanks, good afternoon. Neil, it's been a real pleasure; congratulations to you and to Michelle. My question is on the new investment and just a feel for timing. Is this a multi-year thing, or are these four initiatives going to be in this single year? You mentioned EBIT margin will expand, then you're going to rein in on share repurchases. Is that a one-year thing or a multi-year thing? Just a general gist of the question, how are you going to approach it? Thanks.

The increased investments, Scott, are really multi-year investments. I wouldn't think of them as being incremental increases every year, but I think our commitment is to do more things—fewer things really, really well—and to really start and complete some projects that have the most impact. So I would think of it as clearly a multi-year assignment. On the share repurchase buyback, I wouldn't overreact to that. If you look at what we've guided around our share count, the 15% dividend increase, we're still going to be returning roughly 70% of our free cash flow through share buybacks and through dividend increases even at the low end. So we'll see how the market plays out and what other investment opportunities we have. But as I said, I think the adjustment in that program is going to be pretty modest. You think about 85% return this year in 2017 and probably something in low 70s for 2018. So it's going to be a pretty modest adjustment there.

Great, thanks. And just as a follow-up on comments, Brad or Neil, on seasonality for the upcoming tax season. I know it's early yet, but we have the slow start this past year and IRS broad prevention. Just wondering what you're hearing at this point in the summer from the IRS and what you think we may expect. And then as part of that prior question on your enhanced marketing spend, Brad, you said it was across the ecosystem; just curious how that might impact marketing in spend specifically in the TurboTax category?

Yes Scott, it’s still really early to anticipate what's going to happen. If you just look at some of the leading indicators, Congress is still trying to debate whether there will or won't be changes to tax law. You've got a transition as a commissioner at the IRS in the fall. Obviously, you have new leadership stepping into some of our competitors' roles, and so I think at the end of the day there will be a fast and furious race to get everything done and ready for tax season. We're anticipating that we're agile; we're able to react; we've had quite a few years of doing it. The other thing we do know is human nature; as technology makes it easier, the last thing we want to think about is falling taxes that people continue to push later and later into the season. So I believe we'll continue to deal with those kinds of phenomena. In terms of the marketing stuff, we don't want to talk about specifics around what we're going to increase any focus on in any particular product. What we are going to do, as Neil said, as we reallocated dollars, now that we see a healthy LTV to tax, we see our Net Promoter Score really improving. I mentioned the QuickBooks Online at 22 points year-over-year, and anytime we see that, we say now's a good time to step on the accelerator and build category awareness and get our products out there. So I don't want to comment on what we're going to do with TurboTax other than to say we're excited for the whistle to blow and the new season to start.

Great, thanks.

Yeah, thanks. I want to circle back to the consumer tax and some of the discussion around unit volumes. Can you give us a sense of what you saw in terms of maybe some sign shifts at the low end versus the high end, and how does that play into your strategy for the upcoming tax year?

Yes, Sterling, we will elaborate more on that at Investor Day. We aim to provide detailed insights without revealing too much confidential information. Overall, we approximately maintained our market share this year. Given the complexity of the tax season, where total IRS returns were not robust and we faced new and intense competition, you could argue that maintaining our share isn't too disappointing. However, we are always striving to grow our market share by at least one percentage point each year, so we find the outcome disappointing. We have learned valuable lessons from this experience. We've been through various cycles, and if I recall 2013, we had a 3% increase in units and a 4% rise in revenue. After that year, we reviewed our performance and the following year, we achieved a 9% increase in units and a 7% increase in revenue. We have reflected on what excited us, what we could have improved upon, and how we plan to move forward. We will share more details as we approach the tax season. For now, I can confirm that we maintained our share; we performed better in paid offerings than free ones; and we have learned significant lessons on how to approach this year differently.

And then one follow-up on QBO; given the increased focus here on SE, does it change how the inhibition engine around QBO works? In other words, where you're investing more of the resources from a development effort?

Yes, I want to make sure that I have not left a false perception; when I say increased focus on SE, that's not away from QBO. QBO has a ton of headroom, and it was QBO that improved its Net Promoter Score 22 points year-over-year. That business is really accelerating. QBSE is incremental on top of that. It was a category that we used to over-serve with QBO; they don't need full accounting. All they need is separating business and personal expenses, the ability to send that into a tax return or an accountant, and then be able to track an invoice and get paid. We have the right offering for self-employed, and we have the right offering for QBO. So I would just simply say that today we feel like it's an 'and', not an 'or', and there isn't going to be any massive shift away from QBO to go after QBSE.

That makes sense. Just lastly, Neil, congratulations. I am hoping that the Board presents you with a brand new Corvette and sends you off right.

Thank you Sterling, it's a great idea.

Yes, first congratulations, Neil, and good luck. Brad, I was very interested in something you said in your later remarks about QBO growing 40% as a goal for apparently a longer period. As you get to these big numbers, you're starting to add as many units as you used to have a couple of years ago. Could you talk a little bit about how long you can keep doing that?

Yeah Jim, I know there's always a double-edged sword when you get sort of a guiding principle like that. For us, it is subscribers at 40% plus and online ecosystem revenue of 30% plus, but we really are early days here. The shift of the cloud has put all the decisions back up for consideration. I think I've shared in prior quarters that in 2005, we saw a tipping point where the number of people in TurboTax leaning towards the cloud was 50-50 versus desktop. You fast forward just a couple of years and it became 90-10 for TurboTax, cloud versus desktop. Two years ago, we hit that 50-50 tipping point with QuickBooks Online versus desktop when it came to new users, that number is now 80-20 leaning to the cloud. As you think about more people waiting for the cloud and more countries we can serve, and you throw in SE on top of that, which we couldn't even go after in the past, we don't see in the near-term, the next several years and need to back off of the 40%. But if we do, we will be the very first to come out and change the expectations. But today, as the law of large numbers, we've got 800 million prospects and we currently have 2.3 million existing customers, and we think there's plenty of room to grow.

Great. And we haven't talked about acquisitions in a while, so I thought I would ask: are acquisitions part of your investment approach in terms of maybe buying in some technology or talent?

Hey Jim, they are. Typically, as you just suggested, they are technologies or products or features that enable us to fill out a roadmap that will help us get to market faster for their talent. When Neil mentioned artificial intelligence and machine learning as one of the four areas we're investing in, you can think of that being as much about talent acquisition as it is about the algorithms and capabilities we might buy in a product. We are using M&A, it gets held to the same hurdles as everything else, the 15% plus return over a five-year period. You really won't see any deviation from that as we look ahead.

Great, thanks guys.

Hey, good afternoon, Brad. I wanted to ask you a little bit about what you said about the tax business transforming the assisted side. I'm wondering, as you move up the ladder, what kind of impact do you think that has on the tax segment from a revenue perspective and a margin perspective?

Yeah Kartik, I would say a couple of things. One is we believe there's a lot more revenue opportunity to be captured there. We believe with the assets we bring and the accounting relationships we already have, and then a platform or technology that matches a consumer who needs tax filing needs with a pro who may be willing to lean on that platform and help get those needs taken care of, we think we have a lot of opportunities for growth on the revenue side. We haven't provided any guidance around revenue or margin expansion beyond next year. When we get to Investor Day, we often share here's what the outlook is, and you can think about small business and tax. We’ll talk more then, but right now our guidance is 7% to 9% for next year, which is a healthy year for TurboTax, coming off of last year's guidance which was 6% to 8%.

And then maybe Brad, you know you talked about anticipating about 0% to 1% growth in the overall tax market. What do you anticipate for DIY? What kind of a difference would you anticipate the DIY category will grow versus the total category?

Yeah, I think there is a continuing trend that's gone on for more than a decade that that category DIY is secularly advantaged. As people have grown up with technology and technology enables you to do some magical things, more and more people are choosing to do their taxes using software, whether on a PC or a mobile phone. As you start to introduce concepts like SmartLook—the ability to have a live video chat with a pro while doing your taxes on a phone or computer—that's only going to expand the DIY category. Historically, it's been a 3% to 5% sort of category growth, and at this point, we haven’t deviated from that outlook. This year, of course, was a crazy year across the board for every category, and we didn't quite see that growth like we would have expected. But we don't think this year is predictive of the future. If you look back over the last 10, you'll see that those numbers are pretty well supported.

Thanks, Brad; I appreciate it.

Alright, take care, Kartik.

Thanks for taking my questions, and all the best to you, Neil. From me as well, Brad, it seems like around AI there is an increased urgency from your side, and I guess I see that from the market as well. Can you talk a little bit about the impact that the whole AI and machine learning could have on your business? I mean, it seems like the whole world is going to get reshaped here. I'm just thinking about how that will play out for Intuit, and I know you probably talk a little bit more on the Analyst Day? Thank you.

Yeah, thank you, Raimo. You’re right; we're at this precipice where all this is a massive amount of data, and then the ability to match it with the processing power, data storage, and smart algorithms allows you to do some magical things for customers. We don't kid ourselves; we know the categories we're in are required but not desired. People don’t wake up excited about accounting, paying their taxes, or paying their utility bill. We have three benefits that our customers expect of our products: more money in their pocket with little to no work and complete self-confidence that they didn't mess anything up in the process. When you think about artificial intelligence, it is uniquely suited to solve those problems. It can help you by looking at your characteristics, finding better deals, whether small business loans or lower credit card fees; it can help you get rid of the questions that you would have to answer in TurboTax or anything in accounting so you literally don't have to think about it, so there's no work; and it can double-check your work for you to take the human being and match it with a computer so you have complete confidence that you didn't mess anything up. We believe this is the core of our strategy going forward, and we're not at a standing start. We shared before we have over 100 patents filed, and we have over 30 applications in the market. But we're ramping this up, and we think it's going to be a big opportunity in the future.

Perfect. And one quick follow-up: on QBO, you obviously saw, in terms of unit growth, a nice step-up this year; and you guided for unit numbers for next year, which is kind of slowing down the growth a little bit. What are the puts and takes? Because obviously, you have greater scale, like we discussed a couple of questions before, and what are the other factors we should think about there? Thank you.

Yeah, and you know we were coming off of a really strong year this year, as you mentioned. It was our first year of being able to take advantage of new countries catching fire, like the UK, Canada, and Australia. We had our first year with TurboTax self-employed bundle, which has brought 170,000 units over into QuickBooks Online to the self-employed product. We're going to have some comparison growth overs. When we gave our guidance for this year, it's still that 40% plus number. I expect coming out of the gates we are probably going to see some more favorable numbers because we are going to have some of those things to compare against in the income tax season. We're going to have to grow over a pretty good year this year. But that's not to say we're out of gas and tax. As I mentioned, 170,000 of them are active, and there are 3 million of them in the TurboTax base. So we plan to not make that an issue, but that's why our guidance right now is in that 37% to 42% range. That is not a ceiling for us. We simply think we have some growing to do, and we’re going to continue to learn how we can keep this accelerator going.

Lovely, thank you; congratulations.

Thank you.

So following up on what you discussed a couple of questions on tax. One is over the last three years, what's the number of distinct visitors that you had on tax? And kind of related to that, you've been talking without saying just the word disruptive. But in terms of tax, which market share does it translate into? Disruptive, and then I have another question?

Okay, Michael, I'm in the clarification on the second; on the first one around the number of unique visitors, we had a slide that we put in our Investor Day in the fall, and it has fiscal year 15 and fiscal year 16. We haven't yet released 17; we'll do that in the fall when we come back together in October. We had 89 million unique visitors that logged in fiscal year 15; it went to 92 million in fiscal year 16, and we'll talk more about what we saw when we get together in October for 17. So I say a very large population of people that come to TurboTax.com each year. Now could you help me with your second question around disruptive?

Disruptive means taking that number and increasing conversion, so I'm not sure what conversion is now, but maybe you can give us an idea, ask in a different way of how much you can increase conversion and what that would mean in terms of how many returns you could be doing?

Okay. I think it will be straightforward for us to discuss this in October, and we'll aim to clarify how we move users from being unique visitors to trying the product, and eventually converting them into full-time users. At a high level, about 155 million people are filing their taxes; last year, 92 million visited TurboTax, resulting in approximately 35 million who filed with TurboTax. When we include our Pro segment, that number rises to about 55 to 60 million across both products. We believe that with SmartLook and enhancements in TurboTax, we can cater to a significantly larger portion of that over 150 million population than we currently do. While we aim to transform the industry, I wouldn't necessarily describe it as disruptive in the traditional sense as we are collaborating with accountants who provide expert services. However, we do intend to challenge our competitors by using more advanced technology at a lower cost to customers, and we are committed to demonstrating this capability.

This is Shannon for Jesse. On the small business side, what are your expectations for ARPU trajectory in 2018? I understand the subscriber base is still growing very strongly globally, including self-employment, which would pressure ARPU, but I think it'd be helpful to get your view on the puts and takes there and potential upside drivers? And also a quick follow-up for Neil: are there any updates you can share at this time on ASC606? Thank you.

Alright, let me take the first one, and I’ll hand it to Neil for the accounting treatment. On ARPU, as you know, we have talked about this. It's a mix thing; on an apple-to-apple basis, we continue to see opportunities to improve the revenue per customer for self-employed, the revenue per customer outside the U.S., and the revenue per customer for the QBO customers in the U.S. When you put it all together, you see that ARPU number looking like it's going down because we're growing fast in the self-employed segment and growing quickly outside the U.S. But for us, ARPU is not what we focus on. What we ask everybody to focus on is ecosystem revenue growing faster than 30. It was just 90 days ago that we used to guide 25 to 30, and so it's getting healthier and healthier. Our lifetime value to tax continues to provide an opportunity for us to get those customers efficiently. We’ll talk a little bit more, Neil often does this, we will do it at Investor Day; we will show a chart that says ARPU overall by product line, which direction is it moving. I would say when you put it into the mix, the best thing to focus on would be to focus on revenue at the ecosystem level growing faster than 30. Neil you want to take the second?

The headline ASC606 is that it is not going to have a significant impact on our results over the next few years. We may see some movement in the quarters, and so our quarterization may change a little bit on our tax products, but at a total company level and at the full year level, it's not going to have a significant impact on our results.

Thank you.

Great, thanks very much. Neil, just real quickly with the push to AWS, does that longer term change the CAPEX requirements of the business? And sort of as a corollary to that, does it impact the gross margin percentage looking forward? Thanks.

Yeah Brad, the primary reason we're so eager to move to AWS is really to enable developer productivity. It enables us to get things tested and get features out to market faster. It's a big component of improving the effectiveness and efficiency of our developers. That said, you'll notice that there is some improvement or decrease in our CAPEX spending in 2017 versus 2016 and 2018 versus 2017, so there's certainly an impact there. I frankly don't think the impact on the gross margin is going to be huge. But it's certainly going to have an impact, but the bigger driver above all is to try to get more efficiency and effectiveness out of our R&D dollars. That's where you'll see some big improvement in getting products and getting things to market faster.

Great, thanks very much.

Yes Latif, thank you. First of all, we want to thank everybody for the questions today. We obviously covered a lot of territory, not the least of which was the news that both Neil and Michelle have announced, and we're excited for both of them. If you take anything away from the call, what I hope you hear from Neil and myself today is we're pleased with our results for fiscal year 2017. We are increasingly encouraged by the momentum that we are carrying into fiscal year 2018. We are looking forward to seeing you at our Investor Day where we will share more about our refreshed mission and our strategy and how all these pieces come together. Until then, we hope you have a great remainder of the summer. Thanks everybody.