Intuit Inc (INTU) — Q4 2018 Earnings Call Transcript

Thanks, Latif. Good afternoon. And welcome to Intuit’s fourth quarter fiscal 2018 conference call. I am here with Brad Smith, our Chairman and CEO; Michelle Clatterbuck, our CFO; and Sasan Goodarzi, our incoming CEO. Before we start, I would like to remind everyone that our remarks will include forward-looking statements. There are a number of factors that could cause Intuit’s results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2017 and our other SEC filings. All of those documents are available on the Investor Relations page of Intuit’s website. We assume no obligation to update any forward-looking statements. 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. We are reporting fiscal year 2018 results today under the historical revenue recognition standard. We adopted the new revenue recognition standard in fiscal year 2019, which began August 1, 2018. We elected to adopt this standard under the full retrospective model for comparability and we have provided restated financials for fiscal years 2017 and 2018 in the press release issued today and on our fact sheet. We also posted a slide deck to the Investor Relations section on Intuit's website highlighting the significant changes under the new revenue standards. 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.

Thanks, Jerry and thanks to all of you for joining us. As you read in our press release today, I'll be stepping down as the Chief Executive Officer of Intuit at the end of 2018 and continue to serve as our Executive Chairman. I am happy to announce that Sasan Goodarzi will become Intuit’s next CEO on January 1, 2019. Sasan is also with us on the call today. I'll share more thoughts about Sasan and why I feel it's the right time to pass the baton to him in January at the end of this call. But first let's talk about our results in fiscal year 2018 and our outlook for fiscal year 2019. We had an excellent fourth quarter, capping off a very strong fiscal year 2018. Fourth quarter revenues grew 17% and full-year revenues grew 15%. We are one year into a multiyear change journey and our results confirm that our refreshed One Intuit Ecosystem strategy is positioning the company for durable growth as we look ahead. Revenue growth accelerated across our businesses in fiscal year 2018. This growth was fueled by 18% growth in the Small Business and Self-Employed Group and 14% growth in the Consumer Group. As you can see reflected in our guidance for fiscal year 2019, we expect to deliver another year of strong revenue growth. With that overview, let me share some observations on our business performance. We delivered another successful quarter in our Small Business and Self-Employed Group. Online ecosystem revenue grew 43% in the fourth quarter and 40% for the fiscal year, exceeding our projections to grow better than 30%. We added over 1 million QuickBooks Online subscribers in fiscal year 2018, exceeding our target with more than 3.4 million subscribers, a 43% increase year-over-year. Growth remains strong across multiple geographies with U.S. subscribers growing 38% to approximately 2.6 million and international subscribers growing 62% to over 800,000. Within QuickBooks Online, Self-Employed subscribers grew to nearly 720,000, up from roughly 390,000 just one year ago. As we move into fiscal year 2019, we’re placing greater focus on additional services and penetrating a broader range of customers. Online ecosystem revenue growth has emerged as the best measure of success in this business, and it now represents more than $1 billion. Even at this scale, we continue to expect online ecosystem revenues to see 30% growth year-over-year, with the subscriber base beginning to moderate some as we shift our emphasis in the next chapter of the business model evolution. With the focus on online ecosystem revenue growth, we will no longer be providing forward-looking guidance for subscriber growth, but we will continue to share our actual QuickBooks Online subscriber count on our fact sheet. Turning to the Consumer Group, as we shared last quarter, we’ve had a successful tax season. Consumer revenues grew 14% in fiscal year 2018 as the innovation drove customer and revenue growth, and we made encouraging progress behind each of our strategic priorities. Our team is actively developing the next wave of innovation to better serve our customers next season. We’re excited about the opportunities ahead with TurboTax Live to further transform the assisted category and for our Turbo and Mint offerings to expand our business beyond tax. Regarding the external environment, I want to share our thoughts on the tax legislation changes going into effect next season. We have long advocated for tax simplification. We think anything to make taxes easier to understand is good for consumers. As you know, the new legislation increased the standard deduction, so a larger number of people won't be required to itemize their deduction. This change does introduce some trade-down risk from our paid to our free offering, but in aggregate, we believe tax simplification will be an overall catalyst for the DIY category and TurboTax growth as more assisted customers choose to adopt digital solutions. In addition, the IRS has been developing a streamlined tax filing form, consisting of one summary form and six supporting schedules. We’re working closely with the IRS to fully understand the changes to the 1040 forms, and we’ll ensure that all of our forms and our products are up to date as we do every year. We’ll share more information later this year when we introduce our offerings for next season. In our Strategic Partner Group, our professional tax revenue was slightly ahead of our expectations as revenue grew 4% in fiscal year 2018. We continue to focus on multi-service accounting firms that do both books and taxes. This enabled us to drive our account success while growing our small business ecosystem at the same time. Wrapping up fiscal year 2018, we are one year into our refreshed One Intuit Ecosystem strategy with our business gaining momentum and significant opportunities ahead. We’re activating our ecosystem by connecting our customers, partners, and products across product lines through value-creating solutions. This includes offerings such as our Pro Advisor matchmaking platform, TurboTax Live, and our TurboTax self-employed bundle. We see many more opportunities to connect our ecosystem with newer offerings such as QuickBooks Capital and Turbo, as well as others on the horizon. We’ll share our progress on each of these offerings at our upcoming Investor Day. With that overview, let me hand it over to Michelle to walk you through the financial details.

Thanks, Brad, and good afternoon everyone. As Jerry mentioned at the beginning of the call, I’ll review our fourth quarter and fiscal year 2018 results. Let’s start with results for the fourth quarter for fiscal 2018; we delivered revenue of $988 million, up 17% year-over-year; a GAAP operating loss of $81 million versus a $10 million loss a year ago; Non-GAAP income of $104 million versus $78 million last year; GAAP diluted earnings per share of $0.18 versus $0.09 a year ago; and non-GAAP diluted earnings per share of $0.32, up 60% versus $0.20 last year. For full fiscal year 2018, we delivered revenue of $6 billion, up 16% year-over-year; GAAP operating income of $1.5 billion versus $1.4 billion a year ago; non-GAAP operating income of $2 billion, up 14% versus last year; GAAP diluted earnings per share $4.64, up 25% versus $3.72 last year; and non-GAAP diluted earnings per share of $5.61, up 27% versus $4.41 last year. As previously announced our GAAP earnings per share for the fourth quarter and fiscal year 2018 includes a $79 million charge from the sale of our data center. The impact of this charge on net income and EPS was offset by tax benefits recognized in the quarter. Turning to the business segments, total Small Business and Self-Employed revenue grew 20% for the quarter and 18% for the year, comparing to 14% growth in fiscal year 2017. Online ecosystem revenue growth remained strong and grew 43% in the fourth quarter, up from 41% in the third quarter. For fiscal year 2018, online ecosystem revenues grew 40%, up from 30% in fiscal year 2017. QuickBooks Online subscribers grew 43%, ending the quarter with over 3.4 million subscribers. As Brad mentioned, we believe the best measure of the health and success of our strategy going forward is online ecosystem revenue growth, which we continue to expect to grow better than 30%. Desktop ecosystem revenue grew 7% in the fourth quarter and in fiscal year 2018. Desktop units fell 7% in the fourth and 15% in fiscal year 2018, which was in line with our expectations. For fiscal 2019, we expect QuickBooks’ desktop unit to decline single digits and desktop ecosystem revenue to be roughly flat. Including both online and desktop customers, our total QuickBooks paying customers grew 26% in fiscal year 2018. Total QuickBooks paying customers include QuickBooks Online customers, QuickBooks Desktop units, and QuickBooks Desktop subscribers. The Consumer Group had a strong year with revenue up 14% compared to 8% revenue growth in fiscal year 2017. TurboTax units grew 4%, and TurboTax online units were up 6%. The Strategic Partner Group posted $453 million of professional tax revenue for fiscal year 2018, up 4%. Turning to our financial principles, we continue to take a disciplined approach to capital management, investing the cash we generate in opportunities that yield returns on investment greater than 15%. During fiscal year 2018, we focused on reallocating resources to strengthen our investments in several key priorities, 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. At the beginning of fiscal year 2018, we told you that we expect these initiatives to set us up to deliver strong growth in the coming years. We saw this momentum begin in fiscal year 2018; revenue growth accelerated approximately 5 points to 15%; GAAP operating income grew 7%, including the $79 million charge from the sale of our data center; non-GAAP operating income growth accelerated approximately 2 points to 14%. We finished the year with $1.7 billion in cash and investments on our balance sheet. Our first priority for that cash remains investing in the business to drive customer and revenue growth. Next, we use acquisitions to accelerate our growth and fill out our product roadmap; we returned excess cash that we can invest profitably in the business to shareholders via both share repurchases and dividends; we repurchased over $270 million of stock during fiscal year 2018; the Board approved a new $2 billion repurchase authorization, giving us a total authorization of $3.2 billion to repurchase shares, including the remaining amount on our prior authorization; the Board approved a quarterly dividend of $0.47 per share payable October 18, 2018; this represents a 21% increase versus last year. As I mentioned, we are adopting the new accounting standards for revenue recognition in fiscal year 2019. We will be reporting our results going forward under this standard and will be restating the financial statements of previous years to provide comparability. The new standard will result in an increase in revenue for fiscal year 2018 of $61 million and a decrease in expected revenue of $30 million in fiscal year 2019. While we're changing how we account for revenue, this is an accounting change only and has no impact on customer billings or cash flow. In addition, how we recognize revenue for all online offerings, supply, and desktop payroll and payments will not change. What will change under the new rules is how we account for revenue associated with QuickBooks Desktop units, QuickBooks Desktop subscription offering, and consumer and professional tax desktop offerings. I'll highlight the changes briefly, but please review the materials in the Investors section of our website for more detail. The primary change for our QuickBooks Desktop units and subscription offerings is that more revenue will be recorded in earlier periods. The primary change for our consumer and professional tax desktop offering is that more revenue will be recognized at the beginning of the tax season. We expect the net impact of adopting the new standards to be approximately a 2-point reduction in our revenue growth in fiscal year 2019 versus the prior standard. Under the new standards, Q1 fiscal 2019 guidance includes revenue growth of 5% to 7%, a GAAP loss per share of $0.17 to $0.19 and non-GAAP earnings per share of $0.09 to $0.11. While we’re not providing quarterly guidance under these new standards, our Q1 fiscal year 2019 revenue guidance would have been approximately $30 million higher than it is under the new standards. You can find additional Q1 and fiscal 2019 guidance details under the new standards in our press release and on our fact sheet. And just one more comment on Q1, we expect desktop ecosystem revenue to decline single digits in Q1 of fiscal year 2019. This reflects the change we made in fiscal year 2018, moving our QuickBooks enterprise subscription offering from a perpetual license to a term license to better serve our customers. Under the new standards, our full year fiscal 2019 guidance includes total company revenue growth of 8% to 10%, GAAP earnings per share of $5.25 to $5.35, and non-GAAP earnings per share of $6.40 to $6.50. We expect a GAAP tax rate of 21% and a non-GAAP tax rate of 23% for fiscal 2019. To help you compare with the forecast you have in your model, we’re also providing guidance under the historical standards. Our full year fiscal 2019 guidance under the historical standards includes total company revenue growth of 10% to 12%, GAAP earnings per share of $5.35 to $5.45, and non-GAAP earnings per share of $6.50 to $6.60. With that, I’ll turn it back to Brad to close.

Great, thanks, Michelle. In summary, we delivered a strong year in fiscal 2018 posting a faster pace of revenue growth than we have seen in several years as our One Intuit Ecosystem strategy takes shape. We continue to have our sights set on next year and beyond as we pursue our mission of powering prosperity around the world. With that overview, let’s now shift to the other news we announced today. Sasan is the right executive to lead Intuit in our next chapter. During his 13 years with the company, he has successfully led each of our major businesses and served as our Chief Information Officer. He has been instrumental in the transformation of our company and a key architect of our One Intuit Ecosystem strategy. He leads with intellectual curiosity and humility, as well as strategic and operational rigor. At every stop, Sasan has built high performing and highly engaged teams who deliver amazing results. I am confident in his ability to lead the company to new heights, and I look forward to working with him in his new role. When Sasan steps into the role of CEO on January 1st, he will be succeeded by Alex Chriss as the General Manager of the Small Business and Self-Employed Group. Alex is another Intuit veteran with a stellar track record of success over the past 14 years. We also announced today that Tayloe Stansbury will be stepping down as our Chief Technology Officer on January 1, 2019. This move is another possible transition in a multi-year succession planning process that has been in the works for some time. I want to thank Tayloe for his many contributions over the past nine years, having led our evolution to a platform company, advanced our leadership in artificial intelligence and machine learning, and accelerated our journey to the cloud. Tayloe has built an amazing leadership bench. We successfully prepared Marianna Tessel, our current Chief Product Development Officer for the Small Business and Self-Employed Group to be his successor as CTO in January. And on a personal note, it has been a privilege to serve as Intuit CEO since 2008. Together, we’ve built on the strong foundation that those before us have put in place. We’ve transformed the company from a North American desktop software company to a global cloud-driven product and platform company. We deliver consistent top-line and bottom-line growth, and we’ve cultivated a strong and enduring culture of innovation and self-disruption. Today's announcement is a continuation of a long history of leadership development that has built a deep bench of leaders who will take their place as the next generation at Intuit’s management team. As I look ahead, I have never felt better about Intuit’s future. So with that, let’s open it up and hear what’s on your mind.

This is Sanjit Singh for Keith Weiss and sorry to see you go, Brad, and congratulations, Sasan. Brad, maybe I could start with tax. This year was a very strong year and you guys saw a lot of uptake with TurboTax Live. As you think about the tax changes going into next year with maybe a little more of the demand coming from simpler tax filings, what do you think the implications are for the TurboTax Live portion in terms of the benefit that you can see from that portion of consumer tax?

Sanjit, I would tell you we’re very encouraged by this year’s performance in TurboTax Live. We’re optimistic about the opportunities as we look ahead. As you know, just to put context around this, today there are more people who file using an assisted tax prep method than those who use a do-it-yourself approach. We’ve discovered tens of millions who will be willing to actually use a do-it-yourself solution if they have access to an expert to answer some questions that they may have in the back of their mind. So it opens up a $20 billion market. And when we introduced TurboTax Live this year, we had two hypotheses: first is could we actually retain more of those 3 million customers who leave each year when they have a life event like they had a baby or they sold stock, and I’m proud to tell you that we improved our retention very strongly in this past tax season; we’ll talk more about that at Investor Day. The second hypothesis was could we start to attract more people out of tax stores and the assisted method into TurboTax Live? This year, TurboTax Live did increase 10% acquisition of customers out of an assisted method versus the standard TurboTax Online offering, so both hypotheses proved to be true. But there was one other surprise that occurred this tax season. Each year, 3 to 5 million people enter the tax filing process for the first time. We have always gotten our fair share with digital solutions, but with TurboTax Live, we actually pulled a disproportionate share of first-time filers into this franchise. So we're seeing an improvement in retention, we’re seeing an acquisition increase from those who were using assisted method, and we’re seeing a disproportionate share of first-time filers that gives us a lot of confidence that next year and beyond TurboTax Live could potentially be a game changer if we continue to execute well.

And maybe just if I can sneak in one more on the QBO subs, you mentioned in your script that growth might slow a little bit next year versus the strong growth you saw last year. How does that relate to your overall expansion efforts, particularly on the international side and also with QuickBooks Self-Employed? Are those international markets slower to ramp or are you starting to see some slowdown on the Self-Employed side as well?

I appreciate the question, and let me set some context around why we’ve made this decision. We’re at the next chapter of the business model evolution in QuickBooks Online, and we do fundamentally believe that online ecosystem revenue growth is the appropriate measure for health going forward, and let me explain why. First and foremost, we’re now starting to serve an expanded group of customers, from the self-employed to the core QBO segment with U.S. international, and now we’re expanding into what we used to call the mid-market or enterprise space with QuickBooks Online Advanced. We’re going to be talking more about that in the fall. You’re going to have an expanded group of customers each coming in with a different revenue stream. On the other side, we have our online services which you saw accelerate in this quarter, very strong growth of 34%. That's not only payroll and payments attached, we’re also beginning to introduce those services as their standalone front doors that can ultimately unlock the QuickBooks Online. So think of things like GoPayment or online payroll. When you start to put that together, it starts to muddy what's the definition of the subscriber. At the end of the day, what we know matters most is that we are delighting customers, and we measure Net Promoter to ensure that we are taking market share in every geography, which we measure very intently, and that we are indeed accelerating revenue growth. I’ll give you this as a little mindset that we’re thinking about: I will personally be disappointed if we do not at least meet or exceed the number of net new subscribers we add in QuickBooks Online next year. As I mentioned in my opening comments, we added 1 million net new subscribers this year. That will give you some ballpark of what we mean when we say moderating growth, this is still very strong growth with a business that’s accelerating.

I wanted to touch on a few points regarding taxes. Brad, you noted that part of the guidance for the Consumer Group involves a transition from the assisted category to do-it-yourself. What factors might motivate those assisted customers to move to the do-it-yourself channel, even though the tax codes have become simpler? Additionally, considering your approach to the upcoming tax season, it seems that simplifying the tax code sometimes leads to more confusion. How did you account for consumer reactions that might reflect this confusion, despite the code's simplification? Thank you.

So first of all, we’ve seen a secular shift in do-it-yourself over the past decade plus. If you just look at the numbers the IRS publishes each year, that do-it-yourself category has outpaced the assisted category whether it’s tax or the CPAs pretty significantly. And then with TurboTax Live, we think we’ve untapped a whole new source of growth, because we’ve always discovered there were tens of millions of people going to an assisted tax prep method but add a simple unanswered question, like, hey, my kid just turned 26, can I still claim them as a deduction? We found that with a touch of a screen, we have the opportunity to have an expert come in to that experience to answer those questions. So we look ahead, we think a combination of two things: the government simplification to the tax process now has more people saying, I qualify for a standard deduction, why am I paying someone, I could actually be doing this on my own, I should consider a do-it-yourself solution. And then for those who say, I think I can do this, but I may have a question, we’ll make it very apparent with a lot of delighted customers who are willing to advocate on our behalf and talk about how great the service is. So you no longer have to choose; you can use TurboTax and get access to an expert, but you don’t have to drive to a store, you can do it from the convenience of home, in your pajamas if you want. Those two things fundamentally give us confidence, and we have reasons to believe coming out of this tax season. Anytime there’s a change, there’s always a desire for people to say, do I have enough here to get this done on my own? We’re going to have competitors who are going to try to stir us with fear, uncertainty, and doubt. But as you saw with the Affordable Care Act several years ago, a lot of people said, will this cause people to lose confidence? That was one of the greatest accelerators of growth we’ve had in our franchise. Our team is poised to sort through that fear, uncertainty, and doubt and let people know that we have an answer for them, whether they want to do it themselves or access an expert.

Thank you. First, I want to say, Brad, we’re going to miss you. I know you’ll be around for a couple more quarters, but you’ve had a significant presence for many of us for quite some time. I look forward to working with you and Sasan in the future. So, I just wanted to mention that first. Regarding Sanjit’s question about the strength in online services revenue, a few years ago, the focus with the QuickBooks Online transition was on the potential for increased attach rates with payments and payroll. Since the disclosures have changed and this hasn’t been a major topic during your earnings calls, I wanted to revisit your comments on this. Considering the acceleration, do you think the original vision for QuickBooks Online—of achieving better attach rates with today's services—is starting to materialize later than we initially anticipated? Or is there something more going on in that revenue line? I know you referenced some aspects of their own front doors, but I’m trying to understand how this relates to an earlier ambition that may not have turned out as we originally hoped.

Thank you, Jennifer. And first of all, thank you for your kind comments. And you’re right, I’ll be here for a couple more quarters and then the junior varsity team will exit and varsity will take the field, and I am excited to have Sasan stepping in. If you go back and think about our model over the years, it’s been a razor-and-blade model. And the first thing is to get the razors, and after that, attach the blades. We’ve played that out very well over the desktop era. As we moved into online, we are still aggressively gaining razors; we’re opening new markets; we’re going into the self-employed and now we’re moving up into the midmarket with QuickBooks Online Advanced. But at the same time, we’ve gotten smarter in how to really capitalize on services. This past quarter, online payroll attached to QuickBooks Online grew faster than 30%, and payments grew faster than 40%. Now you introduce these new opportunities to have those services be the first experience for our customer, whether it’s GoPayment for payments or his payroll, and then unlock the QBO. We think that's really going to give us an opportunity to accelerate our services business. So we are in a razor-and-blade business. We feel like there’s a lot of game left in the razors, but we have gotten smarter, and now we’re entering that chapter where the blades are now becoming more important. We do expect you’re going to see online services continue to grow and accelerate.

Brad, if the junior varsity team doubled revenue, we look forward to seeing what the varsity team does. I guess, Brad, just a question around why now you’ve had three of your top corporate positions turnover recently. Obviously, great athletes in those positions. But can you maybe just address, I think there’s some investors that are maybe a little unsettled by what’s happened just with the number of changes that have happened. Can you maybe walk through your perspective?

Let me start with the broader perspective. As you know, we’ve rotated leaders between positions over the years. I have had the opportunity to run three businesses before I became the CEO 11 years ago, and that is by design. We fundamentally believe we grow and develop our bench by giving them opportunities to run different parts of the company, and then that prepares them for greater things. These decisions that have been announced have actually been a multiyear process. We have regular discussions with both the leaders and the Board about what the individual’s personal true north is and what are the business needs looking ahead, and then we make decisions that basically get those all lined up. We have been sequencing these moves, and they've all been based on a multiyear succession planning process. When it comes to me personally, we all know that in these jobs it’s inevitable at some point you’re going to have to say goodbye. The real art is being a part of that decision. For me, there were two mile markers that I wanted to put in place: the first is, is the company ready; the second is do we have an internal leader ready to take the seat; and the third is, am I ready. I feel like with this year being a capstone that our company has successfully transitioned to the next chapter of growth in terms of the next leader; not only is Sasan ready having run every one of the businesses more than I did, but he has primed. I also hope that I would leave when I was more of an asset than a liability. But I really never wanted to be that athlete that lost a step or couldn’t complete the path. I feel like now is the right time; the company is in a good place; we've got a great leadership team in place; Sasan has everyone's confidence; and I learn from him every day; and I think this next chapter is really set up, so that's really why. I would encourage anyone who may be unsettled to simply look at those who've assumed the seats because you know them all; they’re veterans with stellar track records of success.

We feel really good about the growth that we have in our guide. You’re right. When you go back to our financial principles, we talk about double-digit revenue growth and operating income growing in the mid-teens. We want revenue growing faster than expenses. This year, we came in strong with 15% revenue growth and 14% operating income growth. You see for next year in our guide; we are expanding margins; revenue is continuing to be in the double-digit range; and we have operating margins expanding by 10 to 50 basis points. So we feel very good about the guidance. The business is really strong. And as Brad said, there are lots of opportunities for us.

Thanks so much. And Brad, it’s been a real pleasure over the last 10 years or so, but I look forward to working more closely with Sasan going forward. Maybe I can start, Brad, just as you think about tax for next year. Two things struck me. One was your guidance range was actually for consumer was narrower than normal. I would have thought that given the moving pieces in next year's season, you may have actually gone to the other way. So I would love just to get your sense of how you are thinking about the different inputs into that. And then second, just as we think about ancillary revenues on the Small Business online ecosystem. There’s a big gap obviously relative to QBO revenue today. If you compared it to the desktop business, I think ancillary actually got up to almost 2x, QuickBooks Desktop revenue. So I was just curious do you think there’s that same type of opportunity as a multiplier, if you will, over time for the online ecosystem? Thanks.

Great, thank you, Ross. And it’s been a pleasure working with you as well. I’ve learned a ton from you, and you’ve always helped us think about the business in a different way. Let me start with the Consumer Group data. The guidance range is in the same zip code. If you look at 605, it’s nine to 11. I know under 606 it looks like nine to 10, but that’s really just rounding. There have been years where we’ve had a slightly bigger band because we were in the early days with the uncertainties. We were cautiously optimistic, and you’re correct that we felt strong momentum coming out of this tax season. So we feel good about our guidance. On the second one around online ecosystem revenue and services, you're correct that we went through a period where we had razors with QuickBooks Desktop and then that number stalled at about $4 million for a number of years. We made growth by simply selling blades into that install base. But that said, we still have a lot of growth left in QuickBooks Online, and we are just now entering the mid-market space, which comes with a much higher ARPU. So yes, I believe over the long-term, you’re going to see those services continue to accelerate and become very meaningful, but not to the point of 2x anytime soon because we've still got a lot of greenfield with accounting.

Thank you. And Brad, it’s been a pleasure and Sasan, good luck. I’m sure you’re listening in. First on the consumer guide, stripping out that apart, what are you thinking units versus ARPU? Assuming that ARPU is going to be a big part of the story again next year with Live. What do you think the different components that will drive the ARPU growth are? Is it mostly mix shift, and do you see potential to take price again this year? It would be helpful if you could break that down?

Yes, I appreciate it, Jesse, and also the kind words. Sasan is sitting here with us, and he’s anxious and excited to continue to deliver strong results in Small Business and Self-Employed for another few months. So back to your question around Consumer Group. We’ll unpack for this group at Investor Day what we see as the long-term outlook for the Consumer Group. That involves several levers: what do we expect total IRS returns to grow; what do we think do-it-yourself category growth will look like over the next five-plus years; what do we think unit growth will begin to look like; and then how much can you expect from ARPU. I don’t want to get ahead of that at this point. What I can tell you is our outlook on the growth of this business is higher than it was just the last couple of years. We’ll talk more about how much that will come from category growth, units, and ARPU when we actually get to Investor Day here in another 60 days or so.

In FY18, we had operating cash flow that was quite a bit higher, it was 32%. That was due to some benefits we got from our tax benefits this year. We had an abnormally lower tax rate. But going forward, we would expect operating cash flow to more closely track non-GAAP operating income on a going forward basis.

Brad, looking at the tax season this year, as you look at TurboTax Live, I don't think last year you really marketed TurboTax Live. As you enter this year, do you think that changes or do you think you use a similar strategy to which you did last year?

Kartik, you’re correct. We traded it as a version one and our campaign was more around there’s nothing to be afraid of; it wasn’t that explicit about TurboTax Live. As we get closer to the season, we’ll start to unveil more of what we plan to do. But I will share at this point three major learnings that we know that we have an opportunity to capitalize on as we go into next year. One is much more effective targeted marketing about what TurboTax Live is. The second is a better understanding of seasonality. We entered the year thinking that those that want TurboTax Live will be towards the back end of the season, when there were more complex filers. We were wrong. There’s just as many people upfront in the early part of the season who have questions as well. The third is while we had a really good version one, we had an opportunity to improve the Pro experience who actually answers the questions for the consumers. So we spend a lot of time over the summer improving that Pro experience. So those are three big areas we’re focused on. We will absolutely be looking at our marketing messaging and helping create category awareness as there is a new way to do taxes with TurboTax Live. Yes, we do. In fact, we have incorporated that into the guidance we shared with you. We shared that with the new standard deduction, more people qualify. We’ve always had a customer category that when they know that, they may downshift. There’s a group in the middle that we call aspirational buyers. We’ve all learned this in our marketing days: if you have a good better best product line-up, many people buy the middle. There’s going to be an inspirational buyer that may qualify for standard deductions that may gain confidence knowing they could get access to something else. But overall, we believe the bigger opportunity lies with the tens of millions of people who sit in the assisted category. They’re going to discover the same things and they’re going to downshift into the digital solutions. When you net it all out, it leads to the guidance we provided for fiscal year '19.

On the tax, I wanted to get to the new regulations and look for 606 numbers and look at the small business side. You talked about the acceleration you saw in fiscal '18 on Small Business. It seems like you’re basically guiding for the high end of the range to be backed down where it was before you implemented these measures. It feels like you saw acceleration and you've got momentum here. Why would the Small Business growth be calling back where it was before?

A couple of things are going on there. We’re in the process of opening new markets, moving into QuickBooks Online Advanced SKU, and building on the momentum while growing over some pretty healthy numbers. The best way to have a good year is to lap a bad one, and we don’t have that luxury in this case. I wouldn’t over-read too much into that. There’s nothing in the leading indicators that has us concerned about the growth rate. If anything, you might want to read into my past words that we tend to be prudent when providing guidance because we want the opportunity to learn and adjust as we get into the season. When we get to Investor Day, you'll see strong momentum in Self-Employed and QBO in U.S. and international, and real excitement around QuickBooks Online Advanced, which is the enterprise version. We feel great entering fiscal 2019 with the right growth drivers to drive business for the year ahead.

You guys have talked about the 3 million filers that turn off annually. Rough calculations would give you about an 8% churn rate there. How do you think that number can improve over time?

We look forward to sharing the actual retention results at Investor Day, but we have seen the opportunity to continue to turn that dial up and keep more of those customers. We think TurboTax Live is our biggest advance forward to starting to say, you no longer have to leave; you can talk to a CPA, a tax attorney, and enrolled agents right here on your screen and have your questions answered. But we are setting an aspirational goal to keep every customer, except for those who no longer must file taxes with the government.

As we look at margin, we really do look at that at a total business level; we’re not looking at it at the business level. We may have some opportunities with TurboTax Live that have been factored into our guidance for the upcoming year. As Brad said, we’re really pleased with how it’s performed. We think there’s a big opportunity there, but consider it what we’ve given with our guidance.

Michelle, maybe just a quick question on the Desktop business. You talked about unit decline moderating to single digits from 15% this year. Can you just sort of go over what's going on with the coverage there?

The Desktop business, as you know, we’ve had customers who were ready and able to move to the cloud. In fact, we had about 184,000 migrate this year, with about 500,000 total over the last few years. The ones that have stayed behind tend to be the more complex customers, and they also tend to be QuickBooks enterprise. Now that we’re moving to QBO Advanced, we may open up additional opportunities for customers to move over there. But that business and the desktop continues to grow well. What you heard in the forecast that Michelle provided is that we’re down to the point where the customers on the Desktop, it is the best solution for them. We don't expect that decline to continue to be in the mid-teens like we have. Most of those customers have migrated to the cloud. The ones that are staying are staying for a reason. Once we get QBO Advanced, we may have to get them over to the cloud as well.