Intuit Inc (INTU) — Q2 2019 Earnings Call Transcript

Thanks, Latif. Good afternoon and welcome to Intuit's second quarter fiscal 2019 conference call. I am here with Intuit's CEO, Sasan Goodarzi; and Michelle Clatterbuck, our CFO. 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 Sasan.

Thanks, Jerry, and thanks to all of you for joining us. I will start by reviewing our results for the quarter and outlook for the year. I will then spend a few minutes sharing my thoughts about the future. Starting with the results, we're halfway through the fiscal year and continue to see good momentum across the company. Second quarter revenue grew 12% overall, fueled by 17% revenue growth in the Small Business & Self-Employed group, and 11% revenue growth in the Consumer group. Revenue for the Strategic Partner group was in line with our expectations. With this strong performance, we remain on pace to deliver against our full-year revenue and operating income outlook. With that context, let me start with tax. Every tax season is different, and this one is no exception. We believe the new tax legislation and the extended partial government closure impacted consumer behavior, resulting in a slower forming season. As a reminder, there are four key drivers for our consumer business. The first is total number of returns filed with the IRS. The second is the percentage of those returns filed using do-it-yourself software. The third is our share within the DIY software category, and the fourth is the average revenue per return. Our Consumer group strategy is to expand our lead in the do-it-yourself category, transform the assisted tax preparation category, and expand beyond tax to build a consumer platform. This is all in service of helping our customer make ends meet and get their largest tax refunds. Based on the latest IRS data, the do-it-yourself category is performing better than the assisted. Through February 8th, IRS data shows self-prepared e-files declined 3.2%. In comparison, TurboTax e-files through the same period declined 3.5%. We are confident in our strategy, and I'm very proud of our team. Let me share a few specific examples of how we are delivering for our customers this season. Within do-it-yourself, we've invested in delivering the best experience for our customers who file simple returns by including year-over-year data transfer for no charge in our free edition. We're already seeing an improvement in product recommendation scores. TurboTax Self-Employed is again part of our lineup this season, and comes with a 12-month subscription to QuickBooks Self-Employed, enabling customers to track their financials throughout the year. This product was one of our fastest-growing offerings last season. In the assisted tax category, we are transforming the customer experience with TurboTax Live. We introduced a range of price points within the product lineup this season to offer access to an expert for even the simplest filers. For the first time, we're offering mobile access to these experts. We also improved the onboarding experience and tools for the approximately 2,000 pros on our platform, the majority of whom are returning from last season. We're excited to see significant increases in Net Promoter Scores from the pros. Beyond tax, our consumer platform is aimed at helping customers make ends meet. With their consent, Turbo provides customers a view of their overall financial health by combining a credit score, verified income data, and debt-to-income ratio showing customers where they truly stand. This platform gives us the ability to connect our customers with the best financial products to save them money. Turning to Small Business, we've delivered another strong quarter in our Small Business & Self-Employed group, with online ecosystem revenue growth of 38%, again, exceeding our target to grow better than 30%. We continue to place an increased emphasis on online services to deliver more value for our Small Business & Self-Employed customers. I would like to share a few proof points that demonstrate our progress. We are focused on solving the most important problems for our customers by helping them get paid fast, manage capital, and pay employees with confidence. Within payments, last fall, we launched next business day payments allowing our customers to receive their funds much faster than previously experienced. We've seen an eight-point higher product recommendation score for those customers who have access to this product. Within payroll, we introduced next day and same day direct deposit to enable customers to hold on to their money longer and better manage their cash flow. We have already seen over one-third of our online payroll customers benefit from this feature. QuickBooks Capital has funded $277 million in cumulative loans since launching publicly, a little over a year ago. QuickBooks Capital leverages QuickBooks' online customers' data to provide loans to small businesses. Nearly 60% of which were not qualified for loans elsewhere. Our QuickBooks Capital business has a default rate half the industry average. And we remain excited about this opportunity. Finally, we are encouraged by initial results for QuickBooks Online Advanced as we take our game to the mid-market to serve those businesses with 10 to 100 employees. We continue to rollout new features, including custom user permissions and batch invoices. The team is using customer feedback to iterate fast and add functionality. Within our Strategic Partner group, our professional tax revenue was down 1% year-over-year. We continue to focus on multi-service accounting firms that do both books and taxes, enabling us to drive our accountant success while growing our small business ecosystem. To wrap up, we are pleased with the continued momentum of our Small Business & Self-Employed group and remain laser-focused on executing as we head toward the tax filing deadline. With that overview, let me hand it over to Michelle to walk you through the financial details.

Thanks, Sasan. Good afternoon everyone. For the second quarter of fiscal 2019, we delivered revenue of $1.5 billion, up 12% year-over-year, GAAP operating income of $233 million, versus $194 million a year ago, a 20% increase, non-GAAP operating income of $339 million, versus $294 million last year, a 15% increase, GAAP diluted earnings per share of $0.72 versus $0.70 a year ago, and non-GAAP diluted earnings per share of $1.00, up from $0.84 last year. Turning to the business segments, Consumer group revenue was $461 million for the second quarter. While the season got off to a slow start, we remain confident in our overall plans for the year, and for Consumer revenue to grow 9% to 10% in fiscal 2019. IRS total e-files through February 8th are down 7.1%, assisted e-files are down 12.5%, and DIY e-files declined 3.2%. In comparison, TurboTax e-files declined 3.5% through the same period. As a reminder, we'll provide a final tax update in late April, after the tax season ends. Strategic Partner group reported $208 million of professional tax revenue for the second quarter. We continue to expect revenue in this business to grow 2% to 4% in fiscal 2019. Total Small Business & Self-Employed revenue grew 17% during the quarter. Online Ecosystem revenue remains strong, with growth of 38%. 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%. QuickBooks' online subscribers grew 38%, ending the quarter with nearly 3.9 million subscribers. Growth remains strong across multiple geographies, with U.S. subscribers growing 32% to approximately 2.9 million and international subscribers growing 56% to over 980,000. Within QuickBooks Online, self-employed subscribers grew to approximately 845,000, up from roughly 489,000 one year ago. We continue to expect total subscriber growth to moderate as we place a greater focus on additional services and penetrating a broader range of customers. Desktop ecosystem revenue was up 3% in the second quarter. Within the desktop ecosystem, our QuickBooks Enterprise customers continue to grow at a double-digit pace in the second quarter. This further reinforces our interest in the mid-market customer with our QBO Advanced offering. During fiscal 2019, we continue to expect QuickBooks Desktop units to decline single digits, and desktop ecosystem revenues to be roughly flat. Turning to our financial principles, we remain committed to growing organic revenue double-digits and growing operating income dollars faster than revenue. We take a disciplined approach to capital management, investing the cash we generate in opportunities that yield a return on investment greater than 15%. Our first priority for the cash we generate is 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 return 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 $177 million of stock in the second quarter and approximately $3 billion remains under authorization. We expect to be in the market each quarter this year. The Board approved a quarterly dividend of $0.47 per share payable April 18, 2019. This represents a 21% increase versus last year. We've gotten a lot of questions about the impact of a potential downturn. At this time, we're not seeing any evidence of a macro-inspired slowdown in our business. Charge volume trends remain strong and the number of employees being paid in our ecosystem remains on trend. Now, let me turn to our guidance. Our third quarter guidance for fiscal 2019 includes revenue growth of 10% to 12%. GAAP diluted earnings per share of $5.03 to $5.08, and non-GAAP diluted earnings per share of $5.35 to $5.40. You can find our Q3 and our reiterated fiscal 2019 guidance details in our press release and on our fact sheet. With that, I'll turn it back to Sasan.

Thanks, Michelle. With that overview of the quarter, let me take a step back and share my perspective on Intuit's future. I will start with what matters most to our customers. All of our customers have a common set of needs, and those who've made the bold decision to become entrepreneurs and go into business for themselves have an additional set of needs. All of our customers are trying to make ends meet, maximize their tax refund, save money, and pay off debt. For those who are small businesses, they have additional needs. They want to find and keep customers, get paid, access capital to grow, and ensure their books are right. That's why our mission is to power prosperity around the world, and our strategy is the One Intuit Ecosystem, which focuses on unlocking the power of many for the prosperity of one. This strategy is a continuation of Intuit's 10-year transformation led by Brad from a North American desktop company to a global cloud company. As we advance our strategy, we're taking steps toward becoming an AI-driven expert platform. Let me unpack what I mean by an AI-driven expert platform. It's a platform where we and others solve the most pressing customer problems and deliver awesome experiences. It's about significantly accelerating our application of Artificial Intelligence, which progressively learns from the large datasets across the platform and delivers the benefits customers seek with speed, and it's about solving the largest problem customers face, which is confidence, by connecting them with experts on our platform. With that context, let me provide a few examples to bring this to life. When it comes to connecting people to experts, we are doing this today with TurboTax Live. Imagine the opportunity we have to expand live expertise across the platform to serve consumers, self-employed, and small businesses. It's our chance to digitize the service industry. For small business owners, we are focused on being the center of small business growth using artificial intelligence across our platform to accelerate faster funding in payments and to help our customers access capital. Over time, we see an opportunity to better serve product-based businesses as they find and sell to customers across channels. We're also focused on helping customers make smart decisions with their money by connecting our customers to financial products to make ends meet. This is our vision for Turbo, where we are increasing active use and engagement so we can offer value beyond tax through our consumer platform. Last but not least, we are focused on disrupting the mid-market with QBO Advanced. Our AI-driven expert platform will help provide what mid-market customers need at a disruptive price. We are excited about the opportunity in front of us, and we are off to a running start on this journey. Before I close, I would like to thank our Co-Founder, Scott Cook, for creating such an extraordinary company 35 years ago, and Brad for the incredible foundation he has left behind. It is a true honor and privilege to lead Intuit. I want to thank our employees, customers, and partners for another strong quarter. We're pleased with our results through the first half and look forward to the future. Now, let's open it up for questions.

Great job on a strong quarter, everyone. Thank you for taking my question. I'd like to explore some of the early results from this tax season, focusing on two areas. First, what has been the impact of the tax law changes? Is there any early feedback indicating that the simplification is attracting more people to do it themselves, and are they gaining confidence in that process? Secondly, specifically regarding TurboTax, how has the adoption of TurboTax Live compared to your expectations for TurboTax users? I know there has been significant promotion, especially on the landing page. Has the uptake met your expectations?

Great. Hi, Keith. Thank you for your question. A two-part answer; your first one is, as the category champions for do-it-yourself, we're actually quite pleased with the growth that we've seen in the category. And we believe that with our actions, our lineup, and the tax simplification, it has potentially drawn more folks to the category. So, we feel good about what we see thus far. In terms of the uptake with TurboTax Live, as you know, we've made multiple experience improvements this year. One of them being that we've made it available across all of our skews, and thus far we like what we see; our PRS scores are up, both for the consumer and for pros, and we like where we are.

Got it. And if I can maybe sneak in a follow-up for Michelle, when we're thinking about TurboTax Live, are you guys still comfortable that there won't be any real gross margin impact from TurboTax Live, because I mean there is a real person on the other side of that live offering?

Hi, Keith. Thanks for your question about TurboTax Live. We're excited about the potential it offers, especially in the assisted segment, which allows us to bring in more customers. Regarding our gross margin, we believe it will remain around the 84% mark over time. One of the advantages of TurboTax Live is its higher average revenue per customer compared to our standard TurboTax product. Despite having people involved in the service, we're focused on improving efficiency. Last year was our first year, and we acknowledge that we weren't as efficient as possible. We're actively working on this, but we're confident about our margin outlook.

Excellent. Thank you so much.

Thanks so much, and congrats on a nice quarter. Sasan, if we look at the spread between consumer revenue growth and tax unit growth, it looks like you're seeing a nice increase in average revenue per return. What are the puts and takes on the mix that's driving it? And can you give us a sense of ASP or mix across the spectrum of TurboTax Live skews that you're now offering?

Hi, Brad. Thank you for the question. As you know, we've got multiple levers of price, mix, and volume. And we actually like what we're seeing on mix. Our customers are seeing benefits in two areas. One is our Self-Employed offering and two, the fact that we have TurboTax Live available across multiple skews. We're seeing higher uptake in both of those areas, which is great because it means that we're delivering more confidence for our customers, and they'll have confidence in their maximum tax refund. So, we feel good about it, and those are the drivers of it.

Okay. And I could just add a follow-up, either for yourself or for Michelle. It's great to hear the early success this season with TurboTax Live and the strong product recommendation scores that go along with that. How should we think about your ability to meet demand as we get later into the season, and avoid customers sitting in long queues and doing that profitably?

Yes, it's a great question, and that's something that our teams prepare for throughout the year, and we have multiple different scenario plans as we're in season. I think the first thing I would start with is, last year our assessment of ourselves is that we delivered for our customers but we were inefficient on the platform for our pros. This year, we did multiple things. One, in terms of onboarding the pros, this ability we gave them for scheduling case management. They are far more efficient and effective to deliver for our customers. So, we feel good about the capacity that we have, the usage rate that we have, and we have multiple different scenarios to ensure that we're prepared for the rest of the season.

Excellent. Thanks again, Sasan.

Thanks so much, and my congratulations as well. I have two questions. Just first on tax. One of the things, Sasan, we've noticed is it appears that the way that the forms changed, and the way your product offerings change might mean that more prior year free-filers may actually become paid filers. I was wondering if, I guess two things on that. One is, is that a fair assumption or a fair assertion? And then secondly, what are the implications for unit share given that part of the DIY category is free as opposed to paid? And is there potentially some sort of mix shift towards paid and away from free as you think about the mix this year?

Yes, thank you, Ross. Great question; just a reminder, the four levers in the business are IRS, number of IRS returns, it's driving growth into the DIY category. We want to be able to take share in the category, and then last but not least, it's about revenue per customer. This year, we lined up our free offering. We wanted to deliver the best free offering, so we lined it up with the IRS 1040, and included a number of things to make it really an awesome offering, inclusive of year-over-year data transfer. By the way we defined our offerings, there are a number of customers that would look to our paid offerings for the benefit. We are actually seeing some of that uptake and feel good about what we are seeing. At the end of the day, what matters for us is, as the champions of the category is growing the category, and ultimately putting customers in the right products, and we feel good about what we're seeing early in the season.

Great. And maybe one other one just to follow-up, there was some commentary around the test product, like bookkeeping that was out there. And I know it's not a product that's in market yet, but I was just curious of kind of your thoughts around that, and maybe if there's anything just to talk about on a potential product in the future?

Yes, I believe you're inquiring about QuickBooks Live. Let me provide some context. As I mentioned earlier regarding an AI-driven expert platform, our customers, including consumers, self-employed individuals, and small businesses, share common needs. One of the biggest challenges they face is confidence, so a key focus for us is connecting users with experts on our platform. We've conducted some testing to understand what is important to small businesses, bookkeepers, enrolled agents, and accountants, and to facilitate that connection. So far, we are pleased with the results of our testing because ultimately it's a two-sided platform. It serves small businesses while also supporting enrolled agents, CPAs, and bookkeepers in their growth. We are satisfied with our early insights.

Great, thank you. Congrats again.

Yes, thanks very much. So, Sasan, I want to maybe shift over to QuickBooks Online really quick, and just talk about QBO Advanced. You mentioned you feel good about the progress there thus far. Could you just talk about sort of who you expect to be sort of the initial customers for that, meaning we are to expect that there's an opportunity to maybe keep customers that were sort of turning off to a product more for midsized customers as well as actually bring on new customers onto the platform? I guess is there a balance you're expecting in the near-term on that? And then I just had one follow-up for Michelle. Thanks.

Hi, Kirk. Thank you for your question. Let me just start with some context into the way we think about this space. First of all, the way we draw the line is small businesses with employees between 10 to 100. Generally, the challenge in this space is that these customers are over-served and they overpay. There's an opportunity for us to really serve these customers. The good news is, we do this today with Desktop Enterprise; we have well over 140,000 customers; it's over a $440 million business that's growing double digits. We've made the decision now because we are ready to build out the platform in the cloud. We believe there is a big opportunity to serve these customers. First, it's ensuring that we can be there for our existing customers. When we look at Desktop Enterprise, it's been 70% stretchers and 30% new, but as we look at QBO Advanced and really disrupting mid-market, we want to be hunters and nurturers. We want to make sure that we not only deliver for our existing customers as they grow but also want to begin to go after new acquisitions. I would just remind us that we are very early. We know how to play in this space, but now we're building the platform in the cloud and it's not just about the platform, but also the services that we need to deliver. Very early, but we're pleased with the early results.

Okay, that's helpful. Michelle, you've clearly achieved a strong performance in operating margins, which is reflected in the top line. However, with the tax season progressing more slowly, was there any expenditure that moved into the third quarter from the second quarter because of that, or was this just the natural leverage of the model impacting the operating margin earnings outside of this quarter? Thanks.

Thanks, Kirk for the question. Yes, with a slow forming tax season and just our normal operations of the business, we do see expenses that tend to shift from one quarter to the other. We tend not to get overly focused on that. We really do focus on the total year when we think about margins. I would stay focused on the guide we've given for the year and not get too caught up in the quarterly movements.

Fair enough, thanks very much and congrats on the quarter.

Thank you.

Thank you. Good afternoon and great job. My first question is similar to Ross's earlier inquiry regarding the tiers in TurboTax, specifically about the changes due to tax reform. I'm interested in whether you are observing any significant shifts from itemized deductions to the standard deduction and how you are managing that. Thank you.

Hi, Scott, thank you for your question. I think, back to the context that I said earlier, tax simplification is really good for consumers and in fact with us being the category champions and the way we are promoting how easy it is to do taxes yourselves we're seeing growth in the category. Now, with respect to where customers fit across the different lineup, it's playing out exactly within the realm that we assumed in terms of one, those may trade up because of TurboTax Live and the confidence that they're looking for. But also those that potentially used to pay, but now need to be free. So what we're seeing is very much in line with what we expected.

Thanks for that, Sasan. Regarding competitive behavior, there have been many rate changes and adjustments in tier complexity from all competitors this year. I'm curious if you have any insights on how we compare, given that we don't have IRS data until mid-February, and you had to backtrack a week to get information. Do you think any competitors are advancing or lagging in the various tax categories due to their competitive strategies? Thank you.

Thank you for the great question. Having spent three years in the TurboTax environment, I can say this season is similar to previous ones. We respect our competitors, and they are certainly presenting strong products and marketing. However, based on what we've observed so far, we are pleased. It’s important to note that for every percentage point the IRS increases, our revenue tends to rise by one. Additionally, when the category grows by one percentage point, our revenue increases by three. We are committed to expanding this category, and we are encouraged by the trends we are currently seeing.

All right. Thanks very much.

Good afternoon. 12% growth from the first half of the year, yet you're guiding for D Cell to get to eight to 10 for the back half. I'm just curious how you think about the back half and the differences that you faced. Obviously, a big comp from last year, but any other factors that you're paying attention to that we should be cognizant of?

Hi, Brent, a very legitimate and deserved question. Our principle is we guide to the year and we guide to the quarter. Of course, as you've articulated both in Q1 and Q2 we delivered 12% top line growth, and of course, you know, our guidance for Q3. We want to make sure that we are laser-focused at executing that. There's no new dynamic other than we guided for the year and guided for the quarter.

Hi, Brent, thanks. Thanks for the question. In Q2, as I mentioned, we bought back $177 million worth of stock which was up from $101 million in Q1. There has not been any change in our capital planning decisions. We apply our financial principles, and we look at investing in the business to drive growth. As I mentioned in acquisitions and then we look at buying back shares and paying dividends. I would say we’re pretty happy with where we are over the last four years. We’ve returned about $6 billion to shareholders and we feel pretty good about where we are right now.

Great, thanks.

Hi, thank you very much. Congrats to Sasan on taking over as CEO of Intuit. I had a question about the tools that are available to Intuit to improve retention in the TurboTax business and also the QBO business? Thank you very much, that's it from me.

Kash, thank you for your question and your kind words. Do you mind just repeating your question, because you cut in and out? I didn't hear the whole question…

Absolutely. We're happy to go into detail about the strategies available to Intuit to enhance the retention rate in TurboTax and QBO businesses.

Thank you for repeating that; it was very helpful. I want to start by sharing that all of our products are equipped with instrumentation. We analyze data from all of our products, paying attention to customer usage, feedback, and product recommendation scores. This analysis allows us to identify where we are meeting customer needs and where we need to enhance the experience. It also helps shape our short-term roadmap, while we simultaneously work on longer-term strategic plans. The key tool here is that our products are instrumented, and the data we collect, along with customer feedback and recommendation scores, guides our efforts to improve retention across our platform.

Particularly on TurboTax, is there any way to how we use the light product for retention and potentially upselling to make a better and more holistic experience, so the issue that we've had in the past of people dropping out because of competition and whatnot. How do you think about that lever? That's it. Thanks.

Yes, got it, very helpful. That's actually one of the reasons why we are so excited about TurboTax Live because it really goes after the heart of what matters most to our customers, which is that one nagging question that they had. They just bought a house, or they sold the house, or they just got married, or they just had a child, or they made a new investment and what are the implications of that to my tax return? This is why TurboTax Live is so important for our customers, so they can ask a question. We've improved the experience so they can get real-time answers. We've seen this year to be not only a conversion but a retention tool and we're seeing the same this year.

Wonderful, thank you so much.

Thank you, Kash, and I apologize I didn't hear your question the first time.

Great, thank you. I think we've all seen the press talking about not expecting as big a refund this year or people who got refunds in the past are now owing money and you know, that may be one of the reasons we're seeing a slower start to tax season because the people getting a big refund file first. But I'm just curious, you know, as you see to the extent this trend is shaping up where people are getting smaller refunds or potentially owing more money than they have in the past, how is it impacting behavior? Does it change price sensitivity, do they want a second opinion and maybe do things like TurboTax Live? I'm just curious to get your takes on that phenomenon.

Yes, hi Jennifer, thank you for the question. What we've learned through the years, and this is all through data, is that ultimately customers will pick the right product that's right for them. If the refund surprises them, it becomes a confidence question and that's where they need help. Did I do my taxes right? Did I answer the questions the right way? This is why TurboTax Live is so important for our customers, so they can get that nagging question answered, inclusive of, hey, I expected more on my refund, why is it different? With that context, we don't share our year-over-year refunds for our customers, but IRS shared it through February 8th and it was down 8.7% per customer, and we'll just have to see how the rest of the season plays out, but it does not impact, back to your question, which product customers pick and their sensitivity because once they pick a product, they have confidence in the product; they are just more focused on do I have confidence in my refund.

Great. And just sort of a second question, it's similar vein. You know, the same press reports talk about the increased complexity even for the professionals this year, and if we look at the relative delta between the self-prepared e-files and the professional e-files, certainly, that seems to indicate share gains for the DIY category, but I guess, you know, how do you think about the potential durability of that gap? Is there any sense of whether pros are just taking a little longer this season to get those filings in, because they're grappling with new legislation or do you think that's something that could persist as we move through the next couple of months? Thank you.

I think there are two big levers. One is we have digital tailwinds. More and more customers want to do things themselves versus have somebody else do it for them. However, when they need the help, they want to make sure that that expert is there. So one, we have tailwinds. The second thing I would say is that in addition to the tailwinds is we view ourselves as the category champions to drive the category growth, which is why we are focused on not only expanding our lead in the Do It Yourself category, but transforming the assisted category, which in essence gives folks more confidence to do it themselves because they know there's going to be a human there on the other side to help answer their question. I would say those are the two drivers as to why we believe that over time that will persist.

Okay. Thank you.

Yes, thank you for taking the question. I wanted to ask in the consumer segment. I know that you highlighted 25 million registered users across Mint and Turbo, and I know it's early in the season but can you give us a sense of how those initiatives are tracking thus far?

Yes, thank you for your question, Josh. Our primary focus is helping our customers manage their finances effectively. The goal for Turbo is to connect our customers with the most suitable financial products. Currently, we offer 25 options that align with our customers' consent regarding their data. This year, we also launched 20 new features aimed at assisting our customers in achieving financial stability, while also enabling our partners to succeed. Based on the initial data, we are pleased with the outcomes so far; we will present these results at the upcoming Investor Day, and we are encouraged by what we are seeing and learning.

Great. And I had a follow-up around online services. That's been, I think, a nice, positive upside surprise. You had some nice updates on capital and payment and payroll. I'm just wondering if you unpack that; are there certain areas that are maybe coming in ahead of your expectations or you're becoming more excited about as you make more inroads on the services front?

Yes, we are very proud of the team because they are laser-focused on what matters most to our customers. In this case, we are helping them get paid fast, helping them get access to capital, and helping them pay employees but actually hold on to as much money, as much as their money if they can before they have to pay their employees or things like time tracking which drives more accuracy in how you pay your employees. Our teams have been very focused on those customer problems and improving the experience and looking for ways to get the money into our customers' pockets faster or helping them hold on to their money longer. We see some of the innovation that we launched and we talked about earlier, whether it's faster funding and payments or same day and next day payroll—it’s all in service of our teams being focused on what matters to customers and just accelerating both the innovation and our marketing efforts, and that's something that we would foresee continuing.

Great. Thank you for the color.

Okay. Thanks for taking my questions. Just in terms of international sub growth line, I think it was not a really strong quarter up over 50% year-over-year, and I know U.K. has been an area of strength more recently for you all. And I guess with the MCD legislation coming into effect in April, should we expect this tailwind to continue or is that sort of something that might taper off? How should we think about that continuing as we move throughout the year? I have a follow-up. Thanks.

Hi, Chris. Thank you for your questions. We are very pleased with the team's performance on international, and it grew about 56% this quarter driven by several countries: the U.K., Australia, and Canada. Making tax digital, we believe, will actually be a contributor to continued growth, and the reason it will create a digital tailwind for small businesses is they have to change their behaviors in essence for things like invoicing. We view that as a potential catalyst to maintain the growth.

Okay, great. And the follow-up is just on TurboTax e-filers; it looks like they were down a little bit more category. Obviously, it's very early in the tax season, but just curious how you're thinking about share again in 3Q and again what you contemplated at guidance.

Again, just as a quick refresher, we look at IRS growth, growing the category, and then by growing shares, and as we plan out our game plan for the season, we do it in season parts. Thus far we are where we expected to be, and we have a game plan for the rest of the season that we're excited about.

Okay, perfect. Thank you.

Great. Sasan at Analyst Day, one of the big goals you guys laid out was to improve conversion at the top of the funnel in terms of customer traffic. I'm wondering if you guys have any early trends that you could share there in terms of the success on that front.

Yes, hi, Ken. Thank you for your question. That is a really big focus for us as the company because we get the customers coming to us. The opportunity we have is to improve that. We are running multiple different experiments. We continue to run experiments in TurboTax actually to improve traffic to login and we're also doing the same thing in QuickBooks. An example for QuickBooks as a reminder, people come to us from many different reasons; they may come to us for invoicing, they may come to us for payroll, they may come to us just to get organized and we've been shifting from really a quickbooks.com that is just generic size to having landing pages that ask a couple of questions from customers, understand their intent, and take them right to what they're looking for because they come to us for many different reasons. We, in fact, had multiple tests running right now and we've been, and we will continue to rollout the winners. We like our progress here and I would tell you that we will never be satisfied because we have so much room for improvement and we see a lot of opportunity in this area.

Got it. And then a follow up for Michelle, you guys mentioned that the plan was to start spending marketing dollars at the start of tax season it's a little earlier than last year. Can you maybe comment on how effective that's been and then whether or not you guys might consider putting a little more gas on the fire if that has been effective?

Sure. First, thanks for the question, Ken. First have you seen our advertising?

I have seen your advertising, and that's why I am a QuickBooks customer and a TurboTax customer.

You liked it?

I remember seeing something, but I can't recall the specifics right now. However, I believe it's effective. It's definitely a small website; you might want to verify that.

Well good, good, good. What we found is the same thing. Our big push there with our marketing dollars is really we want to be where our customers are, so that's important to us and when we look at marketing and whether we should spend more or not, it really is around some marketing spend driving the outcomes that we want. On the QuickBooks side, we tend to focus on LTV; on the TurboTax side, we tend to focus on payback, and that enables us to make different research allocation decisions. We're always looking at how to best apply funds to deliver better outcomes. So right now, with the metrics we've seen so far, we are pleased with how we're selling. I am so excited to have with QuickBooks and with our TurboTax ads.

Got it. Thanks, Michelle.

Hey, thanks for taking my questions. I had two quick questions; first on QuickBooks on the international. You mentioned the success you had there. Can you talk a little bit about Brazil and France and maybe India situation where we were working on markets of readiness, and I am aware of the U.K. strength but just wanted to see how those regions are doing? And I had one follow-up.

Hi Raimo, thank you for your questions. Just for context, there are six countries that we are in outside of the U.S. It's the U.K., Canada, Australia and of course the other three that you asked about: France, Brazil, and India. I'll hit on each of them very quickly. In Brazil, we really focused the teams on the compliance market. It's actually a large enough market; it's almost two U.K.'s and we like the progress that we see, both our active use and PRS are going up. In France, it's important to remind ourselves that it is extremely early in the shift to the cloud. We are very focused on a few key problems, one of them being document exchange between accountants and small businesses; things we see capture. We like the progress that we're seeing there and the product market fit and we're seeing increased active use and PRS, but it's very early in the shift to the cloud. Again, France is where the United States was 25 years ago in terms of just where it is and moving to the cloud. And then last but not least, India is just going through a significant digital transformation with the government getting involved, and we are very focused on tech-savvy businesses. We are making progress in India, but it is not the same rate as what we're seeing in Brazil and France.

Okay. Can you remind us about the status of your business moving to AWS? With the upcoming tax season, I expect there to be significant scaling. Where do you stand in terms of duplications versus the areas where you are fully operational on AWS? Thank you.

Yes, we are very excited about the changes at AWS; it provides improved tools and automation for our developers, enhancing their productivity and fostering greater innovation. We anticipate that by the middle of fiscal year 2019 to fiscal year 2020, most of our other services will be on AWS, as many of our larger clients already are. While some delivery services will require more time, we expect to have made significant progress overall.

Perfect. Congratulations. Thank you.

Hey, good afternoon, thanks. Following up on some of the online services commentary that number continues to accelerate, just hoping you could expand a bit more around what attached those additional products can do for our proven retention rates in the small business segment over time.

I guess, Michael, thank you for your question. Maybe just a quick repeat of what I mentioned earlier. We are very focused on what matters most to our customers, which is around getting paid, around capital, paying employees, and contracting, and we like what we see and the progress that we see. What's most important for you all to remain focused on is our online revenue being North of 30%. We don't manage the business or set goals around ARPU, but ultimately what's most important to our customers is ensuring that we deliver what we've committed to you all. I would focus on the 30% revenue growth, online revenue growth.

Great. And then on Self-Employed, you added 100,000 subs there during the quarter, could you just help us parse through a bit more how much of that was driven by synergies with TurboTax early in the season, whether there are some additional factors that might be helping drive those synergies? Thanks.

Yes, absolutely. Well, first of all, we're excited about almost adding 400,000 compared to this time last year and really helping the needs of the Self-Employed. We will break out where it came from at Investor Day, but right now it's not something that we will break out, but we like the progress that we're making both going directly to the Self-Employed and what we're seeing across the ecosystem, across the TurboTax channel.

Got it. Thanks for taking the questions.

Just Sasan for you, on traffic. I know at the Analyst Day you talked about how traffic TurboTax.com had been flat last year and you're hopeful that you could see some increase there and then drive some conversion. Could you help us understand what you're seeing in terms of traffic early in the season at this point? And then I have a follow-up.

Yes, hi, Walter. Absolutely, our focus is actually less about growing more traffic but actually bringing customers back where they realize that we have an opportunity to help them with confidence with TurboTax Live. So it's really about the mix of folks that we're focused on bringing back and improving the conversion of those that are already there versus looking to improve traffic year-over-year. And we'd like so far what we see.

Great. And then just on the small business side, you highlighted ARPU as the focus there and you've had I think some good success with TC. Can you maybe update us on what you're thinking in terms of M&A around the small business groups and bringing in some businesses that might look like issues to help drive the breadth of the product down to the base?

Sure, sure Walter. Yes, first of all everything that we do is driven by what's most important to our customers and anything that allows us to help accelerate payments for our customers, put more money in their pockets through capital, innovate in payrolls not only to make it easy but ultimately allow them to hold on to their money the longest in their bank before they have to push a button and the money goes out to their employees or things like time tracking are all important areas that we will continue to innovate because we're still at the early stages. I did not talk about ARPU earlier. In fact, what I reiterated is we focus more on online revenue growth and we want you to focus on that being above 30% because that allows our teams to focus on innovation that matters the most. I think as we look ahead, one of the areas that will accelerate our focus will be how do we help product-based businesses manage across multiple different channels. And that would be an area where we'll look to accelerate our build internally and look externally if we need to.

Great. Thank you.

Yes, thanks. Hi guys. I'm curious about the TurboTax Live users so far this season, how would you characterize the uptake of those users coming out of first-time TurboTax users versus returning TurboTax users?

Hi, Sterling. These are some data points we'll release later, but I would tell you that we like the mix that we're seeing. Just as a reminder, as we've shared at Investor Day we lose 3 million TurboTax customers because ultimately they didn't have confidence and they go elsewhere. We're seeing less drop-off because those that may have a question can now ultimately ask for help and they will get it. We're seeing an accelerated migration from the assisted segment now that they see that there's a way to get expertise on a digital platform. We like the mix that we are seeing and it's also important to remind ourselves we're early in the journey of TurboTax Live and so we are learning and adjusting literally on a weekly basis. But we like what we see.

Great, and then one follow-up, how would you characterize the pricing and promotional activity in the tax side so far through the season?

As I mentioned earlier, we have a ton of respect for all of those that we compete with and everybody has upped their game as they do every year, both in terms of product innovation and pricing strategy. I would just say that everyone's being aggressive, but we've not seen anything that surprised us, and we're being extremely choice and deliberate about what we do with pricing because we want to truly go after where we can create value for customers and keep those customers in the long term.

Great, thank you.

Thank you, Sterling.

Great. Thanks very much. So Michelle, I'll start with a quick comment; I'm a big fan of the Coffee House.

Awesome, I'd love to hear that.

Now to the work, Sasan, I believe last quarter Brad talked about smarter promotional activity, and I took that to mean more on the QBO side. Can you tell us maybe where we are in that process, and is that more of a tailwind going forward or we are beginning to see a big part of that? Thanks.

Yes. Brad was exactly right in what he shared. We believe we have a big opportunity as we think about very strategic pricing. It looks and feels different by country depending on where we are in the cycle of that country, but let me just use the U.S. as an example. We are running a number of tests right now because we now have across our product line, we have Self-Employed all the way to QBO Advanced which is about serving the mid-market, and now we're doing tests with connecting people to experts which is Cookbooks Live, very similar to TurboTax Live. That really is giving us an opportunity to really think about and test different price points, and we believe over time that will be a tailwind for us.

Great. Thanks very much.

Yes, thanks. I have a couple of quick questions. I'll try another mix TurboTax Live question. Last year you were surprised at the low end had any interest in TurboTax Live. Any thoughts on what you're seeing on the low end of the season?

Yes. Hi Jim, you know Greg and the team had some great insights last year which you just articulated and that is every customer no matter what their tax situation is, they will at some point have a question. We're really focused on going after confidence and being able to answer their questions. Therefore, that's why we made TurboTax Live available across all the SKUs. We are seeing uptake across all the SKUs, which confirmed the learning that we had last year and the hypothesis that we went into this season with. We made it available for everyone because everybody ultimately has a nagging question, and this gives them the chance to complete their taxes with confidence. We are seeing uptake across every SKU.

Okay, great. And Michelle maybe you guys have been really efficient on R&D and G&A this year, any saw that due to the AWS conversion. Any thoughts on we have very low increases this year which is pretty amazing?

Thanks, Jim, I appreciate the question. What I would actually take it back to is it's not so much. I mean we're always looking to drive efficiency but we also want to make sure that we are investing at the appropriate levels. I would say specifically around R&D when we look at that spend, it may vary quarter-to-quarter. We really look on an annual basis to stay at about a range of 19% to 20% of revenue. And so that's really what we focus on, on G&A. We tend to be at the end of last year we had 11% of revenue and we look to see ways to get that to decline over time, but we do look at that also on an annual basis. I would continue to think about it holistically and not get overly caught up in the quarter-to-quarter movement.

Thanks.

Thank you. Question on RAs, to what extent if you promote them this year, was it promoted to all SKUs that you have varying amounts, and that it brought in new clients or was it more for existing clients, and to what extent that increased in coming years?

Hi Michael, thank you for your questions. I think you're referring to refund anticipation loans. If that's what you're referring to, first, I'll remind us that this was a business that we got out of 10 years ago because just the level of interest rates was not consumer-friendly. What we are testing with now is no interest anticipation loans. So that ultimately we can serve consumers in the areas that are most important to them and ultimately do it in a consumer-friendly way which is what the company stands for. We're getting some of those tests now and getting the results, and we'll make decisions and inform what we do next year.

Are you competing for the market which is going up to one case 3500 and another case 7000 last year I think you limited it to 1000?

Yes. We're in a similar ballpark now. We're testing between $250 to $1000. The main reason is as we've done a lot of testing in the previous years, it is not a reason to switch from one method to another. Therefore, we're very focused on ensuring that we're delivering against what really matters to our customers because it is not a category grower and it's not a conversion driver which is why we're testing different limits.

Are you promoting it at all?

No, we're just testing it right now.

Okay. Thank you.

Thank you very much.

Yes. Thank you very much. First of all, I really appreciate everybody's very thoughtful questions. We're very proud of our results and the momentum that the teams have, and we are very inspired by the power and prosperity around the world. We look forward to connecting with you next quarter. Thank you.