Intuit Inc (INTU) — Q3 2019 Earnings Call Transcript

Thank you, Jerome. Good afternoon and welcome to Intuit's third 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 everyone for joining us. We had a great third quarter and we’re on track to exceed the guidance we provided at the beginning of the year. We’re seeing momentum across every part of the Company and as a result raising our revenue, operating income and earnings per share guidance for fiscal 2019. During the third quarter, total revenue grew 12% overall, fueled by 10% revenue growth in the consumer group and 19% revenue growth in the Small Business and Self-Employed group. With that context, let me start with the consumer group. We had a great tax season. We grew the DIY category and grew our share within the category driven by our innovation and significantly improved customer experiences. We produced our most robust free offering and a significant progress from our effort to transform the assisted category. As we communicated, there are four primary drivers in our consumer business. The first is the total number of returns filed with the IRS. The latest IRS data indicates total returns were up 0.2% through May 10, below historical trends and our own expectation of 1% to 2% growth. The second is the percentage of those returns filed using do-it-yourself software. Category share grew over a point, the fastest pace since 2016, once again outpacing the assisted tax prep category, we are very pleased with this outcome. And as a reminder, DIY category growth is our largest revenue growth driver. The third driver is our share within DIY. We estimate TurboTax Online share grew half a point. The fourth is our average revenue per return which increased again this season. The growth reflects a stronger contribution by TurboTax Live, improved attach and tuned product line adjusted for the new tax legislation. These items were partly offset by deliberate decisions we made to improve the experience for customers with simple returns, including the year-over-year data transfer from no charge and extending free state filing for the entire season. This season we had more customers than ever before paying nothing. We grew this customer growth in the high teens above total unit growth of 5%. We are confident these were the right strategic decisions to drive durable growth especially as we look for ways to help customers make ends meet, going beyond taxes. Our commitment to provide a robust free offering has resulted in more than 55 million TurboTax customers, who paid nothing for their TurboTax experience over the last 5 years. As I shared before, our consumer growth strategy is to expand our lead in the DIY category, transform the assisted tax preparation category and disrupt traditional consumer finance by expanding beyond tax to build the customer platform. This is an all-in service with helping our customers need and maximizing their tax refund. We made significant progress against these strategic objectives this season. Within DIY we saw evidence that the bold changes we made to improve the experience for customers who file simple returns resonated. These changes drove a 6-point improvement in product recommendation scores for the free offering and contributed higher retention. We're transforming the assisted tax customers experience by connecting people to experts on our platform with TurboTax Live. We introduced a range of price points within the product line this season to offer access to an expert for even the simple returns. After just two years, TurboTax Live is now a meaningful contributor to our business and this product line is among the fastest ever to reach this revenue level. The number of customers using TurboTax Live has more than tripled year-over-year. We estimate 70% of customers who are new to Intuit this season and use TurboTax Live came from the assisted method the prior year, higher than TurboTax Online. And for the approximately 2,000 pros on our platform, we improved the onboarding experience and technology tools, resulting in lower attrition and improved operating efficiencies through the season compared to last year. TurboTax has now approximately 28% share of total individual returns, leading us with a large addressable market. Beyond tax, our consumer platform is aimed at helping customers to unlock smart money decisions by connecting them to the financial products to help them make ends meet. As we learn about their financial life, we can notify them of benefits that can save them money. We now have over 14 million customers registered for Turbo, up from 5 million last season. We have approximately 70 offers this season focusing on four verticals, including credit card, lending, investing, and mortgages. We continue to test benefits and monetization models. While we don't expect a significant contribution to revenue in the near-term, we're making progress and continue to be excited about this opportunity. In summary, I'm very proud of what the team delivered across the consumer offering. Now let me turn to Small Business. We delivered another strong quarter in our Small Business and 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 customers by solving their biggest pain points. We're working to achieve our vision of being the center of Small Business growth by helping our customers get paid fast, manage capital, and pay employees with confidence. Earlier this year, we launched next business day payment, allowing our customers to receive their funds much faster than previously experienced. QuickBooks Capital has funded $360 million incremental loans since launching around a year-and-a-half ago. Finally, we remain encouraged by our early progress with QuickBooks Advanced Online, designed to disrupt the mid-market by investing in mid-market Small Business customers with 10 to 100 employees. Within our strategic partner group, our professional tax revenue is on track to grow 4% for fiscal year 2019, that’s the high end of our initial range for this segment. To wrap this session up, we are very pleased with our results. Now, let me shift to a different topic. You may have heard assertions that Intuit engaged in practices designed to discourage consumers from filing their taxes for free. These assertions have come in several forms and I want to address them directly. We stand behind our marketing actions as both being appropriate and consistent with our core value, integrity without compromise. In addition, any suggestion that Intuit does not support the IRS Free File Program is wrong. In fact, we’re proud that for nearly two decades millions of Americans have used TurboTax Free File Program to file their taxes without paying. Our commitment to free dates back to 1998 when we launched a program to offer free tax preparation software and e-filing services to lower income and active duty military taxpayers. In 2002, the entire tax software industry and the IRS formed the IRS Free File Program model after our initiatives. As a founding member, we’re committed to IRS Free File shared goals of public service and providing free tax filing to those who needed it most for nearly 20 years. As I mentioned earlier, we have more than 55 million TurboTax customers who paid nothing for their TurboTax experience over the last five years. Thank you. And now let me hand it over to Michelle to walk you through the financial details.

Thanks, Sasan. Good afternoon everyone. For the first quarter of fiscal year 2019, we delivered revenue of $3.3 billion, up 12% year-over-year. GAAP operating income of $1.8 billion versus $1.6 billion a year ago, and an 11% increase. Non-GAAP operating income of $1.9 billion versus $1.7 billion last year, an 11% increase. GAAP diluted earnings per share of $5.22 versus $4.53 a year ago, up 15% increase, and non-GAAP diluted earnings per share of $5.55, up from $4.78 last year, a 16% increase. Turning to the business segment, consumer group revenue grew 10% in the fiscal third quarter. TurboTax Online unit grew 7% this season while overall unit increased 5%. We significantly improved the experience within TurboTax Live this season, not only for the customers who use this platform, but also for the tax pros providing tax advice. The improvements we put in place increased pro NBS by more than 50% versus a year ago and created operational efficiency. These include a 30% reduction in pro attrition and improvements in the pro portal that drove a 30% increase in time spent serving customers this season versus last year. We’re excited to continue scaling this business into the future. We also offer TurboTax Self-Employed customers the opportunity to benefit from tracking their financials throughout the year in QuickBooks Self-Employed. TurboTax Self-Employed product recommendation scores tie TurboTax Live for the highest score among our paid offerings. Turning to the Strategic Partner group, we reported $235 million of professional tax revenue for the third quarter, up 4% year-to-date. In Small Business, total Small Business and Self-Employed revenue grew 19% during the quarter. Online ecosystem revenue remains strong with growth up 38%. We believe the best measure of health and success of our strategy going forward is online ecosystem revenue growth, which we continue to expect to grow better than 30%. Online services year-over-year growth slowed this quarter compared to the prior four quarters. This was primarily a function of lacking the TSheets acquisition a year ago. QuickBooks Online subscribers grew 32% and in this quarter with over 4.2 million subscribers. Growth remains strong across multiple geographies with U.S. subscribers growing 25% over 3.1 million and international subscribers growing 55% to over 1.1 million. Within QuickBooks Online, Self-Employed subscribers grew to approximately 970,000 from roughly 680,000 one year ago. TurboTax is a significant channel for QuickBooks Self-Employed, and 440,000 subscribers have come to this channel up from 330,000 last year. We continue to expect total subscriber growth to moderate as we place a greater focus on additional services and penetrating our broader range of customers. Desktop ecosystem revenue was up 4% in the third quarter. Our Desktop units were up 12% reflecting unusually strong renewals during the quarter. During fiscal 2019, we expect the QuickBooks Desktop units and Desktop ecosystem revenues to be roughly flat. Within the Desktop ecosystem, our QuickBooks enterprise customers and revenue continue to grow at a double-digit pace in the third quarter. This further reinforces our interest in addressing the needs of mid-market Small Business customers with our QBO Advanced offering. Turning to our financial principles, we remain committed to growing organic revenue in 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. 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 $3.3 billion in cash and investments on our balance sheet. We repurchased $135 million of stock in the third quarter; approximately $2.8 million remained on our organization, and we expect to be in the market each quarter this year. The board approved a quarterly dividend of $0.47 per share payable July 18, 2019. This represents a 21% increase versus last year. Turning to guidance, our fourth quarter fiscal 2019 guidance includes revenue growth of 10% to 12%, GAAP loss per share of $0.35 to $0.33, and non-GAAP loss per share of $0.16 to $0.14. We are also raising our fiscal 2019 guidance following strong performance the first three quarters of the year. Our new guidance includes revenue growth of 12%, up from prior guidance of 8% and 10%. GAAP diluted earnings per share of $5.72 to $5.74, and non-GAAP diluted earnings per share of $6.67 to $6.69. We now expect the GAAP tax rates of 18.5% for fiscal 2019. You can find our Q4 and updated fiscal 2019 guidance detail in our press release and on our fact sheet. And with that, I'll turn it back over to Sasan.

Great, thanks Michelle. With that overview of the quarter, I’d like to remind you of the strategic objectives I covered last quarter starting with what matters most to our customers. All of our customers have a common set of needs. They are all trying to make ends meet, maximize their tax refund, save money, and pay off debt. And those who’ve made the bold decision to become entrepreneurs and go into business for themselves have an additional set of needs. They want to find and keep customers, get paid, access capital to grow, and ensure their books are right. That’s why our vision 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. The evolution of our strategy is to become an AI-driven expert platform. This is about becoming an open-trusted and easy to build on platform where we and our partners 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 data set across the platform and accelerates speed the benefits to revolutionize the experience for our customers, and it's about solving the largest problem customers face, lack of confidence. By connecting with experts on our platform, leading the digitization of the services industry, let me provide a few examples. When it comes to connecting people to experts, we’re 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 in the areas of tax, bookkeeping, and financial advice. For Small Business owners, we’re focused on being the center of Small Business growth, using AI across our platforms to accelerate cash on funding and 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, transforming omnichannel commerce. We also focus on helping customers to make smart decisions with their money by connecting them to financial products that help them with more money in their pockets. This is our vision for Turbo, where we are increasing active use and engagement, leveraging the tax refund moment to connect customers on our platform to meaningful benefits. Last but not least, we’re focused on disrupting the mid-market with QBO Advanced. Our AI-driven expert platform will help provide mid-market customers the need at a disruptive price. We are making great progress and we’ll have more to share with you in the coming quarters and at our Investor Day. I want to thank our employees, our customers, and our partners for another strong quarter. Now, let’s open it up for questions.

I want to touch on the tax business this quarter and two kind of related next questions. One, you've talked about some reactions, I guess, taken during the quarter. The sort of free state for the entire period as well as free data transfer that pushed more people into the free category. Can you talk to what is the rationale behind it? What is like the business reason for making those moves? Number one. And number two, we have kind of read press reports, we've also seen some political sort of rhetoric starting to rise, a letter some senator sent to you today. Is there any reaction needed from that type of political pressure? Is there any behavioral changes or anything you plan on doing differently in the TurboTax business in response to senator's pressure or is there pressure you're getting from some state local governments as well?

Great. Hi, Keith, thank you for your question. Let me start with what matters most to our customers and as you've heard us talk about, there are two things that matter most to our customers. One is helping them to make ends meet and the other is helping them to get the largest tax refund. In that context, our focus has been to ensure that we have the best product experience. And so what we did this year was very much in line with our strategic approach to deliver the best free offering this year through the year-over-year data transfer for free and extending free for the whole year including our state. We did that because it gives us the opportunity to really help those that are underserved and those that struggle with the income that they make. While at the same time, helping to transform the assisted category, this gives us the opportunity as we grow our customers to ultimately find ways to help them make ends meet through the offerings that we have in Turbo. So those were the drivers behind the decision and we're actually quite excited about seeing the results that we got, which is both customer growth and revenue growth. PRS is actually up over 8 points. Retention is up based on the decisions that we made. So all-in-all we feel very good about the decision and again it's in context of our durable game plan. I think the second thing that I would say is that we have been supporters of free and in fact, as I shared earlier, this dates back to 20 years ago. And with respect to would there be any behavioral changes from us, our view is that our focus has been to actually grow the do-it-yourself category and expand our lead in the category. One element of it being through free. So we don't actually see our behavior changing. We believe that we are focused on the right thing, which is delivering for our customers. We’ll continue to work with the industry and the IRS to see if there are ways that we can continue to improve the Free File Program. But at the end of the day, our focus is on our customers and we believe that everything that we have been doing is very durable and very much in line with what's most important to our customers. And I actually have a lot of confidence in the actions that we're taking.

Great. Thank you so much and I echo the congrats on a great tax season. Sasan, with TurboTax Live units more than tripling, it seems like there was a lot of success there and I know you shared some data points. But can you maybe just expand a bit more on the mix within TurboTax Live in terms of net new versus customers coming over from the existing base? And as well, if you can comment on the changes in the tax code and expectations around trade up, trade down, and new filers coming in the franchise, how does that play out versus expectations?

Hi, Brad, and thank you for your questions. I think I’ll just go back to where I started just a moment ago, which is every twist that we are making is very deliberate and based on what we saw the season, it was really within our expectations. And our singular focus is to serve our customers and we want to do that through expanding our lead and do-it-yourself category, and we want to also do that from transforming the assisted category and helping all of those customers with benefits that go beyond taxes. With that as context, we’re very pleased with TurboTax Live's performance this year. Given that we essentially gave our customers the ability to pick TurboTax Live through any of the skews. Our customer growth tripled; 70% of those customers that came in, the new ones were actually from the assisted category. The prior year for our pros, the net promoter was up 50%. They spent 30% more of their time serving customers this year compared to last year. So we’re very pleased with our progress this year and we know exactly the areas to improve to actually accelerate our growth in this area next year. As it relates to the tax code, as you well know we are big supporters of tax simplification. We believe that it enables consumers to take more control over their financial life. It actually is a catalyst for the do-it-yourself category. We needed to change our lineup this year to ensure that we delivered for customers given the tax code changes. And in essence, what we saw was all really within our expectations and we’re very pleased with the performance for our customers, our PRS scores, and the teams have done a wonderful job.

Thanks, Sasan. And if I could just squeeze one in there for Michelle, with consumer margin ticking down from prior Q3. And I know you’ve been fairly disciplined and consistent with how you think about acquisition costs and metrics like LTC. But can you just remind us, especially with TurboTax Live coming into the mix, how you’re thinking about acquisition cost? And how we should think about the cost of delivering TurboTax Live this season? And how we should really think about consumer margins going forward?

So, Brad, I do this to Michelle all the time in our meeting. So, let me start and then I’m going to turn it over to Michelle. It's a great question and I know others have it on their mind. I wanted to go back to the evolution of our strategy, which is about being an AI-driven experts platform and this is about significantly accelerating our progress with a platform and an ecosystem. When you think about our platform and ecosystem, we are actually building more and more of our services to be able to serve all of our segments. The examples would be the services that we fill across our ecosystem for TurboTax Live, QuickBooks Live, and CyberSecurity. The data scientists that we hire ultimately fuel our machine learning engine that drives our AI benefits for our customers. Those are all at the Company level, which is why we always talk about we manage the margins at the Company level. Therefore that is really what’s important for you all to pay attention to, specifically in the consumer group our year-to-date margins are actually pretty much flat with last year, so we’re actually quite pleased with the progress. I don’t know if I left anything for the answer, but…

The only additional point I would make, Brad, is that when we examine the consumer margins, we have received several questions regarding TurboTax Live and our perspective on it. This year, we successfully grew our customer base while maintaining the same number of professionals, totaling 2,000 as we had last year. This illustrates the operational efficiencies I mentioned earlier, including a 30% increase in customer service time with our professionals. We are pleased with the incremental margin we are observing from this offering, and as we look ahead, we are concentrating on opportunities such as automation and augmented intelligence. These initiatives aim to enhance the efficiency of our agents and streamline the onboarding process.

I wanted to just double click a little bit on your commentary around the platform, your expert platform powered by AI. Even clearly, we've seen some of the benefits of that with TurboTax Live. There's been some discussion on the website about QuickBooks Live and you guys testing that out. I was just kind of wondering, how we should think about the evolution on sort of the Small Business side around that narrative? And I know you've actually given too many data points now; but what should we be expecting to perhaps at the Analyst day? Or give just some ideas about how we can kind of hold you guys? Or what we should expect for you all around this development of this narrative?

Great question. Thank you, Kirk. A couple of things I would say. One is we think about this opportunity, starting with what's most important to our customers. The biggest challenge that our customers say, consumers, self-employed, and small businesses face is confidence. In fact, you’ve heard us talk over the years around the opportunity around non-consumption. One of the drivers as to why people don't switch is because they're looking to interact with a human being to help them do their taxes, their bookkeeping, and advice. On the other side, we've got enrolled agents, pros, and accountants that only serve customers within maybe a 10 to 15-mile radius max. They don't like marketing and they don't like pursuing customers. We believe that this informs a huge strategic opportunity, we have to connect people to experts, to really go after non-consumption, to help our customers make ends meet, to help them run their business and be successful. So I wanted to start there because not only are we in the very early innings of TurboTax Live and what the opportunity we have to transform the assisted category. That same opportunity exists when it comes to helping small businesses get started and run their businesses. We’ve been leveraging the same common services that we've built over the years for TurboTax Live to significantly accelerate building out QuickBooks Live. We've been testing our QuickBooks Live over the last many months. What we learned is very consistent with what we learned from consumers trying to do their taxes. They're looking for ways to get started and get set up. Some actually want the bookkeeper to take all their information, all their documents and set QuickBooks up for them and then give them advice. We believe that this is a significant opportunity for our customers and the ARPU is actually quite significant because the benefit is there. I would say on the other side, as we've been talking to enrolled agents, accountants, and pros, once they understand what we’re trying to do, they are very excited about this opportunity because they see it as an opportunity to be able to grow their business but improve focusing on what matters most to them versus marketing. So the way we want all of you to think about this, this is a big opportunity for us to connect people to experts on our platform to go after consumers, self-employed, small businesses, and fundamentally digitize the services industry and build advantages across the Company.

That’s really helpful. If I could just sneak in one for Michelle sort of related on that topic. As we think about sort of the need for your guys to build out more AI sources from low to this platform. I assume there’s advantages for you also work with AWS on that where you can take those leverage them as well as add people on your side, so that the narrative ongoing operating income passing revenue whole even as given this platform narrative unfolds over the next couple of years? Thanks.

Thanks Kurt, thanks for the question. Yes, I mean when we talk about fitting on principles start there and those really are extremely doable and we are committed to growing organic revenue in double digits and operating income dollars faster than revenue as you mentioned. When you think specifically about something like the experts platform AI services on that yes we have employed and continue to employ as we talk about at Investor Day a number of data appliances who are coming in to really help us continue to develop this critical capability. AWS is absolutely a keen partner with us. We’ve moved all our customer-facing apps to it already, we’re continuing to move some of the backend stuff and we expect that to take and make another 18 to 24 months but they are absolutely a critical partner for us and we don’t see that having an impact when we look at growing operating income.

I wanted to ask in the consumer segment. Your margin, someone asked earlier it was a little larger than expected in the third, but Michelle you've pointed out that year-to-date it was about on track with last year. So my question is, somewhat to the extent you could speak to this year you've marketed TurboTax Live in the early season, but you haven’t in early season last year. You also had the four tiers of pricing in TurboTax Live this year. So is there anything unique or interesting about that that had an impact? And if you can elaborate a little bit on, what you saw introducing the four tiers year-over-year versus last year? Thanks a lot.

Thank you, Scott. Thanks for the question. Actually, where I am going to start is if I set back and look at TurboTax Live. Sasan did mention earlier that this year we made the very deliberate decision to offer it across our lineup. It's been enabled from simple return to very complex return to be able to have access to expert, to really get the confidence they need to go through their tax filing situation. So with that, we believe that that's absolutely the right thing for us to do and a right strategic decision. We did see a lower ARPC in that, but we believe that long-term with the opportunity that we have in TurboTax Live, that's the right thing to do for our customers. If I think back to just margins overall and we did talk about the consumer margins earlier. And when I think about just the CG margins in total, we did market TurboTax Live this year at the very beginning of the season and we didn't do that last year. But we are continually making decisions around marketing decisions and where we apply marketing dollars and how we do that's around the tax season. So there really wasn't anything dramatically different this year that would have impacted our margin. But once again, I would tell you, I wouldn't focus really on consumer growth margin, we really do manage the margins at a full company level on an annual basis in fact I really wouldn't really get to enough on what happened between getting this season and end the season between months and quarters. I really was looking more from a company standpoint on an annual basis. So, Brent, yes, on QBOs, this quarter were at 32%, which is slightly down, but we still feel that that is a very strong number. We have continued to say that we expect the QBO subscriptions growth to moderate. And when you really look at what is joining the health of Small Business, it is truly on my ecosystem revenue and that is continuing to be a strong, a strong growth rate of 38% this quarter. Just to pick up on your price comments, we always look at our price increases, we always have price increases that on any specific basis. We really look to continue to deliver the value for customers and we measure those very carefully. We never want to take a price increase that is going to dramatically impact our customer. And so, we look at those as we deliver more benefits to customers and we continue to watch on the retention side.

Thanks for fitting me in. Sasan, can you provide some insights on Turbo? You've mentioned having 14 million users and 70 offerings. What trends are you noticing there? Are you seeing more activity on the mortgage side, or is it leaning towards credit cards?

Raimo, thanks for your question. So, our singular focus is to help our customers make ends meet when it comes to our vision with Turbo. And with the customer's consent, we are trying to learn what's most important to them and based on understanding their behaviors, we will connect them to financial products that are right for them. And remember, we're in a very early innings of really understanding and learning what is most important to them. What's very differentiated for us is the customer is engaging with us at a significant moment which is the tax refund moment. It gives us an opportunity to learn from them what do you want to do with your money. Do you want to actually save more money or will make offers such as pay you look like you have for credit cards, would you like a consolidated personal loan that could save you a certain amount of dollars. So, we're really focused on helping them make ends meet, reduce their debt, and ultimately save more money. Our advantage is the fact that we know the customer, we understand their behavior, and we're on an agnostic platform to connect them to those products that matter most. We're very early, but we love what we're seeing and what we're learning just informs our game plan as we look ahead.

Perfect, and if I might squeeze in one follow-up. During this tax season, was this the first one you've done fully on AWS, and what were the pros and cons from that experience? Or did you encounter some duplication? Thank you.

Sure. It's our second year on AWS and we had a, what I would call and our teams would call an epic finish with a number of current users at the end of the season, the performance, and the availability was the best we have ever seen. One element of that is our team did an incredible job making sure the experience was an awesome experience, but I too credit being on AWS for the fact that we can handle those kinds of volumes. It was our second year and it was a great outcome.

Okay. Thanks a lot. Just a couple from this if I could. I guess the first was on the TurboTax Live marketing campaign. I was wondering if you could just comment on how that performed relative to your expectations? I know the growth you saw year-on-year was very strong, so just any detail you could share? And I guess also how you're thinking about continuing to invest in marketing behind TurboTax Live to continue to disrupt that assisted tax category? And then I had a quick follow-up.

Hi, Chris, thanks for the question. In terms of raising awareness, we take a very strategic approach to our campaigns and really the focus right now has been to raise awareness, to help consumers understand that there is a different way that there could be another way given their tax situation. Given the campaign this year, it actually worked very well, we look at mix modeling, marketing modeling to try to understand what the returns were for the dollars that we spend and the effectiveness of the campaign. We really liked the metrics that we have seen and we’ll be doing more deep dives to understand what that will inform for next year. The way you should be thinking about this is just as the beginning of a multi-year and decade campaign to raise awareness, delivering great experiences, how customers can help one another and then shifting the elements of the campaign from just simple awareness to effectiveness. But thus far we’ve enjoyed what we’ve seen.

Okay, great. The follow-up is about the revenue per return, which I believe increased by low double digits in the second quarter but is likely to grow by low single digits in the third quarter. I understand that the decision to enhance the user experience led to an increase in free filers in the third quarter. However, I'm curious if those changes also impacted the second quarter, as it seems there’s a significant difference in the growth of revenue per return between the second and third quarters.

Sure, is your question around TurboTax Live versus TurboTax?

Or just the overall kind of changes you made to promote more free filing across the total platform.

Got it, got it. Thank you for the question. So, two things I would say, one is based on the decisions that we’ve made to accelerate free and the decisions that we’ve made to have TurboTax Live across the lineup. In essence, our ARPC would have been several points higher if we chose not to make that decision. But we don’t solve for ARPC; what we’re solving for is accelerated customer growth and making sure that we grow revenue double-digit and ensuring that operating income grows faster than revenue. So I would just focus on those principles, but I would just end with again saying ARPC would have been several points higher if we had not made those decisions on free.

Hi, good evening, Sasan. Just a couple of questions on TurboTax Live. As you watch the progression of that product and its price point. What are your thoughts on price elasticity for the product? Do you think there is an opportunity that it's providing value that you can raise prices for? Or do you think this is a product where you might have to lower the prices and you’ll get a lot more quantity of users?

Hi, Kartik, thanks for your question. This is a $20 billion TAM, 90 million customers, our number one focus is acing the experience for our customers to help them to build confidence, acing the experience for our pros as they do a spectacular job delivering for our customers. There's so much more room for growth here. The least of our focus is pricing although we think about that. It's about solving the problem well because we believe there is so much headroom for growth. We do believe there is certainly headroom for price increases but we’re just so early and it's such a huge TAM that we just believe the opportunity is to nail the experience and get as many customers to use the platform as possible. So it goes viral and they tell others.

Thanks, Kartik. I appreciate the question on TurboTax Live. One of the things that has really helped us when we think about TurboTax Live; number one, I mean, last year was the first year this year, as we said, a number of times means driven and a ton of efficiencies with three extra customers and yet the same number of pros. But we really continue to look at how do we use automation? And how do we use augmented intelligence to drive it? Another thing I would say is we have focused a lot on using technology here and really focusing on technology first, then bringing the experts to help, which has enabled us to be in potentially a different margin range than most people may with this type of offering. So we're very pleased with the margins we're seeing. And as Sasan just mentioned, if there's so much opportunity here right now, we are really focused on how do we continue to bring customers in and continue to just deliver that great experience.

Just one for me. Following up on the QBO subs question earlier, appreciate you been signaling that growth rate is expected to moderate, but it looks like it's happening a bit more on the U.S. side. Is there anything you can add in terms of expectations product split between U.S. and international could stack up in terms of a more normalized growth profile going forward? And then on the international side, any specific geos to call out there in terms of contribution? Thanks.

Hi, Michael, thanks for the question. First of all, the reasons we talked about watching online ecosystem revenue growth of 30% plus is it gets to a place where how do you count to stub because we have SE subs, we have QBO subs. We're now looking at TSheets subs, we have payment subs. So there is one element of that is how do you count the subs? And so, we want to make sure that we actually provide you all a very clear flagpole of what to watch for. The second is, we're actually very pleased with our progress in the U.S. because while we've been focused on self-employed which has seen very good growth, we're really focused on accelerating our focus into the mid-market. And so when you look at the growth rate in the U.S. at 25%, given the mix of customers that we're actually focused on going after, and specifically the services that were focused on going after, we're very pleased with that. The bang marks to your question is, I would focus on online ecosystem revenue growth because that is the best indication for the health of the franchise. In the second part of your question, I apologize, I did not answer yet which is the geographies. We are very pleased with our progress in the UK, Canada, and Australia. We are making very good progress in getting the product-market fit in France and in Brazil.

Hi, thanks. Just the most questions have been answered here, but two quick ones. One on I think there's a fear at the beginning of a season possibly the season trade down from customers who had simplified filings and go into these standardized deductions, moving to free. You did have a strong performance on free. Could you help us understand in the context of what you ended up seeing in the tax season? How the trade down effect either impact or didn’t impact the number?

Hi, Walter. The trade down effect did not affect our expectations. It was within our expectations. The deliberate decision that we made was with again in context of our durable strategy of delivering the best free offering ever, which was around including year-over-year data transfer for free and extending free for the entire season that really impacted our ARPC. Again it was all very deliberate; we’re pleased with what we saw. But really trade down was not a driver; that’s for expectation. It was within our expectations.

I'm curious about the percentage of customers transitioning from QuickBooks to QuickBooks Online and QuickBooks Desktop. How much of this is due to displacing other mid-market financial accounting packages and sources?

Yes, thank you for the question. To begin with, I would say it’s roughly 70% existing customers and 30% new ones. We currently have about 180,000 QBO customers within the mid-market segment. They are interested in features like batch invoicing and roles and permissions. We have been actively enhancing the platform to facilitate the migration of those customers to a solution that better meets their needs. After that, we will focus more on attracting new customers. At this point, our desktop solutions are not a significant factor since those users are mainly seeking inventory capabilities, which we will develop as we increasingly concentrate on product-oriented businesses.

Hi everyone thanks for taking my question and squeezing me at the end here. Two quick ones, we've picked up a late-season to TurboTax Live pro SKU. Just any comment on that what’s the meaningful impact, and how to think about that attentions of character build out? And the other one I guess is a lot of discussion around TurboTax Live, but we view this very much as a multi-year phenomenon. Is there a way to think about an upper bound of the attach on a three-year basis, a five-year basis of a nature investment needed to get there in broad terms should be helpful? Thank you.

Hi, thank you for your question. I’ll start with your first one, which is we’re always experimenting, as I mentioned earlier, with the $20 billion market opportunity and 90 million customers most of which use the associated category because of a lack of confidence. Our initial focus was helping those that may just want to use TurboTax but are looking for help on-demand. We’re also testing an essence full service, which is we’ll do it for you that’s what they want us to do. That’s the test it sounds like you fell into, and we're early in our insights and the learnings. We believe in the future based on what’s most important to our customers. In terms of TurboTax Live, we don’t think about it in terms of the attach, we think about it in terms of what’s most important to our customers because there are some customers that come in and right off the bat they want to ensure they have help along the way. Over time, it could be those that also come in who are looking for this full service offering. So, we don’t think about it in context of attach. We think about it in context of the segments of customers that are high doubts, fear, and uncertainty and are looking for essence of expertise and help. In terms of how to think about how to model it, you know, Michelle, I think did a nice job earlier around the way you all and the way we would want you all to be thinking about this opportunity for us. We are putting our best and brightest engineers on solving this problem for an AI-driven expert platform. It's all about applying technology to solve this problem very, very well, not only for the customer, but for the experts. We should not think about this opportunity as a typical human capital business. We should think about this as completely digitizing services and experts having AI-driven power tools at their fingertips to be able to serve customers very, very easily. In fact, the more we learn by solving the two-sided problems, we actually make the platform better, so that the customers get the answers to their questions much, much more rapidly. So I think the way to think about this is just a huge opportunity for us to drive revenue growth and think about our margins and way to model it at the Company level, which is the guidance that we provided.

Yes. Thank you and I apologize for interrupting you. First, I want to thank everyone for the great discussion and the great questions. I just want to leave you with the notion that we are very excited about our strategy of an AI-driven expert platform. We have incredible confidence in our segments and the progress of the Company. We look forward to sharing more in the upcoming quarters and at Investor Day, and we hope everybody has a wonderful rest of the day, and we thank you.