Intuit Inc (INTU) — Q1 2019 Earnings Call Transcript

Thanks, Gigi. Good afternoon and welcome to Intuit’s first quarter fiscal 2019 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 2018 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 have 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 will turn the call over to Brad.

Thanks, Jerry, and thanks to all of you for joining us. As we kicked off fiscal year 2019, we entered the second year of implementing our One Intuit Ecosystem strategy and we’re off to a strong start through the first quarter. We delivered 12% revenue growth and exceeded our overall financial targets. Small Business and Self-Employed group revenue increased 11% with Online Ecosystem Revenue growing 42% in the quarter. Revenue from both the Consumer group and Strategic Partner group was also in line with our expectations. While this is a great start to the year, there’s plenty of game to be played with our two largest quarters ahead as we move towards tax season. With that backdrop, let me share some observations on our business overall starting with our Small Business and Self-Employed group. As we foreshadowed last quarter, we are placing an increased emphasis on our online services to deliver greater value for our small business customers. We shared many of these advances at our QuickBooks Connect conference earlier this month. First, with QuickBooks Capital, which leverages QuickBooks Online customer data to provide loans for small businesses, nearly 60% of whom may not qualify for loans elsewhere. QuickBooks Capital has funded $200 million in cumulative loans over the first 12 months since launching publicly. Customer receptivity has exceeded our expectations with 84% of QuickBooks Capital customers stating an intent to apply for a second loan in the future. We’ve also introduced an innovative same-day payroll capability within QuickBooks Online, enabling small businesses to pay their employees on the same day if they process their payroll by 10:00 AM Eastern Standard Time. This allows customers to hold onto their money longer and better manage their cash flow. Traditionally, small businesses have been required to fund their payroll two to five days in advance, so same-day payroll is quite meaningful for these customers. In addition, we will soon be launching next-day funding within QuickBooks Payments, allowing small businesses and self-employed customers to receive their funds the next business day, twice as fast as the two to three-day waiting period they currently experience. QuickBooks Payments have also been redesigned, making critical payments functionality more easily discoverable for customers within the offering. We’re also serving a broader range of customers with the recent introduction of QuickBooks Online Advanced. This offering is designed for the 1.5 million mid-market customers with 10 to 100 employees. Approximately 180,000 of our existing QBO customers fit this target profile, providing us with a significant opportunity to grow with them over time. While it's still early, customer feedback on QBO Advanced is quite positive and we’re optimistic about the opportunity as we introduce additional functionality in the months ahead. Turning to the consumer group, the team is actively developing the next wave of innovation to better serve our customers in the upcoming tax season. Our strategy remains focused on expanding our lead into the do-it-yourself tax category while transforming the assisted tax segment with TurboTax Live. TurboTax Live eliminates the traditional trade-off between the do-it-yourself solution or one-on-one advice from a professional. This innovative service significantly increased the confidence of our tax filing customers last season and it's only getting better. During the upcoming tax season, we’re launching several new features many of which were tested during the tax extension season in October. These include mobile access to an expert on demand, given that half of online tax filers use a mobile device at some point when filing their return. We’re introducing a wider range of price points providing access to an expert from the simplest to the most complex of tax returns. Finally, we're providing additional ways for TurboTax users to access a TurboTax Live expert through their tax prep experience including the ability to submit a question and receive a response from an expert in 24 hours. Beyond these customer-facing innovations, we've made several enhancements to the experience for the tax professionals on the TurboTax Live platform as well. These enhancements include a new built-in health panel and expanded case management functionality all in one place. We expect these new tools will improve the overall experience and productivity for the tax pros operating on our platform. As we shared last quarter, with regards to the external environment, we've long advocated for tax simplification and believe that anything to make taxes easier to understand is good for consumers. While the new legislation increases the number of people who will qualify for the standard deduction, which introduces some trade-down risk from our paid to our free offering, in aggregate we believe tax simplification will be an overall catalyst both for the do-it-yourself category and for TurboTax growth as more assisted tax customers choose to adopt digital solutions. This expectation is grounded in historical evidence. Over the past decade, many hypothesized that major legislative changes such as the Affordable Care Act would create confusion and cause a shift towards more assisted tax prep methods that simply didn't happen. In fact, TurboTax filings growth over this period of time has outpaced tax pros growth by 600 basis points, tax stores by over 900 basis points, and the IRS returns grew at a compounded annual rate of less than 1%. These trends reflect the secular tailwind of customers adopting digital solutions even with significant legislative changes. Moving beyond our consumer business to the Strategic Partner group, our professional tax revenue grew 6% year-over-year. We continue to focus on multi-service accounting firms that do both books and taxes, enabling us to drive our accounting success while growing our small business ecosystem. To sum it up, the momentum we exited fiscal year '18 with continues and our testing during the extension filings gives us increased confidence that we should have another successful tax season. With that overview, let me hand it over to Michelle, to walk you through the financial details.

Thanks, Brad, and good afternoon everyone. For the first quarter of fiscal 2019, we delivered revenue of $1 billion, up 12% year-over-year. A GAAP operating loss of $10 million versus a $35 million loss a year ago. Non-GAAP operating income of $102 million versus $65 million last year. GAAP diluted earnings per share of $0.13 versus a loss per share of $0.01 a year ago. Non-GAAP diluted earnings per share of $0.29, up 71% versus $0.17 last year. Our GAAP earnings per share for the first quarter includes a $41 million excess tax benefit on the share-based compensation. Turning to the business segments, total Small Business and Self-Employed revenue grew 11% during the quarter. Online ecosystem revenue remains strong with growth of 42%. As we shared last quarter, 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%. We are pleased with the continued growth of both online accounting and online services revenue. QuickBooks Online subscribers grew 41%, ending the quarter with nearly 3.6 million subscribers. Growth remained strong across multiple geographies with U.S. subscribers growing 35% to approximately 2.7 million and international subscribers growing 61% to over 880,000. Within QuickBooks Online self-employed subscribers grew to approximately 745,000, up from roughly 425,000 one year ago. As we told you last quarter we expect total subscriber growth to begin to moderate as we shift our emphasis in the next chapter of the business model evolution. Desktop ecosystem revenue was down 4% in the first quarter, consistent with the mid-single digits decline we indicated last quarter. Within the desktop ecosystem, our QuickBooks enterprise customers continue to grow at a double-digit pace in the first quarter. During fiscal 2019, we continue to expect QuickBooks desktop unit to decline single digits and desktop ecosystem revenue to be roughly flat. Total consumer revenue was up 22% in one of our smallest quarters of the year. Looking ahead to the upcoming tax season, we have an opportunity to address the needs of even more tax filers with TurboTax Live. Last year, the product contributed to a 2-point increase in retention, brought customers into the franchise at a faster pace than our TurboTax online offering, and attracted first-time filers at a higher rate. As Brad mentioned, we continue to expect tax reform to be a catalyst for the DIY category this season. As a reminder, we will provide a tax unit update in late February concurrent with our second-quarter earnings release. We will also provide a final update in late April after the tax season ends. Professional tax revenue within the Strategic Partner Group grew 6% in the first quarter in line with our expectations. Turning to our financial principles, we remain committed to growing organic revenue double digits and growing operating income dollars faster than revenue. We continue to take a disciplined approach to capital management investing the cash we generate in opportunities that yield a return on investments greater than 15%. Our first priority to the cash we generate continues to be investing in the business to drive customer and revenue growth. Next, we consider acquisitions to accelerate our growth and fill out our product roadmap. We returned excess cash that we can't invest profitably in the business to shareholders via both share repurchases and dividends. We finished the quarter with $1.3 billion in cash and investments on our balance sheet. We repurchased over $101 million of stock in the first quarter. Approximately $3.1 billion remain on our authorization, and we expect to be in the market each quarter this year. The Board approved a quarterly dividend of $0.47 per share payable January 18, 2019. This represents a 21% increase versus last year. Second quarter guidance for fiscal 2019 includes revenue growth of 10% to 11%, GAAP diluted earnings per share of $0.55 to $0.58, and non-GAAP diluted earnings per share of $0.85 to $0.88. We’re also reiterating our fiscal 2019 guidance provided last quarter. You can find our Q2 and fiscal 2019 guidance details in our press release and on our fact sheet. With that, I will turn it back to Brad to close.

Thank you, Michelle. Putting a bow around our performance this quarter, we are pleased with the strong start to fiscal year 2019 and we look forward to accelerating our momentum as we head into peak season. Our One Intuit Ecosystem strategy continues to take shape and I could not be more proud of the innovation and the results that our employees are delivering. As you know, this is my last earnings call as Intuit's CEO. Effective January 1st, I will transition to the role of Executive Chairman, as Sasan Goodarzi takes the reins. It has been a privilege to serve as Intuit's CEO for the past 11 years. I could not be more confident in Sasan and the next generation of Intuit's leadership team. As I look ahead, I have never felt better about Intuit's future. I want to thank you for your support over these many years and I look forward to the continued progress the Company will achieve in this next chapter. And with that, let’s open it up to hear what’s on your mind. Gigi, we will turn it back to you.

I just want to follow up on the comments around tax in the trade-down risk of tax reform, and Brad, I appreciate you reminding us of past examples in why you feel that this should be something you’re able to navigate through and will benefit the overall category and TurboTax, but can you perhaps give us a little bit more insight into how you're thinking about the trade-off of unit versus ASP and the tolerances that you built into the model and guidance you've given us?

Great, thanks Brad, thanks for the comments on the quarter and we will be happy to talk about that. When we put together our guidance for the year, we factored in any of the potential trade-down risks as well as the upside which is quite frankly much larger. When we think about the number of people using an assisted tax prep method, they are also going to qualify for the standard deduction and we will now have the opportunity to move into a do-it-yourself solution because the taxes are simpler, where they'll have an innovative solution like TurboTax Live where they can get assistance, if they lose confidence at any point in the process. So as you saw that fundamentally lead to a higher guidance for this year’s tax season than what we provided last year as well as a more robust long-term outlook. Now in terms of our principles, we continue to strive across the Company to grow our customer bases as fast as we can because we know ultimately that will create a pipeline of growth over the long-term as they continue to grow and have increased problems that we can solve. But that being said we are in a unique situation right now as we launch TurboTax Live, which is creating an opportunity to serve a $20 billion total addressable market that at this point, we weren’t able to effectively serve. And that comes with a higher average revenue per return, so when you introduce that to the mix even as we grow customers, we believe that you’re going to get an uplift from that revenue per return, which is going to drive the overall performance of the segment. So, we would not be surprised this year, if revenue grows faster than customers and the tax business is going to be primarily because of mix. But I want to be really clear, our primary goal is to grow the do-it-yourself category and to grow our share in that category. And if we’re not growing share, we don’t consider that to be a successful season.

Thanks so much and if I could just ask a quick follow-up on QuickBooks. I know you said it before and you reminded us again that total sub-growth is expected to moderate some from here. Just for our modeling purposes and to wrap our heads around what that trajectory might look like any kind of parameters we should be thinking about?

Yes, Brad, we’re really kind of stepping away from that, the reason being is first we think the overall health of the category and that business is really going to be driven by the Online Ecosystem revenue being greater than 30%. The other reason is we’re moving into a chapter of apples and oranges on what qualifies as a subscriber. We’ve a self-employed SKU, we’ve QuickBooks Online, we’re launching QuickBooks Online Advanced, they come with very different average revenue per returns, and now we’re introducing the new front doors, the ability to have a standalone payments offering or a standalone payroll offering and the question will be what counts as a sub? And so our view is, look all those are solving important problems, that’s why it's most important to focus on online ecosystem revenue. While we did provide a little bit of a gating factor for people to think about is we will not be proud of our performance if we don’t add at least as many net subs as we did last year. So if we think about that as a qualifier, when you think about the number of subs that we added, that’s the kind of goal that we put out there for ourselves.

Brad, the economy is on everyone’s mind and I am just curious, I think we all know how defensive the tax business can be, but can you give us a sense on the small business side what’s giving you confidence as you look forward? It’s obviously way too early to call, but what were the components that are put in that you feel good about as you look into next year, that’s even if we go into a softer economy that you can sustain those headwinds?

And as you pointed out, our portfolio over 35 years has proven to be resilient and with the points that you called out, taxes are going to need to be filed regardless of the economy. On the small business side, we’ve learned to look past some of the more public-facing indices, things like small business optimism because if that’s going up, that’s not a surprise for us because one out of two small businesses fail in the first five years. We're always sure it’s going to be the other person. So, they’re just natural optimists and that’s why we love an entrepreneur and a small business owner. So, we look for more the leading indicators that the real health of their business and we look at things like charge volume. Are they hiring employees? Are they hiring contract workers? Are those workers working longer hours? Are they actually increasing the wages for those workers? At this point in time, we’ve not seen any of those indicators weaken and so we still believe that there’s a lot of noise in the market certainly in terms of the investment community and equity market, but we haven’t seen that show up on Main Street yet, but as you might imagine and we shared this at Investor Day, we've already got game plans in place that should there be a softening in the market we know what actions we need to take to both help customers grow but also ensure we deliver on our commitments.

And real quick just payroll attach, the impact going forward seems like a big opportunity. What do you need to do to see that improve meaningfully from here?

Brent, we’ve been focused on as we talked about in the opening comments, our online services, we're still very excited about the opportunity to get more people into QBO. We've also decided and found that it was an opportunity for us to get down a parallel path and get more of these attached services or online services. This past quarter online payroll attached to QBO revenue grew 36%, payments grew 34%, and we’re really getting down to the blocking and tackling, simple design that makes it easier to discover inside the offering, trying to be able to pre-populate data where possible so you can get to a benefit very quickly and those are the execution pieces, and then there’s new innovation, things like same-day payroll, the ability to actually if you file before that 10 o’clock time on the East Coast, you can get your payroll done in the same day. And that is a big acceleration from what you’re able to do with most other offerings in the competitive market, so that basically allows you to hold onto your money longer and that’s a compelling value prop for small business owners. So what we're doing right now is, improving our execution, simpler design, easier to discover, pre-populate data and also introducing breakthrough renovation there, alternatives don't have in the market we think makes our value proposition even that much more compelling.

One main question and a follow-up. Just on the online services side that business is growing quite a bit faster than the core QBO U.S. subs. I wonder if you could help us understand, what sort of prior drivers like payroll and payments are continuing to fuel that online services piece versus some of the new drivers, TSheets and QuickBooks Capital and other drivers like that. How much money you attribute to some of these newer drivers that we haven’t been used to seeing in the past?

Walter, you actually hit the key drivers, you did a nice job of summarizing it. The bulk of this really has been driven by our core payroll and payment, so we do have a nice upside with TSheets which came in, but that is not the bulk of that improvement. The majority of that improvement is coming from improved execution, simpler design, easier discoverability, faster time to benefit and in the new innovations like same-day payroll or next day funding and payments. And it's those wider two things; it’s the new innovation we’re bringing to market that we think is really shifting the playing field more in our direction and you’re going to see more of that coming from us in the future, TSheets is a nice top spin on top of that.

And then, maybe Michelle you could help us understand tax seasonality, things like it's always tough thing to gauge. Maybe you could help us understand what factors you see this year that would impact seasonality we move through the tax season in January and into the year?

Hi Walter, thanks for the question. Yes, every year we need to evaluate how the season will unfold. One of the main factors is the 606 regulation this year, which we've provided some details on last quarter and on the Investor Relations website for better understanding. Another important aspect that affects us every year is the IRS opening day. The IRS has not yet announced their opening date, so we've made some assumptions on that, and we will need to see how it develops.

This is Shankar on behalf of Kash. I have a question on the QBO revenue profile. It seems like the overall QBO revenue is growing faster than the unit growth rate for the first five quarters. But based on what you see right now, do you see that kind of trajectory continue on in the future and maybe just talk about the drivers, not just U.S. but international in terms of how the UK market will play off the rest of the year?

Yes, thanks Shankar, this is Brad. So, yes, we have continued to see an acceleration in QBO revenue and we suggest that that’s the best indicator of the health of this business going forward. What’s really driving that is a combination of things. First and foremost, we continue to be able to execute both new subscribers but also getting online services, up and running, things on payroll and payments or TSheets as we were just discussing. The second is as we bring customers in, we sometimes have a promotional discount for an introductory trial period, and then once the anniversary of that trial period then their average revenue per customer goes up in that 13th month in a nice healthy bump. And so, we got a larger base that continues to anniversary of that add, so you get a lift in ARPU and revenues as a result of that. The third is, we’ve been delivering more compelling value propositions and new feature functionality to customers so our retention rates going up. And if you can go back to Investor Day, you’ll see we improved the retention rate of QBO as well, and so that continues to drive revenue. And then last but not least, we have opportunities as we look ahead to get smarter about our promotions. And so, we have been adjusting things like the kinds of promotions we offer to accountants, we found the sweet spot of what they would get the unit list, we’re looking for without leaving too much on the table. And when you put those combinations together, it’s attached services, it’s the ability for us to have that anniversary group come off of their promotional trial period. We have the opportunity to do things that get wiser on our promotions and then we have improved retention from just stronger value props with new feature functionality and that’s driving the revenue. I will continue to go back to our talking points that we want to keep that Online Ecosystem revenue greater than 30%. We are delighted to see it at 42% now and we’re going to continue to keep our foot on the pedal and see how we can drive that.

As a follow-up on the fact side of the equation, how do you gauge the competitive front, going into the tax season, anything that you see is early indicators about seasonal turnout to be or is yet to be seen?

Well, each year we always anticipate the best from our competitors. We have really good competitors in the market. We often talk about the respect we have for them; they keep us on our toes and they actually improve the game for the end consumer. So, we expect a very competitive tax season as we do each year. At the same time, I feel like we’ve got a really strong lineup in place. We’ve got a compelling offering that’s going to be hard to match with TurboTax Live. Our team has got several things that they’re going to be introducing on our core TurboTax product that we’ll talk a little bit closer to the tax season about. So I feel like we’ve got our best foot forward and we expect to have a really competitive, but in our case we believe we have the chances to have another very successful tax season.

I wanted to dig in a little bit on the QBO Advanced product and I think you talked about the subset of our customer base where it has the best fit currently, but I am curious if we dig into I think you said 180,000 users. How much of that is people who are outgrowing QBO versus QuickBooks desktop customers that maybe wanted to move to the cloud and didn't have the right functionality versus opportunity to go out and get new customers? How should we think about in that context?

First of all, we can look at evidence we already have in the market on the desktop of QuickBooks Enterprise on desktop. We have 140,000 customers there with businesses north of $440 million both units and revenue growing double digits on that platform, and over the years, we’ve come to appreciate, but that mix ends up being somewhere in the neighborhood of about 70% are stretchers, the existing QuickBooks customers who need to continue to grow and add functionality as they add employees. And then about 30% of what we call flinchers where the product is disruptive in the market and were priced at a level that we’re able to get customers off of competitive platforms and onto QuickBooks Enterprise. So our going-in assumption is we’ve 180,000 in the QBO customer base that look a lot like that 140,000 in desktops, so those are our target profiles and those would be the ones that we want to keep in the family and simply have them be stretchers. And of course, as we introduce this product and we continue to add functionality, we think it's going to be just as disruptive in the cloud as it is for the desktop players and we think we will get some switchers from other alternatives as well. But right now, the best proxy we have is the evidence we already proven in desktop and that tends to break down about a 70-30 split.

Brad, I just want you to touch upon sort of the QBO growth internationally anything to call out just in terms of any particular regions, obviously a lot of opportunity in international. So just wondered if anything sort of popped up on your radar screen this quarter that you might not have been expecting mostly for I guess for the good?

Thank you, Kirk. Obviously, we’re proud of the results right now, 61% growth year-over-year in the international markets. We hit escape velocity on our three core markets Canada, UK, and Australia. The UK continues to be the darling of the bunch, they are adding customers at a rate much faster than the competitive alternatives in the market, and we continue to see our net promoter’s score or product recommendation scores advance in each of those markets. As we think about the next group of countries, we continue to have France, Brazil, and India; and we’re monitoring things like active use and product recommendation scores and we’re seeing positive trends in those countries as well. They haven’t hit escape velocity yet but they are getting closer. So net, net I would say if the three core markets we talk often about with the UK being the belle of the ball in that group.

Wanted to dig in a little bit Brad on your comments about TurboTax Live and having a wider range of price points this year, and maybe even just sort of dig into what the purpose behind that is? And is any of that competitive response to some of the tax stores potentially lowering prices for their bricks and mortar return filings for this upcoming tax season?

Thank you, Matt. So first of all, I will go back to coming out of last tax season. We had two big insights for TurboTax Live where our hypotheses actually were off last year, but we discovered some upside opportunity. The first was we had anticipated TurboTax Live would be a service that would be something that people with more complex returns would be interested in. But then we quickly understood that people who have simpler returns also have areas where they don’t have confidence and they would benefit from an on-demand expert. So that lead us to, we need to have TurboTax Live not just as a bundle but actually as an add-on service for the simplest returns all the way up to the more complex returns. The second thing that we discovered is we had held back on our go-to-market and advertising to the second half of the season because our assumption had been more complicated returns would come in the second half, so let’s put the marketing there. We've come to appreciate as I just said, that having access to an expert applies to people early in the season as it does later, so there we have a more robust go-to-market plan that we got set up for the full season as well. Now just happens to be the competition has come out recently and talked about some of the things they plan to do and that gets me excited because we already had our plans in place and I think this will better position us to be able to address what they are doing, while also take advantage of the opportunities we learned last year in tax season.

One thing we're likely to see this tax season is an increase in the number of people switching from itemized deductions to standard deductions. Our calculations indicate that this could involve anywhere from 8 million to 20 million filers entering that category. What steps are you taking to ensure that those who may be filing for standard deductions for the first time are informed about DIY options and recognize the benefits of this switch, especially if they are currently using a different filing method? What is your strategy to engage as many of these individuals as possible?

As you just pointed out, those 8 million to 20 million are spread across multiple tax prep methods, they don’t all fit in do-it-yourself, many are going to be coming into the categories for the first time, some are in the tax source, some are with pros because that’s the way their parents may have filed, or that just may be the way they’ve historically been more comfortable because they wanted to have advice on a certain area of their tax return, and then some are in DIY. So the first thing we’re doing is, we’re going to continue to make sure they understand that there’s a better alternative in the market which happens to be TurboTax and that's going to be our go-to-market campaign where we’ll have our message out there in all forms of media. The second is our word of mouth will work in our favor and we’ve higher net promoter scores in the alternatives in the market that needs people talk about these are the kind of solutions I used to get my taxes done, and they’ll tell their friends and family. And then third is with the introduction of TurboTax Live, anyone who historically would say they may be a standardized deduction, but I am still nervous for this reason they’ll have the ability to come into our solution and be able to get that question answered so that they don’t have any nagging question unanswered when they file. So think about it as a robust integrated marketing campaign, word of mouth continuing to work in our favor and then the network of experts available just in case you decide that you still have nagging questions, you don't have to make the arbitrary choice to get in your car and drive somewhere, you can log in right from the solution and get your question answered on demand. And we thought this through and we feel pretty good about our assumptions, and we think we’ve got a strong plan in place to be able to capture as many of those as we can.

And maybe one just for Michelle, this quarter we saw very high incremental margin across the business for Q1, but for the full year you haven't really I guess aggressively taken up the stance on margins. What are the puts and takes that we should think about as we go through this year? What’s the potential if you will for surprises on margin as we go through tax season given how strong the first quarter has been?

Yes, we did see some strong margin in Q1, a couple of things I’d just tell you to think about. We do sometimes have operating expenses that can shift from quarter to quarter, and we’re seeing a little bit of that happen from Q1 this year into Q2. We did give the guidance reiterated it so we do feel that that’s a good place to focus for the total year. So that’s really what I would focus on, as I would focus more on the total year, and I wouldn’t get overly concerned with some of the movements that we may see between quarter-to-quarter.

Going back to the macro for a minute, Michelle at the Analyst Day, you mentioned managing the balance sheet that can sustain all economic cycles that potentially allows you to lean in during any downturn. I wanted to take a moment to revisit that comment. I was hoping you could walk through your thought process of evaluating those trade-offs and potentially leaning into a tougher macro?

Thanks for the question Michael. There have been quite a number of questions around it that’s why we thought it was important to address a potential downturn and what that might look like for us. For us, we really do go back to focusing on our fundamentals which are for us or our financial principles. We see ourselves as enduring and that goes when you think about growing organic revenue and then growing operating income dollars faster than revenue. We really are, no matter what we think about the economic environment, looking to deploy our cash to the highest opportunities we have. We do have a 15% ROI target over five years and that’s where we continue to focus.

I have a question that involves three parts. Regarding the seasonality that Michelle mentioned, I'm curious about tax reform consultations and the decision to offer these consultations for free. What type of expense impact do you anticipate and how will the timing play into that? Additionally, Brad mentioned earlier that marketing for TurboTax Live last year during the late season is also relevant for the early season. Considering all of this, how might these factors influence the quarterly patterns we've observed? I understand that you previously mentioned some variations, but I'm looking for an overall perspective on potential shifts in marketing and labor expenses this year.

Thanks for the question. A couple of different things, I would say if, first of all when we look at the TurboTax business, one of the things we look at, specifically we were looking at the marketing spend. As we really look at a payback within the current year and that’s what we focus on, we don’t get overly focused on when this going to occur, whether its Q2 or Q3, it is around making the best decision for the tax season and making sure that we do have that payback within the current season. Brad did reference that last year we spent more in the late season this year. Again, we have the opportunity to look at the entire season, we mainly from different positions there. The only other things I would say you called out specifically at the tax reform consultation that we’re providing this year that is right now is for a two-week time period in November, believe it's 13th through the 27th of this month and it does give people a chance to call in and see exactly, how tax reform might impact them going forward. So obviously the impact to that would be in this current quarter.

I am kind of curious as you think about the strategy from a very high level. We look back over the last couple of years, there were definite years that you targeted low-end returns as a way to capture market to your point to allow that to grow as they get to more complex returns and kind of grow in terms of the mix. Versus other years kind of using price to drive revenue, any sense in terms of what the strategy going into this tax season from that simplistic framework looks like?

Yes, Sterling, I think you summarized it well. We covered this at the Investor Day. Our strategy includes a plan with five key components, with the first being to strengthen our leadership in the do-it-yourself category. We aim to remain competitive in free services while introducing digital innovations to our paid offerings, allowing us to grow faster than the overall category. This will be a fundamental part of our strategy this year. The next focus is transforming the assisted tax preparation market with TurboTax Live. We’re very excited about our offering and the promising indicators we observed in October during the extension filing season. We introduced features like access to an expert via mobile, the ability to send questions and receive answers within 24 hours, and varying price points for different return complexities. These are just a few examples of our dual strategy this year. Beyond tax, our strategy also encompasses building a financial identity and expanding our offerings with Turbo and Mint, and eventually looking to global markets. However, this year, our approach is twofold, focusing on both do-it-yourself and TurboTax Live. We believe our new product lineup will simplify choices for customers, and our marketing campaign will enhance clarity. We are optimistic that the do-it-yourself category will continue to outpace other categories, and we plan to capture a larger share of this market. We expect our revenue per return to increase slightly due to a favorable mix with TurboTax Live.

I just wanted to ask about TSheets and specifically and you’ve owned that for several quarters now and just wanted to know maybe more specifically. How happy you’re with that acquisition what you can say about that? And my follow-up is, does that make you want to do more of these types of small business acquisitions?

It’s been great, and I appreciate your kind words. To answer your question about TSheets, it might be our most successful acquisition in recent history. We recently had a Board meeting where we reviewed all of our acquisitions over the past 35 years, focusing on the last 10 and then the last two. We evaluated their performance against the original business case presented to the Board, considering both strategic and financial aspects. Our ability to learn from both our mistakes and successes has improved, allowing us to integrate acquisitions more effectively, and TSheets has benefited from this process. They have helped us rethink our approach to speed, and we have supported them in accessing the channels and innovations they needed to reach their target audience. Moving forward, our strategy remains the same, and we understand the problems we need to address for our customers. The decision to build, partner, or buy will still be guided by our requirement for a 15% rate of return over five years, just like any other decision we face. Our playbook has become more refined, our execution has enhanced, and my board and I are being very honest about our performance as we continue to improve each year in managing acquisitions successfully.

So following up on some of the comments. I was wondering, when you look at Block talking about cutting its price, they also talk about cutting its price at $59 for in-store and then hope of prevent at least, causing people to think before shifting to do it yourself. So one question is, do you think this is going to have much effect. Secondly related, looking at the industry, do you see Block as our competitor or you're more concerned with Credit Karma? And then I want to thank you for what you’ve done over the 10 to 12 years. The Company has made terrific strides. And kind of my question following is that, as you think about what’s going to happen over the next five years, as you look at the company from 30,000 feet. What do you see as going to be the major disruptive device that the Company shoots into the stratosphere?

Thank you, Michael, and I will start with where you left on in terms of the kind words. This team has performed incredibly well over 35 years and I certainly benefited from their expertise and their execution for the last 11 in the seat. So, it's been a pleasure to work with them in the field. Let me start with the first, virtualization our Block and their decisions recently been more transparent on price and to roll out some of their approaches. I think first and foremost, I will go back to the ten-year trend, because we’re seeing a lot of promotional discounts and early refunds and refund anticipation loans in the tax source, but if you look at a 10-year period, the IRS returns have growth six-tenths of a percent. Pros have grown three-tenths of a percent. Tax stores have declined 2.9%, and TurboTax during that period of time has grown 6.3%. So what is the path? And when they get to promotional battles this is often between the tax prep methods, it doesn’t necessarily change anyone’s decision if we’re going to lead the category and go to do it yourself solution. I think the second challenge to that is, $59 is incredibly competitive when you’re thinking tax store to tax store, but it pales in comparison to free when you think about do it yourself. And so, I think that’s the first headline. The second is quite frankly, I mean sincerely, I had a ton of respect for each in our Block as does our company. We had a ton of respect for Credit Karma for Tax Act and all the other players out there. Each one of them brings something unique and different to the category. So it will be hard for me to tell you which one we spend more time thinking about because we look at all of them and it used to be called plagiarism now it's called benchmarking. We look to learn from our competitors and we want to make sure that we have a better game, so we can get out there and compete in the market and earn the customers trust and earn the customers business. As I think to the future, this is really for Sasan and the leadership team, but I will tell you that we’re fundamentally going to continue down the path we’re on, which is a platform company that unlocks this ecosystem. And if you get underneath that, what is the major thing that is powering that? And that quite frankly is data that has been in a trusted and secured manner, stewarded by the Company and then we match that with artificial intelligence and machine learning to do amazing things for customers they could’ve never thought possible. And so if I had to boil it down to anything, it is the power of data which the customers could sense, that we could match up with our science our algorithms and our data science to make magical things happen that I think will be the single biggest breakthrough that’s a sign of the team all over and they’ll continue to drive forward over the next five years.

This one's for Michelle. What early starts Q1 and looking at Q2 guide and hope for just first half much better than expected. Just as a thought was purely due to the strength across your various pockets of your business? Or did you notice anything to suggest maybe moderate shift in seasonality to the front half of the year?

And you actually, yes, you answered it in your own question. It is really as we look at the strength that we’ve seen. You're coming off of FY’18, it was a really strong year for us across each of the pieces of our business, and we continue to see that strength come into Q1. And so, I would say it is more of the strength that we’re seeing in the business versus any other shift outside of the just the normal shift you’d see with the 606 change. So thank you.

Maybe could we get a quick update on where you guys stand on the transition to AWS and beyond that, I know you’re also using GCP on the data AI and machine learning side. Maybe how early we’re in that process? And are we getting to the steep part of the gains from that? Or should we expect more in the future?

It's Brad. We’ll keep that simple. So on the transition to AWS, by the end of this fiscal year, all of our consumer-facing apps will be in Amazon Web Services. Today, we’ve TurboTax Online there. It ran both its primary and secondary instance in the last of the tax season in the cloud that was completely there. QuickBooks Online is now in AWS as is Mint, so we have some other services we will make sure are in there by the end of this fiscal year. There will be a long tail of infrastructure and internal apps that will continue to move to the cloud that will take another 18 to 24 months, but all of our customer-facing apps will be there by the end of July 31st, that’s our target. And the second part of the question I have to admit I wasn’t able to follow, I heard the data and I wasn’t quite sure what the question was. Do you mind repeating for me?

Yes, I apologize. So I believe you’re using GCP for a lot of your, we’ll say big data type of work. I am assuming we’re still very early on in that process and significant gains to be made in the future?

Yes, Brad, that’s correct. So, you’re referring to the Google Cloud Services and some of our capabilities that we have, working with Google on the data and the data lake as well as on Amazon Web Services. Yes, we’re early days in that regard and we’re primarily right now working with Amazon Web Services on most of our offerings. We are running some experiments in a sort of a parallel path with the Google Cloud, but at the end of the day, we’re very early days in that regard, and we’ll continue to share more as we learn more.

Great, thank you Gigi. And let me just wrap up by reiterating that we feel very good with our Q1 performance. We’re out of the gate strong as we head into our peak season. We’re building momentum with some positive leading indicators as we came through these first three months. But as you all know, the real game starts now and comes down to execution. It’s our team’s favorite part of the year. We feel that we’re ready. We've got a strong product lineup, a strong go-to-market game plan. And I want to thank you for your questions, I definitely want to thank you for your kind wishes and I hope everyone has a wonderful holiday season, and we will speak with you soon. Take care.